An investment property is one which is bought with the intention of making a profit rather than being primarily as a residence. This can include properties bought and then improved to increase their value, or those bought and then rented out to produce an income. There are several factors which affects investment property mortgage rates.
While somebody getting a mortgage for a residential property must show proof of income from employment, an investor must show what income they expect to make from the property. An investor who has secured a reliable tenant paying more in rent than the mortgage repayment amount will likely get a better deal. Somebody buying a property to improve and sell will have a harder time securing a good rate unless they can prove they have the funds to make monthly payments in the meantime.
Not all the factors specific to investment property mortgage rates affect them in the same direction. For example, somebody getting an investment mortgage is more likely to be offered the option of a deal with no downpayments. Somebody taking up such a deal, known as a 100% mortgage, will be more likely to be offered a higher interest rate. However, somebody buying a property to let in a desirable area is more likely to be offered a lower rate as there is a greater chance they will be able to make the scheduled repayments.
There are three main types of investment property mortgage rates: fixed rate, adjustable mortgage rate and balloon mortgage rate. Which is best for the particular investor depends on their circumstances.
A fixed rate mortgage means, as the name suggests, that the interest rate is fixed at the same rate throughout its lifetime, regardless of how the underlying bank rates set by the relevant government body or bank may vary. A key advantage of this is that the monthly repayment amount will be the same throughout the life of the mortgage. Not only does this make things more predictable for the investor, but it means that renting a property out should become more profitable as rents are likely to rise with inflation over the course of the mortgage. The main disadvantage is that investors won’t benefit if bank rates fall after the mortgage begins.
An adjustable mortgage rate means that the rate may be changed at any time by the lender. Clearly this is a more risky option for the investor. Generally the adjustable rate they are offered at the time they take out a mortgage will be a little below any fixed rate on offer at the same time.
This type of rate is most suited to people who are prepared to gamble that throughout the life of the mortgage, the adjustable rate will on average be below the fixed rate on offer at its start. It’s important to check the fine print carefully as there may be restrictions on how low or high an adjustable rate may go, regardless of the underlying bank rates. Adjustable investment property mortgage rates are often best suited to people who intend on selling a property within a few years and are thus less likely to be hit by rates rising.
A balloon mortgage rate is where the monthly repayments are set as if the loan would last for a full term, such as 25 years. However, at the end of a shorter time, often five or seven years, the remaining balance must be repaid. If the investor has sold the property or has made money elsewhere, they may repay the amount in cash. If not, they will negotiate a new loan with the lender based on the current rates available at the time. Such a deal is best suited to investors who are confident that they can cover the monthly payments, for example through rental income, and then sell the property at a profit in time to repay the balance.