Financing an Investment Property: 8 Bold Strategies to Try
Financing an investment property should never be done with a “one-size-fits-all” approach. You could have the lowest interest rates on the market, but without the right strategy and finance structure, you could still struggle to achieve your long-term goals.
Fortunately, there is a range of proven rental property financing strategies that can help Australian investors in a more nuanced way.
Financing an Investment Property: Why Strategy Matters
Before you decide on how to finance a rental property, it’s important to have a clear investment strategy in mind. The best strategy will be the one that factors in all aspects of your unique situation, including your income, financial obligations, risk tolerance and goals.
Crucial to your strategy should be choosing the right loan structure. This is because your loan structure will ultimately have a big impact on your:
- Borrowing capacity
- Cash flow
- Ability to scale your portfolio
Choosing a loan structure without a strategy is a bit like building a house without a plan – it may be ok for the short term, but it will definitely limit what you can do in the future.
Investment Property Loan Options and How They Differ
Investment property loan options can play a big role in helping investors achieve their goals. These may include:
- Variable vs fixed interest rates
- Interest-only vs principal and interest loans
- Offset accounts
- Redraw facilities
Keep in mind that these features are not strategies themselves – they’re effective tools that can be used as part of a well-planned strategy.
8 Rental Property Financing Strategies to Consider
When financing an investment property, why not consider whether the following strategies could work for you?
1. Using Equity Instead of Cash Savings
If you have an existing property, you may be able to use your existing equity as a deposit on your first investment purchase. This can speed up your investment purchasing ability, since you don’t have to save up a cash deposit. However, this strategy will increase your overall debt levels.
2. Interest-Only Loans to Improve Cash Flow
For investors who are looking to prioritise flexibility and rental yield, an interest-only loan can be a useful tool. This loan structure enables borrowers to pay off the interest accrued on their loan without having to make payments on the loan principal.
This can be a good short-term option for investors trying to manage cash flow, but bear in mind the value of the loan won’t start decreasing until you switch to principal and interest repayments.
3. Financing an Investment Property with Split Loan Structures
An alternative strategy for financing an investment property is to have a split loan structure. This means that a portion of the loan will have fixed interest rates, providing greater levels of certainty.
The remaining portion of the loan will have variable interest rates, allowing investors to benefit from any potential rate decreases. This approach is similar to diversifying an investment portfolio, rather than putting all your “eggs” in one basket.
4. Using Offset Accounts to Reduce Interest
A popular strategy for investors is to have a loan structure that includes an offset account. This is a transaction account linked to your home loan, where the balance reduces the amount of interest charged on your loan.
For example, if you have a $500,000 loan and $50,000 in your offset account (perhaps as a slush fund for emergencies), you’ll only have to pay interest on $450,000.
5. Understanding Cross-Collateralisation
Cross-collateralisation is when multiple investment properties are linked together under one loan. This approach can sometimes be promoted by lenders as a simplified way of setting up finance for multiple properties.
However, cross-collateralisation can reduce flexibility and make things complicated if you decide to sell one of the investments. An experienced broker can talk you through the pros and cons of cross-collateralisation and help you find the right approach for your situation.
6. Leveraging Rental Income in Borrowing Capacity
It often comes as a surprise to first-time investors that lenders won’t accept 100% of rental income when assessing your borrowing capacity. This is based on APRA guidelines and is designed to ensure borrowers can still meet repayments even when the property is vacant or needs repairs.
However, some lenders will assess rental income more favourably than others. One lender may accept 80%+ of the potential rental income, while others only accept 70%. Choosing a lender with a more generous approach can make a big difference.
7. Guarantor Loans for Earlier Investment
This is considered a “bold” strategy for financing an investment property, but it’s actually quite a common move for first-time investors. Having a family member act as a guarantor can help to reduce your deposit requirements while avoiding Lenders Mortgage Insurance (LMI).
8. Refinancing to Improve Loan Terms
This can be an extremely effective strategy for scaling an existing investment portfolio. As your situation evolves over time, refinancing can give you access to lower rates, a better loan structure or more suitable loan features. Refinancing is also a great way to access equity for your next investment purchase.
How to Finance a Rental Property Based on Your Situation
Remember that no single strategy can ever be labelled the “best” choice for property investors in general. Your income type, debt levels, equity, cash flow and financial goals will all play a significant role in determining the “best” strategy for you.
Key Considerations Before Choosing a Strategy
It’s always a good idea to assess the following factors before deciding how you’re going to finance an investment property:
- What are your serviceability buffers?
- How will your cash flow be impacted by interest rate changes?
- How will you manage long-term flexibility vs short-term gain?
Talking through these details with an experienced finance expert can help you make good decisions for both your short and long-term investment property goals.
Your Next Step When Financing an Investment Property
What should be your next step if you’re thinking about financing an investment property? Start by getting the right advice from someone you can trust. Once you’re equipped with the information you need, you’ll be ideally positioned for your next investment purchase.
If you’re considering financing an investment property, then contact the team at North Brisbane Home Loans. Our brokers can walk you through different strategies and explain how lenders may assess your situation. We’ll answer all your questions and help you find the best loan structure to suit your needs.
Contact North Brisbane Home Loans today and take the next step towards financing an investment property.