Most people do not understand the difference between mortgages and investment loans. After all, the two facilities finance the purchase of properties. Although the two loans have their similarities, they are quite different. Below is a comparative analysis of investment loans and mortgages.
What Are Investment Loans?
An investment loan is a credit facility designed to finance commercial real estate investment. It suits people who wish to invest in retail spaces, rental units or industrial property. Investment loans are offered by conventional banks, credit unions, building societies and various non-bank lenders. Consider the following when applying for an investment loan:
- Establish the required amount. Remember to consider additional costs such as building approvals, conveyancing, property searches and insurance.
- Settle on a specific lender. Consider the loan processing period, required deposit, background searches, terms of the loan, interest rate and the willingness of the lender to create long-term partnerships.
- Assess your financial situation and the real estate market to establish whether you need a fixed-rate, variable-rate or interest-only investment loan.
- Determine how you will service the loan. Remember, the lender expects the monthly instalments as soon as they disburse the loan. If you intend to use the loan for construction purposes, you could opt for an interest-only arrangement to ensure you have working capital until you rent or lease the property.
Most lenders allow borrowers to refinance their investment loan once they repay a specified amount. Refinancing allows you to cash out the property's equity, change the type of loan or lower the interest rates. However, you must check the refinancing costs. For example, a fixed-rate investment loan could attract a break charge.
What Are Mortgages?
Mortgages suit people who wish to buy residential property. Most banks are particular about how you can use the mortgage. If you take a mortgage to build an investment property, the bank could penalise you or increase the interest rates. In comparison to investment loans, mortgages have a lower interest rate since the borrower will not use the loan to generate income.
Most borrowers are often undecided about the type of mortgage they should apply for. Examine your needs to determine the mortgage that suits you. For example, a shared equity loan has a lower interest rate. However, the lender takes a share of the property's appreciation. Conversely, a reverse mortgage is designed for seniors. Ideally, the bank allows them to use the equity on their property. In return, the bank owns the property once they die.
For more information on investment loans, contact a company near you.