What is the difference between home loans and investment property loans?

What is an investment property loan?

An investment property loan is a type of financing specifically intended for purchasing real estate that will be rented out or sold for profit.

Key characteristics:

• Purpose: For buying a property not intended as a primary residence.
• Property types: Includes residential units, townhouses, duplexes, or commercial spaces that will be used for rental or resale.
• Income strategy: Typically relies on rental income to help service the loan.

Investment property loan rates

One of the most notable differences between home loans and investment property loans is the interest rate.

Why are investment loan rates higher?

• Risk factor: Lenders perceive investment properties as riskier because borrowers are more likely to default on investment loans than on their primary residence.
• Market fluctuations: Investment properties are subject to broader economic trends that can affect rental yields and capital gains.

Factors affecting rates:

• Loan-to-value ratio (LVR)
• Borrower's credit score
• Property type and location
• Loan term and features

Current trends:

Investment property loan rates in Australia are generally 0.25% to 0.50% higher than owner-occupier home loan rates.

Property investment financing options

When it comes to property investment financing, borrowers have several options depending on their financial circumstances and investment strategy:

1. Conventional loans from traditional banks

• Offered by major banks and credit unions
• Typically come with competitive interest rates and a range of loan features
• Require strong credit history and a stable income

2. Non-bank lenders (specialised lenders)

• Often more flexible with eligibility criteria than major banks
• May cater to borrowers with unique financial situations or investment goals
• Interest rates can vary depending on risk assessment

3. Private lenders

• Usually individuals or businesses offering short-term, high-interest loans
• Quicker approval processes and minimal documentation
• Higher risk and cost due to less regulation

4. Home equity loans

• Allow you to leverage equity in an existing property to fund a new investment
• Can be a cost-effective way to access capital
• Must have sufficient equity and the ability to service the additional loan

Pros and cons:

• Conventional loans: Stable and cost-effective, but strict lending criteria
• Non-bank lenders: More flexible, but potentially higher rates
• Private lenders: Fast and accessible, but higher-cost and riskier
• Home equity: Efficient capital access, but increases debt exposure on your existing property

Rental property loans

A rental property loan is a subset of investment property loans, specifically used to finance a property that will be rented out.

How they differ:

• Cash flow focus: Lenders assess the property's potential rental income.
• Assessment criteria: Based more on rental yield and occupancy rates.

In the context of commercial rental properties, borrowers may also consider lease doc loans, such as those offered by Yard. These loans are specifically tailored for commercial property investors who rely on the strength of the property's lease agreement rather than their personal or business financials.

Lease doc loans:

• Designed for purchasing commercial properties with a solid lease in place
• Loan serviceability is assessed based on the rental income from the lease
• Ideal for borrowers who prefer a streamlined assessment process
• Offered by Yard: Learn more about lease doc loans

Considerations:

• Rental income generally needs to cover loan interest payments with an additional buffer (typically 1.20x coverage).
• A formal lease agreement is required, usually with at least 12 months remaining on the lease.
• Landlord or commercial property insurance is typically mandatory.

What is the difference between home loans and investment property loans?

Here’s a detailed comparison of both loan types:

• Purpose
  • Home loan: Buy a primary residence
  • Investment property loan: Buy a property for income/resale
• Interest rate
  • Home loan: Lower
  • Investment property loan: Higher (0.25%–0.50% more)
• Deposit requirement
  • Home loan: Often 5%–10%
  • Investment property loan: Typically 10%–20%
• Eligibility
  • Home loan: Focus on borrower income
  • Investment property loan: Focus on borrower income plus rental yield
• Tax benefits
  • Home loan: Limited
  • Investment property loan: Access to deductions like negative gearing

The differences in rate, deposit, and purpose can impact your financial strategy significantly, especially if you’re considering transitioning from owner-occupier to investor status.

Tips for securing an investment property loan

To boost your chances of securing an investment loan:

1. Maintain a strong credit score: Aim for 700+.
2. Demonstrate stable income: Include all income streams.
3. Provide a solid deposit: A deposit of at least 20% will typically eliminate the need for Lenders Mortgage Insurance (LMI), reducing your overall borrowing costs. However, if you prefer to apply with a smaller deposit, LMI can be used to support a low deposit application. Alternatively, if you hold equity in another property, you may be able to use it to lower your loan-to-value ratio (LVR) and potentially avoid LMI altogether.
4. Get a rental appraisal: This provides a professional estimate of the expected rental return from the property and is a key component in the lender’s serviceability assessment.
5. Engage a specialist lender: Consider working with a lender like Yard, who has deep expertise in investment lending and understands the unique requirements of property investors.

Also, take the time to compare loan rates and terms across different lenders. This can be done easily online through resources like Understanding home loan rates.

Conclusion

Choosing the right loan—home loan or investment property loan—depends on your financial goals and property intentions. Gaining a clear understanding of the distinctions between these loan types can help you make well-informed decisions and ensure your financing aligns with your long-term investment strategy.

For tailored guidance, consider speaking with a Yard lending specialist who can recommend the most suitable loan for your situation. You can also start by exploring your options through our loan products or application guide.