EZY LOANS AUSTRALIA · PROPERTY INVESTING GUIDE
Your Complete Property Investing Guide
Get smart when it comes to financing your property investment – returns, loan types, tax benefits and how a broker helps you build wealth.
Is property the place to build your wealth?
Australia is a country of homeowners. If we have not already bought a home, chances are we are trying to find a way to buy one. Perhaps it is this familiarity with the real estate market that makes property a place where many Australians choose to invest. But it is important to know that buying an investment property is quite different from buying a home to live in. We are here to walk you through some of the key things you need to consider when it comes to financing an investment property.
How investment lending differs from owner occupier lending, and the tax and return basics.
Why do people invest in property?
Over the last few decades, the values of some properties have often risen more than the rate of inflation. Some say property ownership is a national obsession, with affordability issues, house prices and interest rate movements constantly in the news.
Apart from a general understanding of the market, there are other reasons people like to invest in property. Some common ones are the potential for capital growth (how much the property rises in value over time), return from rent, and tax benefits. You will find more about these over the next few sections.
Another plus is you do not need to be a long-time investor with lots of funds on hand to start. If you already own a home that has increased in value, you can potentially unlock this equity to help purchase another property. Or, if you have yet to buy your own home, you can use the rent to help pay the mortgage on an investment property and get a start in the market.
Earning a return from property
There are two basic ways to get a return on your property investment:
Capital growth
When you sell a property for more than you paid for it, that profit is called capital growth. Places that enjoy more capital growth are usually sought-after locations - proximity to the CBD, water, or areas with a surge in population. Capital growth in any area is not guaranteed.
Rental returns
Income from rent is a more immediate return than capital growth. As long as someone is renting the property, their regular payments can help with funds towards your mortgage and property costs. Every suburb is different, so it is critical to do your own detailed research.
Where and what to buy
One of the most common and consistent pieces of advice you will hear when it comes to investing in property is to choose with your head, not your heart. You need to be objective in choosing and weighing up the benefits and drawbacks. It should never be emotional, but when it comes to a location, it may be worth considering an area you know. You will still need to do your research and observe the market to get a good idea of what is good value and what is not.
It is important to get as much information about an area as possible, so ask around and do some digging using the relevant data available. Some areas have more potential for capital growth, others for greater rental returns, so it is good to know exactly what you are looking for. Another decision is whether you buy a unit, a house or some land. One may outperform the other depending on size, cost, location, supply, demand and market conditions.
A home may be easy to rent but could have a higher purchase cost. A unit may be cheaper with lower maintenance, but there may be an oversupply in an area. A block of land will not generate rent, but if the location has potential there may be an opportunity for capital growth. Consider the appeal of the property for potential renters, and for buyers when you want to sell. As always, we would encourage you to get an independent valuation to make sure you are not paying above market value, and to get the right financial advice.
What mortgage type suits your needs?
As with all loans, there is more to finding the right investment loan than searching for the most attractive rates and fees. A low rate is important, but it is not everything. Your new loan will probably be different from your current home loan, as it is for a very different purpose. The types available are generally the same as those for your own home, but with different advantages and drawbacks for investors:
Variable
The interest rate goes up and down depending on factors such as the official cash rate, market conditions, and each lender's decisioning. When it goes down, so do your minimum repayments. But when rates go up, your payments will too.
Fixed
The interest rate can be fixed for one to five years. Even if rates change, your repayments stay the same, so you know exactly what they will be and you are protected when rates rise. Of course you will not benefit if rates drop, and there may be significant break costs to change the loan before the end of the fixed term.
Split rate
One part is variable, the other is fixed. This lets you enjoy the benefits of an interest rate drop, while also protecting you from being fully affected if rates rise.
Interest only
You pay only the interest on your loan, not the principal. This can be attractive to investors as repayments are lower and only interest payments are generally tax deductible. However, an interest only loan will usually cost more over the term, as you will not start paying off the principal until after the interest only period ends.
Line of credit
This can be attractive to investors as it is a simple way of unlocking equity in your own home and using the funds as a deposit for your investment property.
Looking to maximise your tax benefits?
One reason property investing is attractive is that there are currently a number of tax benefits that may improve the return on your investment. These are simplistic descriptions, so always speak to a tax expert to understand the implications of owning an investment property.
Deductions
Many costs of owning an investment property may be claimed as a tax deduction. The interest payments and loan fees may be deductible, and other costs may be too. Legislation changes, so check with your accountant to find out what you can claim - it can add up to a valuable saving.
Negative gearing
When the costs of owning your investment property are greater than the income you get from rent, you may be able to negative gear. The loss is offset against your annual income, reducing your taxable income and potentially providing tax savings.
Capital gains tax
When you sell, any rise in value from when you bought it is the capital gain. Buying and selling costs are subtracted, and what is left is added to your annual income, so the gain is taxable. If you have owned the home for more than 12 months, you may be able to claim a 50% discount on the gain.
Talk to us about your options
If you are thinking about borrowing for a property investment, it is a good idea to speak to a mortgage broker like us first. We offer a wealth of information and expertise for you to draw on. Not only will we help you find the right loan, we will aim to make the whole application and approval process much easier.
The first thing we will do is meet and chat about your needs, personal goals and investment objectives. We can then give you an accurate idea of your borrowing potential and help you find a loan that suits you, so when you find the right place, we can sort out your finance as quickly as possible.
We can also point you in the right direction when it comes to relevant data about the property market. Historical data about an area’s value, population changes and projections, and average rental returns over the last few years can help you make an informed decision. Choosing the right loan might be as important as choosing the right property – there are hundreds of different loan products out there, and it is just a matter of finding one that meets your needs.
Why not go straight to a bank?
Of course you can go to a bank, but this can be trickier than it sounds. Which one do you choose? Which of their products is right for you? And what about other lenders, building societies and credit unions? There are a lot of options out there and, with regularly moving interest rates and new products, it is an ever-changing market.
That is why a broker makes sense. We do this day in and day out. We know the lenders and their products, and we keep up to date with changes. Banks enjoy working with brokers, as we do a lot of the work for them and may help speed up the application process. Put simply, having a broker in your corner makes it easier to find the right loan, saves you time and, hopefully, money.
Using a mortgage broker is the smart way to go
- We provide real choice, looking to find you the right deal
- We work with multiple lenders, not just one, keeping competition alive
- We may negotiate a better outcome
- We help at a time and place that suits you, doing the legwork for you
- Our aim is to save you time and stress, and get things moving as quickly as possible
We're here to help make it easier
If there is something you do not understand or need more of an explanation, please just pick up the phone or email today. Talk to Ezy Loans for free, obligation-free advice on your property investment.
Written by Amrinder Singh – Mortgage & Finance Broker, Ezy Loans Australia. Credit Representative 505232, authorised under Australian Credit Licence 377294 (Mortgage Australia Group Pty Ltd).
This guide provides general information only and does not take into account your objectives, financial situation or needs. It is not financial, tax, credit or legal advice. Tax benefits depend on your circumstances – always confirm with a registered tax agent or accountant. All loans are subject to lender approval and eligibility criteria.
Ezy Loans Australia is a Perth-based mortgage and finance brokerage helping first home buyers, investors and refinancers across Australia secure the right loan with confidence.
Contact Info:
- 905 Hay St, Perth WA 6000
- amrinder@ezyloansaustralia.com.au
- 0432 066 362