Five essential ingredients to investment success that the banks won’t tell you!
When it comes to financing your investment properties, choosing the wrong loan structure, lender or product can have a serious impact on your investment journey.
It’s important to consider that banks are more focused on their profits & products, than providing a personalized investment lending options tailored to your investment property goals.
Here are the top five ingredients for structuring a successful portfolio – which you won’t hear from the banks.
#1 Understand what impacts your borrowing capacity: Most lenders have specific policies that restrict or limit lending to those with lower incomes or those seeking to invest in properties in certain postcodes. Conditions will differ between lenders.
CBA, for example, announced this week that it will now cap rental yields at 8% for mining towns when assessing loan applications. The property might yield much more in reality, but the bank plans to only use 8% in its calculations as part of its risk mitigation.
In addition to rental income, existing debt, LVR, whether you are buying alone or with someone else, your age (and how this affects the term of the loan), your dependents can also impact your borrowing capacity.
#2 Find the best interest rate. Banks care about profit margins for their shareholders, so will generally not offer you their very best rate upfront. Shop around to make sure you secure the best deal. This is where a mortgage broker can really save you time; they will find the best deal based on your specific needs.
Regardless of the rate you secure, ensure you will be able to comfortably meet your repayments if interest rates go up (base on up to 2% increase).
#3 Choose the right product. How do you know you are on the right product to achieve your wealth creation goals? It is important that you research the products available to determine which meet the requirements of your investment strategy.
A low interest rate is important but securing the lowest rate will likely mean forfeiting other features that may be important to your situation such as the ability to make extra repayments when you want to.
#4 Avoid cross securitisation: Cross securitisation involves combining all of your properties in a single structure with one lender, and using the combined collateral to fund further investments. This structure benefits the lender by providing it with greater security should you fall into financial hardship or should you try to manipulate your portfolio either by purchase or sale. For the investor however having all properties tied up in a single structure can be a major disadvantage by reducing borrowing capacity and the ability to find better deals with other providers.
Avoid cross securitisation by separating your properties into standalone structures. Implementing a standalone structure for each property means that if one property increases in value it won’t be held down by another that may have decreased in value. You will still be in a position to build your portfolio by using a line of credit against the property which has generated equity.
#5 Diversify your lenders to secure the best deals – but be aware of fees. Further to #4, standalone loan structures give you the flexibility to take out loans with different lenders to secure the best deals available in the current marketplace. This is a great strategy on paper, but for big portfolios with substantial debt this usually results in more than one set of fees and higher interest rates overall. Compare the fees and rates of standalone structures within one lender with the rates and fees that would be payable across multiple lenders to find the most cost effective option.
Finance brokers who are property investment focused act as you’re representative to ensure the right loan, structure and rate is secured not only for a single purchase but with your ongoing portfolio growth goals in mind.
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