Thinking of taking out an investment loan? Property experts share their words of advice

Property investment is big business for Australians with many building their wealth via bricks and mortar.

Latest Australian Bureau of Statistics data shows close to 50,000 new investor loans were approved in the June quarter, up 3.5% on the three months prior.

The uptick in investor loan commitments over the quarter comes after two consecutive quarters of decline.

AMP chief economist and head of investment strategy Shane Oliver says this was reflective of the lag impact of the slowdown in the property market seen in the latter part of 2024, and very early this year.

Further cuts to the cash rates are expected to see numbers pick up as investment loans become more of an attractive prospect, he adds.

The Reserve Bank confirmed the third rate cut of the year in August, meaning the cash rate is now at a 28-month low of 3.60%.

University of Adelaide master of property Peter Koulizos says the lower interest rates now on offer will result in investors competing with first homebuyers for very similar properties.

“I think what you might see is a slight dip in investment loans next year, because next year is when the Help to Buy scheme comes into play (the shared equity scheme) to encourage even more first homebuyers than normal to get into the market,” he says.

“I’m not saying that there will be less loans, but the proportion, when you’re comparing it to first time buyers and other owner occupiers, would be lower.”

But with the new financial year in full swing and a high likelihood of further RBA cash cuts before Christmas, Mr Koulizos believes there more investor loan activity is on the horizon.

How an investment loan differs

Many people looking to take out an investor loan were often unaware that not only a bigger deposit was required but they came with a higher interest rate compared to owner occupier loans, Mr Koulizos explains.

“You need a 10% deposit plus a higher interest rate compared to a 5% deposit and a lower interest rate for owner occupier,” he says.

From a paperwork perspective however, Perth-based Mortgage Choice loan consultant Shannon Hassett says the application process for an investment loan is the same as for an owner-occupier loan.

“I guess the biggest thing they (borrowers) need to be aware of is the equity available in their existing properties and the structure how they set it up if they’re going to use that equity to borrow for future investment,” she says.

Ms Hassett explained how a standalone loan worked with the following example: If you have ‘property A’, which is your owner-occupied property, worth $1 million and you owe $500,000 against it, and you wanted to go and buy ‘property B’, for $1 million, you will need a deposit of $250,000.

“You can do that by doing it two ways, you can draw equity out of property A, so they keep their $500,000 loan, and then you do a separate loan with the same bank, for $250,000 for the purpose of investment.

“And then property B has an $800,000 standalone loan on it, so all up the property B, for taxation purposes, owes $1,050,000 which is 100% of the purchase price, plus the fees.”

The other alternative could be keeping everything separate, or cross securitising the two properties, meaning putting up both securities as collateral, where you borrow the whole debt required, Ms Hassett states.

However, the downside to cross collateral is the risk of a decline in the property market, and in the event you need to sell, it can affect your selling price and put your owner-occupier property at risk.

Things to consider

While an investment property purchase is a way to grow wealth, Mr Oliver warns the downside is the dependence on property prices going up.

If prices go down, an investment loan holder will unintentionally have a negative gearing strategy, where they are potentially making a loss.

“If the interest payments are more than the rent you get on it, and if other costs associated with the property are more than the rent you get on the property – you making a cash flow loss,” he adds.

“And also if you borrow too much, you lose your job or lose your source of income to service that loan, and you are running the property at a loss every year … then you can be forced to sell the property, which may be before you manage to get a decent capital growth on it.”

Rental demand fluctuations, economic cycles, interest rate changes and a property market over supply were among other factors investors should have on their radar, Ms Hassett advises.

 “Unexpected costs can reduce profitability,” she says.

“So a gap in the market from your tenant is  a huge one, vacancies, non-payment, property damage can affect your income, and then changes to laws, so regulatory or political risks, lending rules …these can all impact returns and the buyer’s strategy.

“Investors have to know that just because they’re buying into a strong market, at any point the market could turn and they really do need to have, a backup plan, like a plan B from a financial cost perspective, and make sure that no matter what happens, they have got that in their pocket.”

Enlist the help of experts 

Whether you were a first time investor, or were continuing to build an investment property portfolio, Ms Hassett recommends having a three step plan – planning, purchasing and managing.

“So making sure they set investment goals, check their finances and build a really great team around them,” she says.

“In the planning stage, define their cash flow, sign on short and long term strategies, check their finances to assess their borrowing capacity, and then building their team with a strong finance broker, mortgage broker, and account managers.

“And then in the buying process, they need to research the market, find the right property, do their due diligence, secure finance and make their offer strong.

“This is where their solicitor and settlement agent are really important to ensure they’ve got all the right conditions in to cover them.”

This article first appeared on Mortgage Choice and has been republished with permission.

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