If you're about to apply for a loan for your next investment property, make sure you know what you're in for.
Blogger: Warren Littlefair, general manager, Peard Finance
The start of the 2014/2015 financial year has seen strong activity for investors in the Perth property market driven by low interest rates and competitive house prices. A number of banks, for example, have now dropped their five-year fixed interest rate for investors to below five per cent.
However, securing an investment loan can be very different from taking out a home loan for an owner-occupier property. In particular, investors need to take into account the following points:
* Study your choices: There are a large number of institutions that offer tailored home loan packages for investors covering fixed-rate and interest-only loans. There are several hundred home loan options to choose from and securing an interest rate reduction of just 0.25 per cent on an average investment loan can result in thousands of dollars in savings over the life of the loan.
* Financial documents: Make sure that you have a comprehensive list of all financial documents to support your loan application.
* Speak to your tax advisor about the most effective tax entity: To purchase your investment properties through ie. family trust, individual or company structures – especially if purchasing cash flow positive property.
* Interest rate rises: Take into account any future interest rate rises or falls. While fixed rates are generally favoured by investors, in the current climate of falling interest rates it may not be the most suitable strategy.
* The costs: Don’t always select the home loan with the lowest advertised interest rate. Application and monthly management fees, for example, can considerably add to the overall cost of a loan that might be advertised at a very low interest rate. Look at the comparison rate which takes into account these costs.
* Check the fine print: Low introductory home loans, eg. may have high break costs or might revert to a high interest rate making this kind of home loan a more expensive option.
* Ownership period: Determine how long you plan to hold the property. If it is for a short period of time, then a home loan that offers very flexible conditions might be an attractive option.
* Debt reduction: Select a loan option that allows you the ability to quickly reduce your debt commitments if required, eg. through the use of ‘offset’ accounts, a borrower may significantly reduce the term of the home loan and save thousands of dollars.
* Mortgage insurance: Make sure that you consider ‘surprise’ costs when applying for the loan, ie. mortgage insurance.
* New debt: Do not take on any additional financial burdens during the loan application process, ie. buying a new car on credit. New debt could complicate the home loan application.
* Settlement: Allow enough time for finance approval and settlement. Generally you should allow at least three weeks for finance approval and four weeks for settlement.