What Type of Loan is Best for an Investment Property?

If your aim is to invest in properties, you might want to contemplate a loan option different from that of an owner occupier. When seeking approval for an investor home loan, the two primary choices available to you are “interest-only loans” and “principal and interest home loans”.


What’s an interest-only investment loan?

IO loans, by definition, are home loans that postpone the payment of the borrowed amount (the “principal”) for a fixed term, usually ranging from three to five years. During this particular period, you are only expected to repay the interest on your loan, not the principal. Once this set term has concluded, repayments shall shift to the principal and the interest, which is identified as principal and interest (P&I) repayments.

The term for interest-only loans usually lasts the same length as that of a typical home loan, about 30 years. Instead of paying principal and interest for the full three decades duration, borrowers may pay only the interest in the first five years, for instance, and settle a much larger amount for the remaining 25 years.

When it comes to making monthly repayments over the loan term, interest-only home loans can be summed up as “less at present” but “more ultimately”.


What’s a principal and interest home loan?

P&I pertains to two important constituents of your home loan repayments. The very first component is the principal, which refers to the initial amount you borrowed for your mortgage. The other is the interest, which is the amount charged by the bank to lend you money.

For instance, if you borrowed $400,000 for your home mortgage at a 3.00% p.a. interest rate, the amount of $400,000 would be the principal amount you must pay back, while the interest is the additional amount you have to pay on top of that principal (3.00% per annum on the outstanding balance).

As each P&I repayment is made, a sample of the payment goes towards settling the principal as the outstanding amount decreases. Therefore, the portion of the payment settling the interest decreases.


What’s the key difference?

The main contrasting feature between P&I repayments and interest-only repayments is that P&I loans start to repay the actual loan principal right from the start. As a result, the tangible house for which the funds were borrowed is slowly mortgaged, whereas interest-only loans only pay off the miscellaneous interest costs.


Analysing the types of loans available for investment properties – what is line of credit?

A line of credit loan is an approved credit amount, judged based on your usable equity. You only pay interest on the portion of the credit used. Consider getting an equity release, and in case you’re not planning on utilising the funds right away, ensure you have an offset sub-account to prevent interest expenses from accumulating on lower-interest loan increments until after the funds have been used.

If you withdraw a lump sum, you’ll be required to pay interest on the entire amount. On the other hand, with a line of credit, you only pay interest on the utilised amount. Nevertheless, the urge to access the money for needless luxuries might prove tempting…


No matter what type of loan for investment property you’re applying for, transparency is key

When applying for an investment property loan, it’s critical that’s you don’t misrepresent your property intentions. The disparities in rates are normally attributed to the level of risk concomitant with every type of loan. Investment properties tend to have higher odds of default, consequently having the potential to cause more significant exposure for the lender, among other factors.

Despite the type of loan that you’re after, the most practical tips still apply. You should:

  • Strive to reduce your current debts

  • Enhance your credit score

  • Prove that you are financially qualified to settle a mortgage


Ready to get started?

For more information, don’t hesitate to contact Perry Finance – we specialise in commercial loans, residential loans, and development finance. Call 03 9101 8517 or send us an email today.



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