So, you’ve decided you want to begin investing but don’t know where to start? Or maybe you’re looking to diversify your portfolio further but aren’t necessarily backed by the right funds? In these situations, borrowing to invest may be an option for you. However, before you begin, you must understand investment loan rates too.
Whilst, not the answer for everyone, and not without its risks, investment loans may open the door to broader investing opportunities. However, the success of these loans can lean on what kind of investment loan rates accompany them. Read on for more information about the basics of investing and investment loan rates.
Please note, specific ideas and products presented in this article may not be on offer by Monzi nor the lenders we work with. This article presents only general information. Consider seeking professional financial, taxation, legal or other advice to check how the information and ideas presented on this website relate to your unique circumstances.
What is an investment loan?
Borrowing to invest, leverage, gearing; these are all titles given to investment loans. Unlike standard home loans or personal loans, investment loans are specially designed to use this cash to grow your investments.
If you’re a first-time investor, it may be worth speaking to a financial advisor about whether an investment loan is right for you. Borrowing to invest is typically considered a strategy for experienced investors due to its high risk. This risk stems from market fluctuations.
When the market rises, your return will increase. However, when they fall, your losses may be larger. Moreover, if you make a loss, you won’t be exempt from your loan repayments. So, before taking out an investment loan, it is important to understand their features and the accompanying investment loan rates.
What are investment loan rates?
As with any loan, interest will apply to your investment loan. Investment loan rates are the rates that your lender will charge as a percentage of your principal. The amount of interest you pay correlates with a few aspects. Typically, the amount you are borrowing, how risky your lender considers the loan and the state of your loan to value ratio.
Each lender may offer different investment loan rates. These rates generally aren’t too different between lenders, given that they are influence by the market. However, it may be worth weighing your options as, regardless of how small the percentage, an interest rate saving may still save you money in the long run.
Investment loan rates, however, are only a small aspect of a potential loan that needs to be considered.
Types of investments
There are many different forms of investments for you to delve into and expand your portfolio with. The two that are most common, however, are property investment loans and share investment loans.
Although, this doesn’t mean you should overlook the lesser discussed investment options. You may consider mutual funds, gold or cryptocurrencies. Regardless of what you invest in, taking an investment loan will always have pros and cons.
How can you compare investment loan rates?
For your future investments, considering the investment loan rates may be imperative. Due to this, it may be worth knowing the methods available to you for comparing these rates. The easiest way to do this is to google ‘investment loan rates comparison’, and it may generate any number of sites that offer comparisons between lenders and their rates.
Generally, these comparison sites may allow you to filter the lenders so that you can see which lenders are also offering the loan features you want. Alternatively, you could visit the sites of the lenders you are interested in, and locate their investment loan rates and conduct a self-managed comparison. However, this may be more time-consuming.
Keep in mind that the loan with the lowest interest rate, may not be the best option. You should also compare loan features such as the term, the additional fees, and repayment frequency. You may need more flexibility than the loan with the best rate is offering. On top of this, even if a loan has a cheap rate, it still might not be the most affordable option in the long term.
How might investment loan rates impact you?
The investment loan rates are only a fraction of the loan factors worth considering. However, despite their impact, there are some questions worth asking yourself first.
As mentioned previously, the features make the loan. The low rate you may have found might be excellent. However, if you foresee a need to rework your loan term and your loan doesn’t offer this feature, you may be digging yourself a hole.
Usually, potential borrowers are seeking the opportunity to make extra payments, have an offset account, or a redraw facility. Whilst you can always refinance the loan further down the track, finding flexibility upfront may save you the hassle.
How you access your lender may also be worth considering. Are you okay with having to go into the branch, or would you prefer to control your funds and repayments via internet banking? Your investment loan should suit your lifestyle so that it doesn’t become a burden.
You may need to consider what level of certainty you would like to surround your repayments. This is where you evaluate your need for either a fixed or variable loan. Do you need a fixed loan to be comfortable with your repayments, and plan them into your budget? Or would you prefer more freedom that may come with variable loan?
How risky is borrowing to invest?
Investment loans are not all smooth sailing. They are often considered quite a high risk. This is due to a handful of factors:
- Interest rate increases – if your loan is not fixed, interest may be subject to change. If your rate is to increase by a few per cent, would you still be able to make your repayments?
- Capital value decreases – your investment can depreciate based on the market. If your capital suddenly falls in value and you have to sell, it may not cover the remainder of your loan.
- Room for more considerable losses – as a result of a capital value decrease, if you sell and cannot cover the loan, it doesn’t go away. You will still need to make your repayments.
- Investment income – if, for example, you lose a tenant and are not getting income off your investment property, you need to ensure you can still cover your repayments. You also need to make these repayments without neglecting to feed yourself and keep your lights on.
What is a reasonable property loan rate?
It’s hard to throw a blanket over property loan rates and confidently say what a reasonable rate is. This is because the market is not fixed, and what may be a good rate one month, may become obsolete the next month. Not only this but a fair rate for a fixed loan, may not be an appropriate rate for a variable loan.
As a general figure, anything under five per cent is acceptable. However, don’t neglect flexibility, certainty and accessibility as relevant selling points.
What’s the difference between a regular loan and an investment loan?
When talking about investing in property, the classes of the loan are either owner-occupied or investment. When referring to other forms of loans, such as borrowing to invest in shares, the alternative would be a personal loan that you can use for whatever you like.
So, here we will focus on the difference between owner-occupier loans and investment property loans. Owner-occupier loans are, as they imply, homes that the buyer will be living in. A third party inhabits investment properties.
The main difference is in the expenses. Investment loans are typically more expensive than the regular home loan. This is a result of higher interest rates and appraisal and closing fees. The reason investment loans are more costly is because of the higher risk that they pose to the lender.
In terms of other investment avenues, if you aren’t taking, for example, a margin loan, then your other option for borrowing may be a personal loan. You can use a personal loan for whatever reason. However, if planning to invest, you should seek financial advice first.
LVR and LMI: what are they?
These are two terms that come up in the process of most loans. You will usually find them in a home loan and margin loan terms and conditions. Therefore, you need to understand what they mean.
Firstly, LMI stands for lender’s mortgage insurance and is put in place to protect the lender, not the borrower. Lender’s mortgage insurance comes into play if your deposit is less than 20% of the property’s value. The LMI is a one time cost which you can roll into the total loan amount.
LVR is the loan to value ratio. LVR interacts with the LMI as your loan to value ratio is what determines whether the lender’s mortgage insurance is necessary. If your LVR is under 80%, then the LMI is not required. Some lenders will lend to LVR’s of up to 95%. However, they are offered on a limited basis and may be quite risky. You can reduce your LVR by increasing the size of your deposit, or you can find a guarantor.
Fixed vs variable vs split home loans
As discussed earlier, whether you choose a fixed, split or variable home loan is possibly more important than the investment loan rates. But let’s look at them each in a bit more detail. Keep in mind that it may be a good idea to consult a financial advisor before making your decision.
Fixed-rate home loan
A possible motivation for taking a fixed-rate loan is peace of mind. If your loan is fixed, then you can create a budget without having to worry about a change in rates due to the market. Depending on your lender, you may even be able to choose the period that your loan is fixed for.
The flip side of the coin to a fixed loan is that if interest rates decrease, you will have to continue with whatever you are paying. You may also have less access to flexibile features.
Variable-rate home loan
Variable-rate mortgages possess the features that allow you a range of flexibility if you need to respond to various life changes, such as a job loss or a costly health issue. Having a variable loan may also allow you to pay your loan faster if you can.
However, as interest rates can change, you will need to consider whether you can afford to make your repayments if the investment loan rates go up.
Split rate home loan
If you can’t decide between one or another, you could take the best of both worlds and split your loan across both options. There are various ratios for you to break your loan. Ask your lender about what options are available to you.
Can you refinance investment loans?
Yes, you can refinance your investment loans. If you haven’t thought of doing so, or haven’t come across this concept before, refinancing is a way to get better deals on your investment loan rates, along with other desired features. When refinancing, you can either increase, decrease, or maintain the loan. Depending on what it is you’re seeking to achieve by refinancing, your options may change.
Keep in mind that there are risks accompanying refinancing. It may be wise to prioritise covering your mortgage repayments, as they need to be repaid no matter what. Even if your property happens to lose its value, your lender will maintain their terms and expect you to meet them.
When can you start investing?
There is no real age for you to begin investing. As long as you’re older than 18, you can invest as soon as you have the spare cash to do so. If you are a young adult, you may not be able to apply for an investment property straight off the bat. Instead, you can start getting involved with buying shares.
When it comes to borrowing to invest, you should ensure that you have some investing experience behind you. It may also be wise to form a strong understanding of the investment process and how to monitor the market. A good starting point for beginners to the investing world could include pocket investing apps that invest your loose change.
Interest-only investment loan rates and payments
There may be interest-only home loans available to you on the market. This means that for a certain period, for example, five to ten years, you pay only the interest. For the length of the loan term, the principal amount will remain intact.
This will give you lower monthly repayments and may also allow you to receive tax claims, particularly if your property is hosting tenants. This may be in your best interest if you would like to prioritise other personal debts.
The interest-only investment loan rates are subject to the lender and how reliable you are as a borrower. You can compare potential interest-only investment loan rates online using a comparison calculator.
Margin loans are the investment loans that you secure against your shares. To qualify for a margin loan, you will need to supply some starting capital, whether a cash deposit or securities that you already possess. Your lender should have an approved securities list (ASL) outlining all the forms of capital you can use.
The amount you can borrow is, as with a home loan, dependent on your LVR. This is because your loan to value ratio equates to your financial position. If your margin loan is successfully approved, you can go on to diversify your portfolio and thereby, influence your LVR as you go.
Taking a margin loan will allow you to invest in shares, managed funds (a money pool with other investors) or exchange-traded funds (ETF’s, a collection of securities traded on an exchange).
What should you do if you get a margin call?
The downside of margin loans is that you are opening yourself up to the possibility of receiving a margin call. Margin calls are a phone call you may get from your lender, to inform you that you need to deposit more approved securities to meet your minimum equity requirements. This is generally a result of your stocks losing value.
In these situations, you must address the margin call. It is non-negotiable. If you fail to do so, your broker may potentially close some of your portfolio positions, or worse, sell your shares without consulting you. This will result in you being void of any return from your shares. To make matters worse, you will still owe your repayments and broker.
The stock market is dependent on luck and trends. If you want to take a margin loan, you need to prepare in case stock prices fall. The more you borrow to invest, the greater your level of risk.
How to manage margin loan risks?
If you have read the above information and still would like to take a margin loan, here are some tips to help manage the potential risk:
- Be prepared for, and do not ignore, a margin call – consider setting up a ‘trigger point’ which is a mark slightly above the minimum equity requirements as an early warning you are approaching a margin call. If you do receive the call, ensure your response is appropriate and timely.
- Pay your margin loan interest regularly – whilst this interest is typically low, it still needs to be paid periodically.
- Monitor your equity, investments and loan – be aware of what is happening with the stock market and your portfolio.
Low deposit investment loans
Low deposit investment loans do exist. However, they come with significantly more risk to the lender, which makes them less common. But what is a low deposit investment loan? Essentially it is just a loan you can use for an investment property, that has a deposit of less than 20%.
Taking one of these loans will mean that your investment loan rates will be higher, resulting in higher monthly repayments. This will also result in you having to pay LMI unless you use a guarantor to help you with the loan.
You may obtain a low deposit investment home loan from a variety of lenders. However, they are typically less readily available in comparison to other investment loans.
Good investment loan features
When seeking an investment loan, there are particular features you should keep an eye out for, that may make your loan more favourable. Here are some of the features:
If your rental property is unoccupied and you typically rely on rent payments to pay monthly costs, repayment holidays can come in handy. This feature allows you to potentially pause your repayments for up to a year. However, interest will accrue despite this.
An offset account is potential savings account for extra funds, accompanied by a debit card for access. Offset accounts may allow you to cut back on your loan’s interest. This may also allow you to save for a second investment property.
This potential feature allows you to borrow extra money without applying for another loan. You have access to a predetermined line of credit. The amount you choose to borrow may be secured against your property’s equity. However, due to this convenience, interest rates may be higher.
If your property is a rental, this feature will allow you the opportunity to sync your repayments with your tenant’s rental payments. For example, if you get paid rent fortnightly, make your repayments fortnightly also. This is a long term strategy that may shorten your loan term overall.
What is and is not an investment?
Some misconceptions are surrounding what is and is not an investment. Earlier in the piece, the things that are investments were discussed. However, some people may be under the impression that there are other things that you can invest in.
Your car is not an investment. Your super is not an investment. The house you live in is not an investment. Nor are the possessions that you choose to fill it with. These things are simply your assets and, while you can potentially make money off of them, you shouldn’t be expecting a high return.
Investments are products and services that make your money work for you. A car that begins depreciating as soon as you drive it off the lot is not making your money work for you.
Tax on investment properties
Your investment property can make capital gains or capital losses. Depending on how your investment performs, you may be eligible to receive potential tax breaks. Your property makes capital gains when you sell your investment for a higher price than you initially paid for it. This will result in a capital gains tax (CGT). However, if you have held this property for more than a year, this tax can potentially be halved. You will need to include this information in your tax return for the year.
If you sell your investment and make a loss, meaning it sells for less than you paid, this is a capital loss. If this happens, you can reduce the capital gains you made in the year of the loss. Alternatively, you can carry the loss forward to allow you to offset future capital gains.
For further information on capital losses and gains, along with taxes, the Australian Taxation Office (ATO) has information to aid you.
Positive and negative gearing
As mentioned, gearing is an alternate term for borrowing to invest, which means that your gearing can either be positive or negative.
If your gearing is positive, this means that the income from your investment is more than the amount you paid for it. In other words, there will be more money coming in than going out. However, this income will be taxable.
As you might expect, negative gearing is the opposite of this. If your investment results in negative gearing, you may be entitled to claim tax deductions. Keep in mind that even if you are making losses, your investment will be costing you money. So, ensure that you have cash from savings or your salary to cover these expenses.
Can you claim stamp duty on an investment property?
Stamp duty is an extra cost that you have to pay for property transfers and to change names on certain documents. Unfortunately, stamp duty is not tax-deductible. However, when you are ready to sell the property, you can use it to reduce the size of your capital gains tax.
Therefore, stamp duty on an investment property can end up working favourably for you, however, not initially. It is worth keeping in mind for the long term investor.
Do you have to pay tax on shares?
Capital gains are not property exclusive. You will also have to pay CGT on shares and other investments. However, akin to capital gains tax on property, if you have held your shares for longer than a year, this tax amount can potentially be halved.
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