Debbie Shankar - 21 Oct, 2016

How to Structure an Investment Property Loan

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When it comes to sound property investment, you need to consider your loan structure. This concept will allow you to stretch your dollar further. Plus, it will enable you to become a shrewd asset manager over time.

Initially, you will have to rely on your lender to kick-start your portfolio. However, this doesn’t mean that you have to be at the mercy of your lender. Therefore, before you start an investment portfolio, look critically at home loan types. Also, consider home loan features and how you can best use these to reduce your costs.

By understanding home loans well, you will be able to find the right loan structure for you. You will also be able to reduce your overheads, which means you will have more to spend on more investment properties.

Keep Your Investments Separate to Maximise Your Loan Structure

One of the biggest mistakes investors make is using many properties to secure the purchase of investments. While this looks fine on paper, it can cause issues later.

Firstly, if your properties are linked then you may not be able to access any profit when selling. Generally speaking, this occurs because your loan-to-value ratio may not meet lender’s guidelines. Thus, they will suggest that you use any profit to rectify this issue.

Secondly, having linked properties will reduce your borrowing power and flexibility. For instance, if you want to refinance, then all of your properties will have to be revalued. So if the market has changed, then this may reduce your borrowing power. It is also difficult to move a single property to another lender if they are all linked together. Instead, you will have to reshuffle all of your investments.

Select an Interest Only Loan Structure

An interest-only loan structure is ideal for investment property as you only have to pay the interest incurred. As a result, you will reduce your monthly mortgage costs so you have more money for other investments. In addition, this interest is fully tax-deductible, so you will reduce the amount of tax you will pay.

Always Use an Offset Account

Linking an offset account to your investment mortgage is an excellent way to create a financial buffer. Such an account allows you to build up funds should you encounter any financial problems later down the track. Furthermore, it also reduces the amount of interest that you pay on a property.

Reduce Your Bank Reliance

All lenders want to see an LVR that is 80% or lower. Consequently, the smaller the deposit you pay or, the more you borrow against an investment, the higher your LVR ratio. Notably keeping your LVR under 80%, you will not incur Lender’s Mortgage Insurance (LMI) or need to offer another property as security. Following this strategy increases your control over your assets. Besides, you will get a more competitive rate from your lender.

Do not Put All Your Eggs in the Same Basket

Rather than using the same bank for all of your home loans, spread the love. Although using the same financial institution may give you a better rate, sometimes this can backfire. When you borrow from the same lender for all loans, they can use this against you when you refinance. A lender can also get complacent if they have all of your business. Under these circumstances, your lender may take it for granted that you won’t go elsewhere. Consequently, they do not offer you the best deals.

Overall, do not settle for second best. You and your lender both benefit from a mutually rewarding relationship. Accordingly, if you feel your bank is letting you down, then discuss your options. Approach your lender first, and voice your concerns. If you do not feel they are listening, then contact a mortgage broker. Always stay well-informed and ahead of the market; this tactic will see you prosper.

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