Navigating the rocky seas of property investment finance can be a challenging task for home buyers and investors. And it’s made even more difficult by all of the misconceptions about home loans that are out in the ether.
If you get your property investment financing wrong, it can cost you thousands, sometimes tens of thousands of dollars over the life of your loan. Get it right though and the benefits can be enormous, including saving thousands on interest repayments and excessive fees and charges.
For real estate investors, structuring your finance correctly is even more critical as it can mean the difference between building a lucrative, wealth generating property portfolio and never progressing beyond the first one or two investments.
So how do you make sure you end up with the right type of property investment or home loan finance and come out on top?
Here are 11 traps that can snare borrowers when seeking the best mortgage product and how to make sure you don’t get caught out.
1. Caught up in the razzle dazzle of the lowest rate
Given that the most talked about topic when it comes to home loans is interest rates, it’s not surprising that getting the best rate often becomes the sole focus of home buyers and investors. But what might seem like a good deal can often come with strings attached in the form of higher fees and ongoing costs or less flexibility. Then of course there are low honeymoon rates that some banks offer, which roll over after a year or two and start to look a lot less attractive.
Get it right
Avoid the temptation of a lower headline rate by working out exactly what you need from a finance product and the features that will best suit your requirements now and in the future.
If you’re a home buyer, you might want some of the bells and whistles to help with your day to day finances, such as credit cards attached to your mortgage account. As an investor, you’ll need flexibility when it comes to refinancing in order to add to your portfolio and the potential benefits of extras such as Line of Credit facilities. It’s all about planning a sound, overall financial strategy.
2. Getting too fixed on your loan
When interest rates are on the rise, it’s common for borrowers to panic and go about fixing their loan in an attempt to avoid skyrocketing repayments. The problem is, they’ve often left their charge too late and missed out on the best deals.
When you do the sums, it becomes clear that a fixed rate will generally cost you more in interest than a variable one over the life of your loan. Then there’s the often high exit fees you’ll be forced to pay should you decide to refinance or terminate your loan prior to the end of the fixed rate period. Again, it all comes back to how much flexibility you want or need.
Get it right
A fixed rate mortgage can be beneficial if you prefer the certainty of knowing what your monthly repayments will be. This can be true for home buyers as well as investors, with the latter sometimes wanting to ensure they can cover any out of pocket expenses on their investment without the risk of rising rates pushing their mortgage repayments beyond what they can reasonably afford.
But if you need flexibility or want to take advantage of the best going rate, you should carefully assess whether fixing your loan is the best scenario for your requirements. And importantly, will it really save you money in the long run?
3. Not counting the true cost
First home buyers in particular are often unaware of just how much the true cost of home ownership is. They think all you need is a deposit to get you over the line, but there are many extra costs associated with property, including legal fees, stamp duty, lender’s mortgage insurance (if required) and of course paying the removalists. These extras can end up being the equivalent of 5 to 7 per cent of the actual purchase price.
Get it right
The best way to avoid coming up short when you buy a property is to do the sums carefully and make sure you account for every out of pocket expense you’ll incur. Often lenders have on-line calculators that will not only tell you what your repayments will be each month, they’ll also estimate your buying costs. This is a good place to start and will give you an idea of how much you’ll truly need upfront.
4. I need to wear my Sunday best to secure a loan
In the good old days, you had to dress to the nines and visit the bank manager to get the nod of approval if you wanted a home loan. A lot of people still believe that the only way to obtain property finance is to sit down, face to face with a lending manager in their branch and many first time borrowers find this prospect rather daunting.
Get it right
There are actually many other means of arranging a loan. You can apply on line, over the phone, through a mobile lender who will come to you at your place of work or home at a time that suits or even by snail mail. Then of course there are mortgage brokers, who can remove the need for direct contact with lenders altogether and act as your go-between to secure the best loan product.
5. Believing the best deal will be made through a broker
Many borrowers are now choosing to use mortgage brokers to apply for a home loan on their behalf. Some do it for the convenience and to avoid taking up valuable time putting in hours of research, while others like it because they don’t have to deal with the lender directly. Then there are those who believe a broker is most likely to get them the best deal going.
While mortgage brokers have access to various lenders and loan products via their lending panel, they don’t actually research the entire market for you. In fact some non-bank lenders, like building societies and credit unions, won’t even allow brokers access to their products, so if the best deal for you happens to be with one of these institutions you could miss out by engaging a broker.
Get it right
Mortgage brokers can be a very good option, but if you want to make sure you’re going to secure the best possible loan for your needs, you really have to do some homework of your own. You could also try approaching a broker who has access to a wider range of lenders and loan products on the market.
At the end of the day, an experienced finance broker is a good ally if you’re starting out and feel overwhelmed by all of the information out there or if you’re an experienced investor looking for someone to assist with your financial portfolio.
There are another 6 tips in the next article in this series…
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