Investment Home Loans

A property is ‘negatively geared’ when its expenses are more than its rental income. Initially, negative gearing can seem confusing – why would you want to pay for property expenses out of pocket?

But, in the context of your broader financial goals, negative gearing can often be a good thing. Because investment property expenses are tax-deductible, holding a negatively geared property can lower your taxable income. When the property is eventually sold, you’ll receive a return on your investment from any capital gains.

Even if you haven’t fully paid off your investment property mortgage, you still have equity in your property – the difference between its current market value and the remaining value of your mortgage. For example, if you own a property currently worth $750,000 and you still have a mortgage of $525,000, you have $225,000 in equity.

Some of that equity can be ‘unlocked’ to borrow more money or get a better loan. Usable equity is generally 80% of your property’s current market value minus your mortgage. Using our earlier example, 80% of $750,000 is $600,000; subtract your mortgage of $525,000, and you’re left with $75,000 in usable equity.

You could use that $75,000 to refinance to a loan with more favourable conditions, put down a deposit on a new property, or even take out a renovation loan to improve the value of your existing property. 

Finding the right investment property can mean different things depending on your financial goals and circumstances. Generally, a ‘good’ investment property is one that goes up in value (capital growth) and produces enough rental revenue to cover its mortgage and expenses.

Of course, not all rental properties need to make a profit. If your property is negatively geared, your expenses might be more than your income (which can be helpful for tax purposes). Negatively geared properties generally make money through capital gains (which are realised upon the property’s sale), rather than rental income.

A loan-to-value ratio is the amount of money you borrow divided by the purchase price of your property, expressed as a percentage. 

For example, if you had a $60,000 deposit on a $600,000 property, you would have an LVR of 90%. 

The higher your LVR, the harder it can be to secure a mortgage. If you have an LVR over 80%, your lender may require that you pay lender's mortgage insurance (LMI) to offset the added risk. Although traditional banks often have a maximum LVR of 90% or 95%, your mortgage broker may be able to connect you with digital banks that are willing to work with higher LVRs. 

A split home loan is a loan that has been divided into two or more parts. Having a split structure means you can nominate one portion as a fixed-rate loan and the other as a variable-rate loan. 

Because fixed-rate and variable-rate loans have different features and benefits, a split structure gives you the best of both worlds – a level of repayment certainty, combined with potential benefits from interest rate drops and the ability to make repayments faster. Depending on the lender, you might also get access to redraw facilities and offset accounts. 

Of course, the nature of split home loans means that the less desirable features of both loan types are always present. The fixed-rate portion won’t benefit from interest rate drops, and the variable-rate portion could be vulnerable to interest rate rises. 

So, while a split loan can be beneficial in certain circumstances, it’s important to talk through the implications with your mortgage broker before you make any decisions.