What is an Investment Loan?
An investment loan can come in many different shapes and forms. Some may require a business loan to start up their brilliant new idea. Or others may see an opportunity in the share market. And look to leverage that knowledge by taking out a margin loan. However, the most common type of investment loan is a type of home loan that a person/trust/company/SMSF takes out to buy an investment property. It is a mortgage designed for those people who would like to buy a property. And rent it out as an investment, subsequently using the rental income to fund regular mortgage repayments.
How does an Investment Loan Work?
Investment loans generally operate on a similar idea to normal home loans that you would encounter if you were buying a house to live in yourself. Essentially, you buy the property, you pay a deposit. And the bank can lend you the rest of the amount required to purchase the property. You are then required to pay back the loan along with any interest charges in regular installments for the term of the loan. Simple enough right?
Investment loans can vary from this norm is that some of their approval conditions and features. For example, you may need to pay a larger deposit when compared to the total purchase price of the property. This is called the loan to valuation ratio (LVR). According to Canstar’s database, loans on investment properties tend to garner a higher interest rate on average than residential home loans.
Benefits and Disadvantages of Owning an Investment Property
There are a lot of benefits and similarly a lot of disadvantages when it comes to owning an investment property. It is important to note that you should do your own research and seek independent financial advice in-house at R T Accounting & Taxation Services to see whether owning an Investment Property is a wise move for you.
Source of Income
There are two types of investment properties. Those that are positively geared and those that are negatively geared. A positively geared property is an investment property that earns an income that is greater than the costs required for the property to be owned. A negatively geared property is one that earns a loss after costs. Investment properties have been known to provide a long-term income stream that typically increases over time.
Growth in Property Value Over Time
Historically, Australian house prices have grown. Basically speaking, it could be noted that the value of property investments has increased in that time as well. With the Australian housing market rising in demand over the last year, garnered by low-interest rates, it has never been a better time to purchase a property.
Going back to the positively geared and negatively geared properties, both types can provide tax benefits. Firstly, claiming expenses against buying and maintaining an investment property can be claimed as tax deductions to reduce your rental income generated by the property. Below are the deductions one can claim:
- Interest on the investment loan
- Home and contents insurance and landlord insurance
- Property agent fees and commissions
- Repairs and maintenance costs
- Council rates
- Decline in value of certain depreciating assets such as timber flooring, carpets, and curtains.
- Construction costs (“capital works”)
- Costs of advertising for tenants
If you are in the highest tax bracket and wish to reduce your taxable income by purchasing an investment property, it would be beneficial to negatively gear your property to have a loss and lower the tax bracket you are in. The net benefit here is that when you sell your property, you make your income from the sale of the property to make up for the years of losses.
If you negatively gear, and in some instances, positively gear properties, then it is possible to make a capital loss when you sell the property, which means you could have to pay the bank the difference between the property sale price and any leftover amount left on the loan.
With many people deciding to move back home due to COVID-19, coupled with low interest rates which has made even buying a property easier for you, vacancy rates have risen in the past year. This does not mean you mortgage repayments will stop; you will still need to pay your mortgage repayments.
Investment properties can be beneficial to many people. However, each situation is different, so it is important to consider all other costs before deciding to invest in a property and take out an investment property loan. Get in touch with the Mortgage Lending team at R T Accounting & Taxation Services to get a tailored quote on how purchasing an investment property can be beneficial or otherwise for you.