In this month’s newsletter, we look at the third step in our property investment series – the importance of developing the right finance strategy.
 
Now that your property investment goals firmly in mind, have developed an investment blueprint and are clear on the correct investment ownership structure, now is the time to consider both the importance of a plan for your finance and the various options available to you.
 
It is easy to just think of your lending as something fairly generic and not a key part of your strategy. The reality is that there are significant differences between lenders and products which can make a noticeable difference to your portfolio and success over time. It is here where you need to invest some time into researching and understanding the best mortgage options available to you. This may be done yourself if you have the time or you should look to find a trusted relationship with a qualified advisor such as a mortgage broker.
 
The reason for some intelligent research at this point is that good forward thinking will impact on a range of important factors including true financial costs over time, and the extent to which you can grow your portfolio for any given level of income. A good professional will help you maximise your lending to get to a preferred price point, or help you understand in which order you are best to approach lenders to help maximise your borrowing to grow your portfolio.
 
The number one mistake that people make is simply chasing the lowest interest rate. While you do want to minimise your interest rate, simply chasing the lowest rate will often leave you worse off. Even the simplest, no frills, cheap loan will have:

  • Potential legal, valuation, or other set up costs
  • Will definitely have basic government charges eg mortgage registration
  • A discharge processing fee should you want to change
  • Often have very tough borrowing conditions that will limit how much you can borrow at the cheapest rate
  • Be very limited in terms of adjustment for future portfolio growth
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    Once these costs are considered it is very easy to be worse off compared to taking a marginally more expensive product that:

    • Provides more flexibility over time therefore avoiding costly changes to grow your portfolio at a later date.
    • Significantly higher maximum loans amounts – allow you to buy at a better price point or buy your next property sooner. The opportunity cost of a delayed or missed investment can be worth many thousands of dollars compared to the hundreds of dollars of marginal interest rate savings in a poor product.
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      What factors should you consider?

        1. How rapidly will you be growing your portfolio?

        Based on your income will you be aiming to buy several properties in quick succession or will you be constrained to purchase once every few years. This may impact on the importance of flexibility in your loan product as it is important that you be able to adjust your account balances over time to keep your tax records clean.

           
          2. Does your intended strategy rely on you regularly revaluing in order to access equity?

          A more basic lender of product may have greater costs for loan increases and valuation fees. They may be very limited in terms of creating new loan splits for tax purposes for that next investment. These costs, or cost to refinance when the limitations are realised, leave many property investors worse off than they might have been had they made a smarter choice of lender and loan product initially.

             
            3. How tight is your personal income?

            Different lenders have different policies on how they treat rental income, debts with other lenders, and what happens when your rental income exceeds your current work income. Going to lenders in the right order can maximise your ability to make that extra purchase, next purchase sooner, or purchase at a higher price point. Going to a lender too early will often prevent you from being able to strategically go back to them when their policies would have helped you as you approach your borrowing limits.

               
              4. Clean loan structure by tax purpose

              The right products will allow you to have multiple loan accounts to keep things very distinct for tax purposes. There is no point saving a few hundred dollars in interest if you have to pay your accountant twice that to separate everything out for your annual tax returns.

                 
                5. Lenders Mortgage Insurance

                Mortgage insurance occurs where the lenders must ‘reinsure’ your loan with a specialist insurance firm when you borrow more than 80% of a property’s purchase price. When buying for investment there are pro’s and con’s for looking to maximise your borrowing for investment – even if that means paying mortgage insurance. Whether it is appropriate will depend on your overall situation and personal risk profile and should be discussed with an appropriate professional. In this context it is relevant because each lender has to negotiate their own rates with the insurers – so they can vary considerably across lenders.
                 
                In this regard the differences in mortgage insurance premiums can be far greater than any difference in interest rate between 2 lenders. So often this can be the major cost determinant and it would be a mistake to just look at interest rate! Also, Lenders Mortgage Insurance (LMI) is currently not transferable so, if you jump on the wrong product with a cheap rate, it can mean you find yourself badly stuck or facing a very large cost to move. So, it is more important than ever to make an informed decision upfront if you are considering mortgage insurance.
                 
                The above are just examples of factors that should be considered and whose relative importance will vary with your personal circumstances and preferred investment strategy. Reviewing the large amounts of information in this space can range from time intensive to nigh impossible. This is where an appropriately qualified adviser can save significant time and provide industry insight that you may not otherwise have been able to obtain. A good mortgage broker may also have access to loan discounts not publicly advertised that may impact your decision on best lender for you.
                 
                So remember, if you have invested so much time working out your property strategy then it also makes sense investing some time in exploring the various finance options available for you and getting the right finance strategy in place.
                 
                While interest rates are a key consideration, the loan market is currently more competitive than ever. Now might be the time to take a “pulse check” of your current situation – including a strategic review of your loan structure in order to ensure you’re getting the best out of investment. For more information, call the IPS team on 02 9324 8841 or go to www.ipsg.com.au or email info@ipsg.com.au
                 
                Stay tuned for next month’s article – (Step 4: Buying Strategy) of ‘The 8 steps in creating and growing your property portfolio’.