Interest only loans
Ideally, investment property loans should be interest only because an interest only investment loan is FULLY tax deductible. Interest only loans can be fixed or variable.
It is usually the best cash flow solution when used with good capital growth.
With an interest only loan your repayments are set to cover the interest component of your loan only allowing you to keep your repayments on your investment property to a minimum. Generally, interest only loans are for a maximum five year term (depending on your lender) reverting to a principal and interest loan at the end of the agreed interest only term. However a further interest only loan can be negotiated at this time. The interest on your investment loan is tax deductible, making these types of loans attractive to investors.
Fixed rate loans
These loans are set at a fixed rate for a specified period – usually one to five years. Repayments do not rise or fall with interest fluctuation throughout the specified period. At the end of the term you can lock in another fixed rate, switch to variable or go for a split loan. These loans may have limited features and lack the flexibility of variable loans. There may be early exit fees and limited ability to make extra payments.
Standard variable rate loans
These loans are the most common. The variable rate loan offers more features and flexibility so the rate is usually slightly higher. The extra options (for example a redraw facility, the option to split between fixed and variable, extra repayments and portability) should be taken into account when choosing your type of variable loan. Repayments vary as interest rates fluctuate.
Offset accounts
An offset account is a savings account attached to your loan account. Money in this account is offset against the loan amount thereby reducing interest payable. Significant savings are made by reducing compound interest with the use of these accounts.
Other advantages of an offset account include being able to pay off your home loan faster than the repayment schedule demands while being able to redraw money if the need arises.
