Investment Loan vs Home Loan — Let The Battle Begin

So you’re ready to step into the property market and are wondering what your best plan of action is? What do you need to know about an investment loan vs a home loan? Surely any big purchases can ultimately be deemed an investment, right? So what’s the difference?

To be very clear, the main difference between an investment loan and a home loan is simply this:

So let’s pit these two against each other and see who the odds favour.

In The Red Corner — An Investment Loan

Gloves on and mouthguard in — your standard investment loan is ready for action! This heavy hitter is used exclusively to purchase an investment property that you intend to rent out and flip for a profit, or hold onto for a future passive income stream. Unlike home loans, investment loans can also be taken out on commercial property.

But don’t let those showy good looks fool you, investment loans are typically the more expensive and risky of the two loans in terms of the following:

• Interest rates are usually higher than home loans because investment properties are seen by lenders as higher risk.
• Loan-to-Value Ratio (LVR) is lower and often capped at 80-90%, meaning you need a larger deposit to secure the loan, which is especially true if you’re looking at buying commercial property.
• Repayment terms are typically stricter, and lenders may want historic proof of the rental income of the property prior to issuing a loan.

When it’s punching above its weight, an investment loan can offer:

• Potential for positive gearing or being cashflow positive when the rental income is enough to cover the mortgage repayments and the associated expenses of ownership.
• Tax benefits such as deductions for interest payments and other expenses, such as renovations or emergency repairs.
• A property portfolio over time, hopefully leading to wealth accumulation.

But when it’s firmly in the wrong weight class, it may mean:

• Higher interest rates and larger deposit requirements.
• The property is subject to market risk, meaning rental income may fluctuate, and the property value may decrease. It could also sit vacant for periods between tenancies.
• More scrutiny from lenders, making it harder to qualify for than a standard home loan.
• No options for grants or stamp duty exemptions.

In The Blue Corner — A Home Loan

A home loan is lighter on its feet, easily bobbing and weaving around some of the more cumbersome aspects of the investment loan.

This can often be the first bout for the scrappy underdog, as a home loan is typically used for the first property a person buys with the intention of living in it. As such, the loan terms, rates, and conditions are structured to help secure that place to live.

This loan is a no nonsense, straight-down-the-line type with a few key features:

• Interest rates are generally lower compared to investment loans since lenders view owner-occupied properties as less risky.
• Lenders might allow a higher LVR, meaning you can borrow a larger percentage of the property’s value, sometimes up to 95%.
• Repayment terms can be more flexible, with longer repayment periods and possibly the ability to take advantage of government grants or incentives for first-time buyers.

When it’s punching above its weight, a home loan can offer:

• Lower interest rates.
• Higher LVRs that allow you to purchase with a smaller deposit.
• Access to government incentives and grants that are often available for first-time buyers.
• An easier pathway to secure property ownership.

But when it’s firmly in the wrong weight class, it may mean:

• You’re tied to your primary residence with less financial and geographical flexibility.
• No direct income is generated from the property.

Investment Loan vs Home Loan — Still On The Ropes?

At the time of applying for finance, you’ll need to have made an initial decision about the type of loan you’re hoping to get.

Most likely you’ve made the decision to get a jump on adulthood by owning your own place so will choose to apply for a home loan. Maybe you’re happy where you’re renting and are deciding whether or not to start a property portfolio. Whatever your choice, hopefully you now have an understanding that acquiring a loan may be dependent on the type of loan you initially seek.

This choice of investment loan vs home loan may also be counter-punched by questions your lender asks you when you’re in the processes of securing finance — especially if your planned acquisition is somewhere other than the city you applied for the loan in. Whatever your particular situation is, it’s always best to have all the information before the match so you can come out swinging once you’re in the ring.

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