Broker gone mad???

Choosing the right investment loan can prove as difficult as finding the right investment property. Is there any difference between a loan from a bank and a loan from a credit union? Is it worth paying extra for a loan with more features? If you need to borrow a lot of money where should you go?

The main problem is there are potentially more home loans to choose from than there are investment properties.

With so much choice it’s hard to know where to begin. However, one thing is for sure – you shouldn't go with the first lender to approve your application. Gone are the days when ` borrowers visited the bank manager cap in hand. Today most lenders are keen to visit you. Borrowers today are in the driver's seat, so take advantage of it!

Where to begin?

One way to manage the selection of an investment loan is to use a mortgage broker. Mortgage brokers can do a good job of wading through a wide selection of mortgages to find one that meets your needs. However, if you are happy to leave the selection process to someone else, you need to have a clear understanding of the selection criteria they're using to both eliminate and include lenders. Whether you choose to use a broker or whether you prefer to do-it-yourself, you should spend time defining your needs and preferences.

What do you want?

Because there are so many factors differentiating the many loans out there, its a really good idea to consider and list your needs before you set out.

Questions that every lender will ask you are: –

How much do you need to borrow?

What will the loan represent as a proportion of the property value (i.e. the LVR)?

Are you borrowing for investment or personal purposes?

How long do you intend borrowing for?

Are joint incomes required to meet repayments?

Which State/Territory is the property located?

You may also have special needs –
buying the property through a unit trust or company structure, or you could be buying land with a view to building a house.

Loan Functionality

Investors should always think about flexibility with their investment finance. Would you like to vary the size of the loan without lots of paperwork? Would you like to vary your repayments? or Do you simply want a no frills loan with the best available rate? Ultimately, the loan structure you choose will determine the flexibility you have.

So, let’s look at loan structures. Loans can be: –

Standard Amortising;

Line of Credit (Equity)

Amortising Equity; or

Standard Interest Only

One way of describing the structure of the loan is the repayment schedule. The repayment schedule is defined by the term of the loan (say 25 years) and the types of payments you make – interest only, or principal plus interest. A traditional principal and interest loan for the purpose of buying the property (and nothing but the property), is known as a Standard Amortising Loan.

More and more borrowers are taking advantage of the equity in their property by using it as a security to borrow for other purposes. Loans that allow you to use a mortgage for purposes other than investing in property fall into the "Line of Credit" category. These loans don’t have a strict repayment schedule therefore, work best for borrowers who have plenty of self discipline.

Amortising Equity Loans let you borrow against the equity you have built up against your home. However, each time you change the loan amount, your repayment schedule is reset. You pay principal and interest repayments on the basis of your specified terms. These loans are good for borrowers who have built up equity in their home but like (or need) the repayment discipline that an amortising loan provides.

If you don’t need to build up equity in a property, you may choose to use an interest only loan. Investors typically use interest only loans to maximise tax deductibility over the life of the loan.

The problem with assessing a range of opportunities is simply dealing with the large number of variables. This is where understanding your own needs and working with a specialist finance broker comes in handy. Although each of us has unique financial needs, it’s a simple fact that some products on the market have more features than others. If you find a loan that has a mountain of features, chances are you won't be the only person that suits. Similarly, some loans are cheaper than others. If we combine these two ideals and hunt down all the loans with the most features that are amongst the cheapest, we find the best 'value for money' products.

On top of all this are the multitude of tax implications: depreciation, variation, etc. There are no quick and clearcut answers to your questions and you either must through time and effort learn alot more or refer to a specialist/expert.

I hope this has been of benefit to you?

tylon020 – one point i must note if you have an redraw for the IP is that …some accountants can be fussy about you placing extra surplus cash into your IP redraw as the SOLO purpose of this redraw should only be for the IP…ie rent etc…
If you start transferring your salary and another incomes into the redraw it can become messy for the accountant.

Offset on the other hand is different. it does not have a set clause for the use.

So it be a good idea to pop an email to your accountant

Regards
Michael

Tylon, make sure you ask your Accountant about Tax Variation (the old 221d) and how it applies to you. It should always form part of one's tax minimisation strategies (if applicable and worthwhile).

Not knowing your situation fully, its a bit fuzzy.

Its not always said very often however it does need some thought, – The current economic climate.

If the house prices are stagnating it could be worth thinking about P&I.( ever so slightly pay some down)
If the prices were growing fast you would not hesitate to go IO as the growth in prices with earn you equity and
increase your wealth.

In saying that all the posts above are really well said.

Any thoughts?