Expert Advice by Lindy Lear

27/10/2014

Over the years I have met many investors who want to get started or add more property to their portfolio, however they often do not know the right questions to ask to get the best finance outcome and achieve their property goals sooner.

Should I use my own bank or a broker for my finance?

Deregulation has changed the face of the finance industry, and competition in the market means there are many more choices out there for customers looking for investment finance. Unless you ask the right questions, you may find the options from your own bank loan officer are limited and your debt exposure with one bank may stop you growing your portfolio in the future, depending on how the loans are structured. An independent mortgage broker who has experience with investment loans or is an investor themselves can offer you many more options with a variety of banks and loan products and they can advise you on the best structure for the loans based on your long term goals.

Should I go for the lowest interest rate?

Everybody loves a bargain and when interest rates are low investors are happy! However not all loans have the same features and benefits for customers and selecting a loan just for the cheapest interest rate may not always give you the best result. You should check what the charges are for setting up the loan, whether it matches your personal circumstances, and what features (eg offset account) are included, and what restrictions there may be.

Should I go for principal and interest (P&I) or interest only (IO) loans?

As an investor it makes sense to go for interest only loans. The loan is fully tax deductible, runs for the first five years of the loan only, and gives you lower monthly repayments which improves your cash flow. Smart investors know that it is important to select a property that has potential for capital growth, as you are not paying down the principal you need growth to achieve equity in your property.

Should I go for Fixed or Variable Loans?

This decision should be based on what you are trying to achieve with property and what strategy you are using. If you have a short term buy and sell strategy, fixing could incur very high break costs for paying out the loan early. If you have a long term buy and hold strategy, then it makes more sense to  fix rates when they are attractive compared to variable.

How should I extract equity from my home to invest?

If you view the equity in your own home as your wealth creation tool, then you understand the power of leverage to build a property portfolio from the equity.  This equity can fund the deposits and costs for each purchase and grow your portfolio faster. It is as good as cash savings.  Equity not used is called “lazy” money, and Ian Hosking Richards believes lazy money needs to be “spanked” to work hard for you!

Less preferred by investors is to cross-collateralise a loan. This is when the banks lend you 100% plus costs of the purchase price and secure the new loan against your home.  Whilst this appears an easy option, it leaves you with no extra funds or “buffer” to run your property.   A more flexible loan structure preferred by smart investors is where equity is released into an account (eg:  line of credit account) where there is no interest charged until the funds are used.  This account can be a full transactional account to manage your portfolio income and expenses whilst maintaining a buffer. As an experienced investor I prefer the more flexible loan structure, as with a buffer I sleep better at night!

Should I refinance my home?

I have heard that banks are very open to better deals if you intimate that you are thinking of changing banks, so it is a good conversation to have with your bank or broker as to the benefit of refinancing.  If you have equity in your loan, the equity can be set up at the same time as refinancing, and then you will be in a strong position to buy your next investment opportunity when it presents itself.

I suggest your next step is to find an experienced mortgage broker who can advise you of the best structure for building your portfolio. Please contact me if you would like some help. Happy investing!

 

Lindy Lear is a successful property investor who had a late start into investing, yet she built a portfolio of eight properties in just three years. She is a qualified property advisor and general manager of Rocket Property Group, and she won the Reader’s Choice Award in 2009, 2012 & 2013 for Property Investment Advisor of the Year. Lindy is passionate about helping others realise their goals through investing in property, and can be contacted on Ph: 1300 850 038 or visit www.rocketpropertygroup.com.au

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Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.