Finally after five years, yep 5 years we have finally purchased our first investment property!
Now we're confused as where to turn to for a loan. We are looking for an 80% loan around $140K.
We've approached various mortgage brokers who are off getting information packages together for us. We're looking at the fund managers recommended in The Property Investor magazine AND then we are wondering about Banks.
So…I guess I'm wanting to know where you more experienced investors start. Do you stick with a mortgage broker, do you approach a mainstream bank or something different again.
There are so many loans out there, we are just not sure where to start.
We do know that we want a loan in the Company/Trust structure, we want it interest only, we want it at a fixed rate for at least five years and as few if any ongoing costs as possible. Is there anything else we should be looking for?
Thank you for any advice you can share.
Cheers
Congratulations!
As far as your finance goes that shoudl be a walk in the park as they say. With a 20% deposit there are plenty of options, and I imagine your proposed rental and present income will easily service a loan of this size.Just bear in mind in a smaller regional centre, the lender or broker may not have done many loans for a trust structure, as PAYG or company lending would be much more the norm – so it may take a little longer to get organised – no drama if you are patient, and you don't pay higher interest rates or fees for buying as a company or trust.
As far as the rest goes, the only 'trap' is that as a rule, the 'big 4 banks' are not as competetive as other lenders for amounts under $250k. Some of them have basic loans, but with monthly fees. Most require an annual package fee in order to offer a significant rate discount.
However, don't let monthly or annual fees put you off if you are getting everything else you want, and a great interest rate.
Ie, An interest only loan for the amount in question at 8.07 percent with no fees at all will cost you $9038 per year in interest – the same amount at 7.25% with a $10 month fee would cost you $8120 in interest, plus $120 fees total $8240. No brainer! So don't let a monthly or annual fee put you off necessarily. That said, you need to look at whether you want to establish a relationship locally with a lender, or use a broker (I would suggest one with a shopfront and not flogging their own loans alongside others) or whether you want the cheapest possible loan from a smaller 'no name' lender at the possible (and likely) sacrifice of service and advice when you need it. PRos and cons for all, but ultimately it is up to what you feel comfortable with. Wait and see what the people you have asked already get back to you with – and don't be afraid to ask questions.
All the best !I agree with V8ghia with a 20% deposit you will be welcomed by most lenders however do not expect to obtain an attractive rate with a fairly small loan.
A couple of things:
1) If you are after a loan of around $140K i assume that the property is in Regional Australia so just make sure that your Broker checks the post code as although the loan is unlikely to be mortgage insured you do not want any problems post valuation.
2) You are putting in 20% deposit so i assume that the Company has cash reserves or introduced capital. Before you rush in an put your funds down could the Company not look at borrowing 100% plus costs and utilise the cash funds to better use.
3) Remember that this could be the first of many IP purchases you do over the next few years so make sure you that your brokers structures the loan and securities correctly. I spend too much of my time untaggling security messes made by Banks or inexperienced Mortgage Brokers.
Finally 2 of the 4 major Banks have put their interest rates today taking effect from this coming Monday although the Reserve Bank of course left the Cash Rate on hold so consider a Rate Lock or similar. It wouldnt be like a Bank to take advantage of public fear by increasing Rates on a whim and a prayer. !!!!!!
Richard Taylor | Australia's leading private lender
Thanks for your feedback guys.
What do you think of the MembersEquity loan of 7.59% fixed for 5 years IO? There are no fees.
We thought by putting down 20% for our first purchase we create ourselves some automatic equity and with a bit of work on the property we have bought we believe we can create even more equity too. Something that we can then leverage on for our next purchases.
Have u thought about putting 20% deposit into a 100% offset account to counter any interest rates from the loan and, to use equity finance company to invest 20% of the deposit into the loan thus leaving u with a deposit of 5% towards your loan. The lender will top the loan up to 100% and the repayments will be low, inthe end ur only using 5% of your own money and saving on interest rates. I know it soundz like your money is going around but, its actually offsetting towards your interest rate. Have u also thought about a line of credit, this will counter your interest rates as well. If your not sure about this, ask your broker.
Blueheelers post has slightly lost me to be honest but:
Whatever you do DO NOT use a Line of Credit on an IP.
There is limited lenders who will offer a 100% offset on a 5 year fixed rate.
Richard Taylor | Australia's leading private lender
Hmm, not sure I follow any of that myself, but many thanks for the suggestion. I will educate myself and get my head around all the options, in hindsight we should have nutted this out ages ago.
We definitely don't want a line of credit, at this stage anyways. We wanted to achieve our first IP using only the IP as security and not having to use our own properties as security – this we have achieved.
Cheers
Sorry about the confusing info ive provided, what i was trying to say was………………instead of depositing 20% of your own money towards the investment, deposit that money into a 100% offset account to counter the interest rates. i know some 2nd tier banks who will.
There’s a company who will loan u 20% deposit interest free. There are a couple of policies that the company is asking and that is, u need to come up with 5% of the loan. So therefore, u have 25% and the Lender comes up with 75%
Could u plz explain why u wouldn’t use LOC, thanx?
My understanding of a LOC is that we would use our respective PPOR as collateral for the LOC.
We are three mums who have set up a Company and Unit Trust and want to keep our investing completely separate from our personal properties.
blueheeler
You are referring to the Shared Equity product issued through Adelaide Bank.
Unfortunately the product is not available for investors at this stage.Richard Taylor | Australia's leading private lender
The Company I’m refering to is called,
Equity Finance Morgage,Milson Point, NSW. You can contact them on 1300 720 110 or 02 9466 8200.Their are some criteria u must qualify for.
Yes they fund through AB and not available to investors.
Richard Taylor | Australia's leading private lender
Blue Heeler,
No offence, but putting aside the fact that the product is not available for investors, it would be bordering on insane to take an equity share loan when you have a 20% deposit. You have to give away a large percentage of the capital growth which could well equate to an astronomical amount, particularly if you sell after holding the property for a long period of time. I'm not big on the product in any situation, but it is strictly for those who can't afford the deposit for a house and would not be willing or able to wear the large LMI fees on other 100% loan products.
Kind Regards,
Cameron Perry
Director
Perry Financial Strategies
Level 13, 30 Collins St
Melbourne VIC 3000
Ph (03) 9662 1999
Fax (03) 9662 2044Hi bjb007, I note in your original post that you plan to use a company/trust structure. There are probably plenty of good reasons to do this but on Friday I encounted my first negative of doing this. You see I just recieved my first ever Land Tax Assessment for a property in Vic and if you ask me they appear to have targetted properties held in a trust by introducing a “new” land tax scale for such properties.
My Vic example
1) Unimproved value of land held in a trust = $199,000
Annual land tax assessment = $746
vs
2) Unimproved value of land not held in a trust = $199,000
Annual land tax assessment = Nil
My Vic property is now receiving the same treatment as a property with an unimproved value of $536,000 just because its held in a trust????
bjb007 I “trust” (no pun intended) your investment property is not in Vic? Not sure if any other states have done the same?
HallgNo offence taken Mortgageman.
I do understand what ur saying about sharing part of your capital growth but ur using OPM……….interest free.
Wouldn’t it be wise to deposit your 20% into a 100% offset account to counter interest on top of the loan as well?
In doing this, u have saved 40% interest on your loan.
Look forward to your positive re-action.
Hello blueheeler
I think you mean interest on 40% of the loan.
But what have you given away? I don't know these loans but assume that they want 20% of your capital gain in return. Imagine how much you would have to give away if you had bought a property pre boom and sold post boom or kept it for a long time so that you must have had a capital growth in that time period.
Real life example.
I bought a property in 1992 for $255K
20% is $51K so interest saved on this part using 9% for the 15years is -/+ $42K and another $42K saved because of the 20% in an offset account, as per your suggestion.
Total interest saved $84K.
Note: I don't know the real average interest rate for the period but think 9% should cover it?Current value of property $920K so doing it very roughly CG is $665.
20% of this is $133K. So I saved $84K to give away $133K.Good business for the bank I think.
Elka
Hi Elka
Thanku for your positive feedback and i do understand what ur saying. What I’m trying to say is, ur using someone elses money, not yours, someone elses.
Lets say the Equity Finance Company asked for 40% of capital gains, u still come out on top with 60% if u decide to sell, i think 40% of your cg is a small price to pay when youve used their money to make a 60% profit for yourself.
To be honest, i would not sell my property and what i would gain from this is capital and exponential growth.
I understand Alistairs words of warning and agree with him but think every client is slightly different and has different needs and requirements.
One of the EMF deals i did was for a client who wanted to buy in Noosa and couldnt afford waterfront on a traditional loan but using EFM could. They were happy to part with 40% of any future profit as they got in today and will not be making any repayments on the 20%.
Richard Taylor | Australia's leading private lender
"Wouldn't it be wise to deposit your 20% into a 100% offset account to counter interest on top of the loan as well?
In doing this, u have saved 40% interest on your loan."
Mate, you sound like you think that 20% equity mortgage amount is free. It isn't. It doesn't matter whether an expense is deferred or immediate, its still an expense and the rate is potentially very high if you get good growth from the property.
APerry wrote:"Wouldn't it be wise to deposit your 20% into a 100% offset account to counter interest on top of the loan as well?
In doing this, u have saved 40% interest on your loan."
Mate, you sound like you think that 20% equity mortgage amount is free. It isn't. It doesn't matter whether an expense is deferred or immediate, its still an expense and the rate is potentially very high if you get good growth from the property.
Sorry if im confusing the subject but if the 20% deposit from Equity Finance Company is interest free then i see a great savings. This is not an expense it's a savings.
Look forward to your positive feedback
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