Aussies are buying property with their ears pinned back – upsizers, downsizers, sea- and tree-changers, first home buyers and investors alike.
Year-on-year, latest figures show a 35 per cent increase in total new lending, according to APRA quarterly loan statistics. Of this, investor loans represent just under 30 per cent.
But if you are one of the many people apparently intent on purchasing an investment property in the next few months, what is the best type of loan to get? And what is Australia’s best actual investment loan?
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The type of loan that suits investors
When you are borrowing to buy a home you intend to live in, your goal from the very first day of getting that loan should be to get rid of it. In other words, pay it off.
The way to do this is with a principal-and-interest loan, where your higher repayments gradually reduce what you owe.
But if you’re buying an investment property, to rent out, that’s not necessarily the case. Or it’s not if you also have a home loan.
Now, this is because investment loans attract tax deductions for costs including interest. This means the government effectively chips in for your repayments.
To maximise this benefit, there are arguments to keep your loan amount at the maximum (without over-borrowing, of course). And the way you do this is with a cheaper interest-only loan, where you do not make any contribution towards reducing the principal.
This is a smart strategy while you also have a non-tax-deductible home loan because it means you can funnel the money you save on investment loan repayments, onto your so-called ‘bad’ home debt.
The investment loan counts as ‘good’ debt because it is reducing your tax bill. Hopefully, your asset is also growing.
However, the advice might be different once you repay your home loan. Then, it’s worth considering also paying down any investment loans via a principal-and-interest loan. After all, fully paid off assets that generate income are the retirement Holy Grail.
But what are the precise best loans in this buoyant property market?
Australia’s best loans for property investors
The good news is that fierce competition in the mortgage market has driven down both owner occupier and investor interest rates.
Yahoo Finance asked data house mozo.com.au to hunt down the best investor loans both while you want to pay interest-only and on a potential switch to principal and interest.
But we went further than this and included only those loans with a powerful debt-reduction feature: a genuine offset account. In fact, I call this the debt-busting secret weapon.
Though many home loan providers claim to offer offsets, only products issued by what’s called an authorised deposit-taking institution are actually able to. If the institution is not, any offset accounts are just redraw facilities in disguise.
We’ll get to why that is important shortly.
For interest-only investor loans, Well Home Loans comes top with 2.49 percent. Next come Bank of Sydney, Easy Street, G&C Mutual Bank, Australian Military Bank and the Bank of us.
The top two loans carry an optional (genuine) offset account for a $10-per-month fee, which is far cheaper than the circa $400 annual package fee you pay for this privilege with big banks.
If you’re in a phase of life where you want to be repaying principal on your investment loan, there are rates available as low as 2.19 percent. This comes from Tic:Toc, with Well Home Loans, Queensland Country Bank, Bank of Sydney, Credit Union SA and Easy Street behind them.
For good measure, we also asked mozo to determine the most competitive owner-occupier, principal-and-interest loans too – remember, the type you should usually have on a home you want to own.
What is interesting is that Tic:Toc and Well Home Loans mortgages top this loan product too, so if you want to hold both your home and investment loans with the same institution, they can each be cheap.
So, finally, why are offset accounts important on a loan?
The offset debt-freedom advantage
Backing up, an offset account is a savings account attached to your mortgage, where the balance nets off what you owe on your loan.
That means if you have a $100,000 home loan but $10,000 sitting in an offset account, you pay interest only on $90,000.
An offset account is particularly powerful when held against an owner-occupied property, because that’s where you want to be saving as much non-deductible interest as possible.
Further, remember at the beginning of COVID lockdowns last year, all the kerfuffle when , in a hugely controversial recalculation of what they owed on their loans (the public and political backlash saw them abandon the move)?
That cannot happen with a separate, quarantined offset account…a real one! Your money is safe both on that front and in that it is protected by the Australian deposit guarantee (up to $250,000).
But there’s also more to it. With an offset account, your loan balance is never technically paid down, so if you decide to convert your now-home into an investment property in the future, those tax deductions have stayed at their maximum.
Offset accounts give you the ultimate safety and flexibility.
What is the value for investors? For investors, money held in an offset account against an interest-only loan can actually reduce the interest you have to pay. So, unlike being committed to principal-and-interest repayments at a certain level, investors may have to find less money month after month.
Which frees up even more funds to throw onto that non-deductible home loan – to get it down faster, easier and cheaper.