Variable Interest Rate - With this type of loan, the rate you pay fluctuates typically in line with changes to the official cash rate. This type of loan tends to have a range of flexible features such as a redraw facility however as investors can usually claim the loan interest as a tax deduction. Please speak to your accountant or financial planner to discuss if an Interest Only loan is the right option for you.
Fixed Rate - A fixed rate loan can be effective for investors as it provides certainty of repayments, allowing you to organise your finances without the risk of increased repayments because of rising interest rates. This can be helpful to investors because rent payments on a property are fixed during the term of the lease, and if market interest rates rise, the landlord may not be able to raise the rent until the lease expires.
Interest Only - With most standard home loans, your repayments are made up of interest charges plus a principal repayment of the loan balance. This allows you to pay off the principal amount owing (borrowed) over the term of the loan.
When an interest only period is applicable/chosen, the loan principal remains the same unless you choose to make additional payments because you are only paying off the interest charges. You would only have to pay the original amount borrowed, if you were to sell the investment property or when the interest only period expired.
This type of loan can be useful for investors during the interest only period of the loan as your monthly repayments are less than they would be if you were to pay off principal as well. In addition, you may receive a tax deduction for the interest payments.
Line of Credit - A line of credit is a revolving credit facility also known as an equity loan. This loan allows you to access the equity in your property to create additional wealth through investment, complete capital improvements or free up cash for other purposes.
Your line of credit loan is secured by a residential property. It enables you to withdraw funds up to a set limit at any time. Generally, a line of credit is an interest only loan, and in some cases, you may be able to capitalise the interest payments. Interest rates are usually higher than for a standard variable home loan.
You generally only pay interest on the portion of the loan that is drawn down. Some home loans will renew the line of credit after a set period, whereas others will require you to begin making payments on the principal after a set period. The interest rate on a line of credit is generally variable.