The Best Home Loan for Property Investors

by | May 26, 2021

Deciding on the right loan structure as a property investor, is a little bit like choosing the right outfit on a first date. It depends on what stage of life you’re at!

If you’re new to the game, something a little daring might work best. Later on, you might want to play it safe.

It’s the same for property investment and the stage you’re at reflecting how risky or safe your loan structure needs to be.

Here we weigh up the pros and cons of principle and interest loans vs interest only loans for property investors.

 

UNDERSTANDING DIFFERENT TYPES OF DEBT

Any type of loan is a type of debt. Debt can make people nervous. If you want to be successful as a property investor it’s important you know the difference between good or rich debt, and bad or poor debt.  

Poor or bad debt, is just that – BAD! 

Bad debt is borrowing money from a lender to buy something that immediately loses value and has no prospect of earning you an income. 

Bad debt is spent on things like new cars, jet skis, motorbikes, furniture. Expensive to buy, these items lose value as soon as you make the purchase. They never resell for more, or even the same, as what you paid, and it’s impossible to generate an income you can live on from them.

Rich debt is using other people’s money (usually the bank’s) to buy an asset. An asset puts money in your pocket. An investment property puts money in your pocket via rent. As an asset, an investment property has an added bonus in that it also benefits you with some tax effectiveness and efficiency that can also put money in your pocket. A jet ski doesn’t do that!

As a property investor you need to get comfortable with debt. There is nothing wrong with debt as long as it’s rich debt and not poor debt. You just need to know the difference.

 

WHEN INTEREST-ONLY LOANS ARE THE RIGHT CHOICE

During the acquisition phase of your property investor journey, your primary aim is to purchase the right properties, not to pay down your debt. Embracing debt can take a while to get used to, but you need to think about the long game and what you’re trying to achieve, i.e. many properties, all creating wealth.

If you can get an interest-only loan in your acquisition phase, this is 100% what you should do. Why?

Because interest-only loans give you flexibility with cash and that flexibility allow you to move on to the next property faster. Having access to spare cash is vital in your acquisition phase, which can last for years. If you’re paying every last cent you have to pay down your principle, where is the next deposit amount going to come from when you want to buy a second, third or fourth investment property?

If your comfort-zone demands some visible debt reduction – or at least the potential of it – instead of a principle and interest loan, opt for an offset account. 

The advantage of an off-set account is that you can put any extra money into that offset and make extra payments if and when you want, but you retain access to that cash. 

If you opt for a principle and interest loan and you suddenly need money, you have to apply to the bank to redraw that money – and there’s no guarantee they’ll say yes. An off-set account gives you the comfort of seeing some “savings” without losing control of the money.

 

WHEN A PRINCIPLE AND INTEREST LOAN MAKE SENSE

When you move from your acquisition phase, into your holding phase, and finally into your consolidation phase of property investment, it might be time to change your loan structure.

Unless you have a significant income, it’s hard to pay off debt while borrowing money to buy three or five investment properties. But once you’re happy with your portfolio, a principle and interest loan can help you start to pay down your debt, while still reaping the rewards from your investment incomes.

No matter what style of loan you choose, the most important thing is that you are able to service that loan while achieving your goals. 

LOAN STRATEGY IS FUNDAMENTAL 

Having a long-term plan around your loan strategy will be important to your overall success as an investor. 

Let the experts at Positive Real Estate teach you about how to calculate your loan repayments while you’re still investing at one of our free property investing seminars

Sign up for one of our information and education events, where you’ll be equipped with the tools, resources and support to thrive, and not fall behind on your path to financial freedom – whatever that may look like for you. 

Book your spot now and find out what you need to know about the current market landscape and how you can make it work for the ultimate wealth creation opportunities. 

 

Book here

Click here to like us on Facebook and see more updates like this.

Hey there, do you enjoy the Positive Real Estate Blog? If you did, why don’t you book into a Property Information Night in your area and get more information from our team. You can do so here.

Leadership & Property Investing

Leadership & Property Investing

It’s time we had a conversation about leadership – real estate investor style. Some people are unwilling to run their own financial affairs. If you are listening to this show, that means you are a property investor or preparing to be. This means you have to be the leader of your financial life. This episode is dedicated to unpacking your primary question, what’s stopping you from being more self-led, and an unwelcome visit to the podcast from my hearth and home neighbour.

Oh yes – and it’s dedicated to three awesome listeners of the podcast! Alison, Sue and Peter – this one’s for you! No Lake Weirdo for you!

Banks vs. Non-Banks, Are They Safe?

Banks vs. Non-Banks, Are They Safe?

Here we go again, APRA is back with banks and non-banks and are they really safe? who and what are they? Come along and find out why Jason thinks it will be a better choice going forward for investors. Let’s Wealth Coffee Chat!

House Prices To Drop 12%!

House Prices To Drop 12%!

Why do we think that CBA is predicting this will happen? Come along and join Jason to take a deeper look into this. Let’s Wealth Coffee Chat!

From Mortgage Disaster to Financial Freedom with Helen & Ian Morse

From Mortgage Disaster to Financial Freedom with Helen & Ian Morse

This is a story of courage and bravery. Of how naivety can lead to expensive mistakes (see margin loans being called on) to having the grit and determination to see it through to the end. Helen and Ian Morse have ridden this very rollercoaster, and whilst there’s a lot of heartache in the story, it has a very happy ending, with the couple’s financial independence allowing them to travel the world for over 12 months – with more bucket list dreams to come.

Once you’ve listened to this episode, I’d love it if you hit the subscribe button so you get notified every time a new episode drops.

Your Burning Questions Answered (Part 2)

Your Burning Questions Answered (Part 2)

I failed you on the previous episode! I had so many questions from you that I didn’t answer on the previous ep! The last show was a failure because I didn’t get to nearly as many questions as I wanted. So we are doing a second Q+A show. Listen to hear the answers to the most pressing questions in the real estate space and my expert opinion.

How Property Investors Can Reduce Tax Down To Zero!

How Property Investors Can Reduce Tax Down To Zero!

Every smart property investor knows that to create and maintain a portfolio, we need to have good cash flow. One of the ways we can support this is by using depreciation and tax. But, just like equity, depreciation only works for us if we know how to access and then leverage it.

NEWS FLASH: Clearance Rates Dropping!

NEWS FLASH: Clearance Rates Dropping!

These news headlines are just getting better and better. Today we talk about the most recent headline which is are Clearance rates dropping and how will this affect us as property investors? Let’s Wealth Coffee Chat!

Retired by 50 with Sharen Carruthers

Retired by 50 with Sharen Carruthers

Sharen Carruthers had a goal to invest in real estate and be retired by 50. She achieved her life’s dream with two weeks to spare and then did as many retired people do. She travelled the world to all the places she wanted to. She gave her time to family and some business interests. And then … she got bored.

This exciting, inspiring and enlightening conversation with Sharen demonstrates that sometimes our goals and dreams are there to open up a new possibility of what’s next. It’s not always the achievement of a goal that is the magic. It’s the opportunity that the achievement. And Sharen shares all of that on this episode of Property Investor Tales. Enjoy!