Investment Loan Interest: Higher Or Lower?

Investment property loans are a popular way to generate steady cash flow, build wealth, and attain financial freedom. However, the interest rates on these loans are typically higher than those on primary residence mortgages. This is because lenders know that borrowers are less likely to prioritise repaying a loan on a property that is not their primary residence. As a result, borrowers are more likely to default on an investment property mortgage, so lenders charge higher interest rates to protect themselves against this risk.

Investment property loans are more expensive

Lenders know that you are more likely to default on an investment property mortgage, so they charge a higher interest rate to protect themselves against this risk. The qualifying requirements will be higher, too. If the property were your primary residence, you'd probably do everything within your means to keep up with your mortgage payments and avoid the more adverse effects of losing your home.

For investment property loans, you'll typically be required to place a minimum down payment of 20%. If you put down more than that, you are likely to qualify for a better interest rate. Moreover, mortgage lenders know that having more skin in the game will be a great incentive for you to repay the loan. Since you have invested more of your money, you'll have more to lose if the investment goes south. Another way lenders protect themselves when financing real estate investments is by checking your credit score. Your credit score will show them the risk of doing business with you.

Lenders protect themselves against the risk of defaulting

Investment property loans typically have higher interest rates because lenders know that if you don't plan to live in a property and only think of it as a business, you are less likely to see repayment of the mortgage loan as a priority when your finances get tight. You simply don’t have as much of a personal stake in the property as you would if it were your primary residence. After all, the worst that can happen is you lose the rental property. This means that you are more likely to default on an investment property mortgage.

Another way lenders protect themselves when financing real estate investments is by checking your credit score. Your credit score will show them the risk of doing business with you. Lenders will also set higher qualifying requirements for investment property loans. If the property were your primary residence, you’d probably do everything within your means to keep up with your mortgage payments and avoid the more adverse effects of losing your home.

Investment property loans have more stringent requirements

For example, for investment property loans, you'll typically be required to place a minimum down payment of 20%. If you put down more than that, you are likely to qualify for a better interest rate. This is because having more skin in the game will be a great incentive for you to repay the loan. Since you have invested more of your money, you'll have more to lose if the investment goes south.

Another way lenders protect themselves when financing real estate investments is by checking your credit score. Your credit score will show them the risk of doing business with you. If the property were your primary residence, you'd probably do everything within your means to keep up with your mortgage payments and avoid the more adverse effects of losing your home.

Therefore, it is tougher to secure an investment property loan than a mortgage to purchase a primary residence.

Lenders check your credit score

Investment property loans have higher interest rates because lenders know that if the borrower doesn't plan to live in the property, they are less likely to see repayment of the mortgage loan as a priority. Lenders check your credit score to assess the risk of doing business with you. Your credit score will show them how likely you are to repay your loan on time and in full. A higher credit score indicates that you are a lower credit risk, which can lead to better loan terms and interest rates.

Lenders use your credit score to determine whether to approve your loan application and what interest rate to offer you. A higher credit score can lead to a lower interest rate, which can save you money over the life of the loan.

Your credit score is based on information in your credit report, including your payment history, credit utilisation, length of credit history, types of credit, and recent credit inquiries. Lenders will also consider other factors, such as your income, employment status, and debt-to-income ratio, when evaluating your loan application.

You can improve your credit score by making on-time payments, keeping your credit card balances low, and avoiding taking on new debt. Checking your credit report regularly can help you identify any errors or discrepancies and dispute them with the credit bureaus.

By understanding how lenders check your credit score and taking steps to improve it, you can increase your chances of securing a loan with favourable terms and interest rates.

You are less attached to a home that is not your primary residence

Investment property loans typically have higher interest rates than mortgages for primary residences. This is because lenders know that if you don't plan to live in a property and only think of it as a business, you are less likely to see repayment of the mortgage loan as a priority when your finances get tight. You simply don't have as much of a personal stake in the property as you would if it were your primary residence. After all, the worst that can happen is you lose the rental property.

Lenders are aware that if the property were your primary residence, you'd probably do everything within your means to keep up with your mortgage payments and avoid the more adverse effects of losing your home. This means that you are more likely to default on an investment property mortgage, so a higher interest rate is a measure by lenders to protect themselves against this risk.

Qualifying requirements will also be higher for investment property loans. For example, you'll typically be required to place a minimum down payment of 20%. If you put down more than that, you are likely to qualify for a better interest rate. This is because lenders know that having more skin in the game will be a great incentive for you to repay the loan. Since you have invested more of your money, you'll have more to lose if the investment goes south.

Another way lenders protect themselves when financing real estate investments is by checking your credit score. Your credit score will show them the risk of doing business with you.

Frequently asked questions