‘Back to Basics’ Best in Current EnvironmentPosted: August 31, 2011 @ 1:47 am PM by admin
In the current economic climate a ‘back to basics’ approach is right for the shrewd property investor.According to Smartline Adviser Michael Sugiandi this includes getting your finances organised and having a well-executed strategy and loan structure in place.
“Lenders are increasingly rigorous, due to changes brought about by the recent introduction of the National Consumer Credit Protection Act (NCCP), in assessing loan applications, which require borrowers to have their finances organised to not only minimise approval times, but also maximise the amount they can borrow,” he says.
“Whether you are a first-timer or an experienced property investor, a cautious approach and getting the financing of your investment right from the outset is fundamental to investing success.
“It’s not unusual for lenders to request additional information while they are assessing a loan application, even if all of the documentation initially requested has been supplied.
“If you want to give yourself the best chance of being approved for a loan, you want it to happen sooner rather than later, and you want to be able to maximise the amount you can borrow, take the time to get your affairs in order first.”
Mr Sugiandi said those intending to borrow should be minimising the number of credit and store cards they have and the available limits.
Aside from making your credit file ‘busy’, which in itself can cause declines as lenders’ automated credit scoring systems can class you as a ‘credit junkie’, it can also make a big difference to your borrowing capacity.
Resist signing up for any additional debt and make sure all your bill payments are made on time – from your mobile phone account to your personal car loan. This is becoming increasingly important as more and more of your repayment history is being recorded on your personal credit file, which is thoroughly scrutinised by lenders.
Mr Sugiandi says the considerations associated with financing the purchase of an investment property go much further than getting the lowest interest rate possible, or weighing up the pros and cons of fixed versus variable.
“While these are certainly important elements in the investment loan equation, what is just as important is the structuring of the loan,” he said.
“When done properly, this is where you can ‘turbo charge’ the wealth your investment property creates for you. However, with the wrong structure, you can get yourself in a mess.”
Loan structuring focuses on the type of loan used, how you fund the required deposit, what securities are provided and what type of payments you make.
“In order to structure your investment loan appropriately for your individual needs, you actually need to know what these needs are and have some form of a strategy in place,” Mr Sugiandi said.
“You need to know where you want your investing to take you, so you can work out how to get there.”
This means asking yourself:
• Are you happy with a single investment property or do you want to build up a large portfolio? If you want to purchase multiple properties, how quickly do you want to buy them?
• What are your investment time frames (five years or 30 years)?
• How much you are able/prepared to put in every week to fund the gap between income and expenses?
• Is your focus on cash flow or capital growth?
Once you’ve given some thought to these questions, you should then be looking to work with your accountant and mortgage adviser to determine the best property investing strategy and structure that will help you to achieve your property investment goals.
Some of the considerations when investigating your investment loan options include:
Funding the Initial Purchase and any Ongoing ShortfallDo you have the cash for the initial deposit and fees associated with your property purchase or will you be using equity in your home or other properties? If you want to borrow more than 80 per cent of the value of the property, you will need to pay Lenders Mortgage Insurance (LMI), which can run into the tens of thousands. How will you be funding any shortfall as a result of the expenses and costs exceeding the income? Will this be from your weekly salary or will you be looking to use your existing equity to supplement this shortfall?
Interest Only versus Principal and InterestMany investors prefer to pay interest only on their investment loan, particularly if they still have a loan on their owner-occupied property. This means that if the investor is looking to reduce debt, they can focus on reducing the non-deductible debt on the family home.
Offset Account versus RedrawBoth offset accounts and redraw facilities can be a good way for an investor to help reduce their investment loan debt. However caution needs to be exercised when putting money in and then pulling out from the redraw facility as this can have implications from a taxation point of view. Using an offset account may be a better option. It’s also important to talk with your mortgage adviser about the differences between partial and 100% offset accounts and the impact these can have on the amount of interest you pay.
Fixed versus VariableA fixed rate is often preferred by investors as it provides certainty when managing cash flow, but at present there is a gap between fixed and variable rates (of about one per cent), which means variable rates can look quite attractive. Alternatively, fixing a portion of the loan and having the remainder variable can provide the best of both worlds.
Deposit BondsA Deposit Bond allows property buyers to make a purchase without having to provide a cash deposit. The guarantee is issued by a third party leaving the purchaser free to use the funds, which may, for example, by placed in a term deposit to earn interest. Providing the guarantee is paid according to the terms of the agreement – both long and short-term guarantees are available depending on the length of settlement – this option can see buyers leveraging funds that would otherwise sit in a trust account.
For example, if a deposit of $35,000 were placed in a term deposit account paying 6.35% pa, for six months, the investor would earn $1111.25 in interest. Minus the $420 Deposit Bond premium, the benefit to the investor would be just over $690.
Mr Sugiandi said that the current cautious economic and lending environment did not mean that those on what is considered a low income were unable to consider investing in property.
“What is required, however, is thorough homework and a bit of creative thinking,” he said. “For example, the choice of property is critical for those investing on a low income.
“The best type of properties for the low income investor will be those that are at the lower end of the scale in price, but with high rental returns.”
As with all aspects of property investing, it’s critical to do your homework on the best way to finance your planned property purchase and get the best deal possible.
A good mortgage adviser will be able to compare what’s on offer from a wide range of lenders, which can lead to surprising results.
Smartline Home Loans Pty Ltd and their representative have made every effort to ensure that the information is free from error, neither Smartline nor its representative makes any representation or warranty as to the completeness or accuracy. Readers must decide if this information is suitable for their personal situation or seek advice.