Wondering if you should take advantage of rock bottom rates by putting some of your home equity into an investment property?
We spoke to co-founder and director of PGA Advisory, Michael Mancuso to suss out the do’s and don’ts of refinancing to buy an investment property, as well as why it might be a good idea.
Why should I refinance my mortgage to buy an investment property?
Rates are at a historic low
Co-founder of PGA Advisory, Michael Mancuso, says that rates are at a historical low, making it quicker than ever to pay off an additional mortgage on an investment property.
Additionally, he says that refinancing for the deposit, rather than cross-collateralising (using your family home as collateral on a loan for your investment property), protects your home as an asset.
The Dos: How to get started
Seek financial advice from a professional
If you’re thinking about refinancing to purchase an investment property, Mancuso says that the first step is to get a second opinion from a finance professional.
“They will be able to calculate what the max borrowing amount would be, the purchase price, and ensure you are able to settle the file with no real hurdles,” he said
“They will assess income levels, debt levels and what they can do to facilitate property purchase for their clients”
He recommends going to a finance professional who handles these deals every day.
This will not only give you piece of mind, but will ensure purchasing your investment property will be a smooth, easy and low-risk process.
Make sure you have enough equity in your home
As a rule of thumb, Mancuso recommends having enough equity to be able to purchase an investment property with a 10% deposit, plus all costs, and a buffer.
“The buffer is there to protect against unforeseen challenges, such as damage to the property or tenants not paying rent,” he said.
“It is to protect people, so they are not forced into selling the property in the short term, which we call a fire sale.”
Generally, Mancuso says they’d start by running the numbers for their customers by getting a bank evaluation to lay out exactly where their equity and debt levels sit.
“Aside from that, we do advise how much of a return they would be looking at from a capital growth perspective, which is usually done as a dollar amount,” he said.
The don’ts: What to avoid
Mancuso says he frequently sees folk going it alone and making mistakes. Here are the common ones to avoid.
He likens DIY refinancing and purchasing an investment property to having a plumbing problem and getting an electrician to fix it, saying you might patch repair it, but you won’t be able to get it to maximum efficacy.
“People who aren’t banking, finance or property professionals are more likely to experience the pitfalls if they do not seek help from a professional. Brokers will be able to see the pitfalls a mile off because they have been there before,” he said.
Don’t cross-collateralise the property
Mancuso recommends investors avoid cross-collatoralising. He says that cross-collateralising a property can put the main resident at risk.
Stay away from banks who don’t have your interests at heart
Make sure you’re getting the best deal, and not the deal that best suits the bank. According to Mancuso, this is where brokers are worthwhile considering.
“This is where brokers become important because they will search across the whole market. When people walk into their bank, they will not be made aware of any other deals out there,” he said.
If purchasing a home under construction, make sure you look for fixed-price contracts.
Don’t get caught out promising unspecified amounts of money. Not going into a fixed price build contract can mean you have to pay a lot of money at the end to finish the purchase (money you might not have).
Words by Melanie Hearse
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