Investing in property is a reasonably secure form of building long term wealth. If investment properties are selected well it can deliver many good returns for the long-term investor.
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What are the benefits of property investment?
- Earning rental income which can cover a part or all of your loan repayment.
- Benefiting from capital gains when you sell after the property increase in value.
- Building equity in your home loans, which can be used to invest in other properties.
- Financial benefits through taxation and gearing.
- An avenue to diversity your investment portfolio if you have other investments in cash, shares or funds.
What is equity?
Equity is the difference between the market value of your property and the outstanding balance on your loan. For example, if your property is worth $600,000 and it has a mortgage of $200,000 then you have an equity of $400,000. A property’s equity will increase over time as you make repayments on your loan or as the property increase in value. If you have had your home for a few years, you could have built up a significant amount of equity in your property.
Can I use the equity in my home as a deposit?
Yes, If you’ve owned your own home for a few years, you could have built up quite a bit of equity in your property. Equity is the value of an asset not subject to any lender’s interest. For example, a property worth $500,000 with a mortgage loan of $150,000 has equity of $350,000. Instead of finding a cash deposit to buy an investment property, you could use this equity as the deposit.
What’s negative gearing?
A property is negatively geared when the rental income it produces is less than the cost of owning it. This cost include interest on the loan, bank charges, the cost of maintenance and repair as well as capital depreciation.
Negative gearing has tax benefits for investors because it allows them to deduct any losses they make on their investment property from their taxable income.
Are there interest-only repayment options on investment loans?
Yes, loans with interest-only repayments are ideal for investors wanting to invest and seek returns in the short to medium term. Because you are only paying the interest accrued on the loan and not the principle, interest only loans will have a reduced payment amount compared to a principle and interest loan. For the property investor interest-only loans could function to minimize your complete outgoings and improve your cash flow. The interest paid can be claim come tax time through negative gearing.
What interest rate options are available?
Investment loans can be obtained with a variety of interest options, these include:
- Variable interest rate– The interest rate will change according to market conditions
- Fixed interest rate– The interest rate is fixed for a certain period. This protects the investor against market fluctuations.
- Split interest rate – Your loan can be split into two portions where one portion is on a variable interest rate and the other portion is on a fixed interest rate. This allow the investor to enjoy the benefits of both forms of interest rate.
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