In a previous article Rolf Schaefer outlined the first five mistakes to avoid when structuring your finance, whether you’re a home buyer or property investor.
Why? Because the mortgage product you end up with can mean the difference between building a lucrative, wealth generating property portfolio and never progressing beyond the first one or two investments.
Here he walks you through the next six steps you need to get right when organising property investment finance.
6. Thinking a big bank will give you more bang for your bucks in your property investment loan
There has been a lot of talk from the government lately about reviving competition in the finance sector, particularly between the big banks and non-bank lenders. That’s because the big four in Australia – the Commonwealth, Westpac, ANZ and NAB, have a monopoly on the mortgage market with over 90% of the market share in home loans.
However when you look beyond the massive advertising campaigns that banks can afford to flood the market with, often you’ll find that their smaller, non-bank counterparts can provide just as good, if not better deals. Banks rely on consumers to go with what they know and most of us have been a bank customer all of our lives, hence we feel more confident dealing with them for a mortgage. But are you really getting the best deal?
Get it right
Rather than remain in your comfort zone, when you start researching lenders why not consider smaller operators who might be able to better what the banks have on offer? Often you’ll get more personalised service from non-bank lenders and your money will still be safe as they are regulated by the same industry body – the Australian Prudential Regulation Authority – that keeps the big boys in check.
7. It’s the lenders fault if I can’t make the repayments on my property investment loan
While legislation was recently introduced to give lenders a greater duty of care when it comes to ensuring borrowers can afford the loans they’re offered, a large responsibility still falls on your shoulders when it comes to knowing what financial commitments you can uphold.
Getting in over your head is never a good idea and it’s not going to help if you fall behind on your repayments and try to point the finger at your lender.
Get it right
If you think you might be about to sign up for something you could struggle with financially, don’t proceed. There is no point putting yourself in financial hardship and enduring sleepless nights for the sake of a bigger and better home or trying to escape the rental roundabout. If in doubt, wait or lower your expectations, draw up a budget and make sure you have enough left over after all of your expenses to meet your mortgage repayments.
8. I can get finance for any property I buy
While this is true in most instances, some lenders have very strict criteria when it comes to the type of property they’ll accept as security against a loan, as they need to ensure they can offload the asset quickly if you default on your mortgage in order to cover their costs.
Bearing this in mind, some types of real estate are more favourably looked at than others by the banks and they’ll assess the location, size and features of a property before accepting it as security. For instance, a regional town or small one bedroom apartment will be less likely to pass the test than an inner suburban detached family home or spacious apartment.
Get it right
Before you commit to any property, you should check with lenders whether they will accept the asset as security or not and if there will be any higher costs for doing so. For instance, the purchase of an off the plan CBD apartment will not be funded by most banks at a loan to value ratio of more than 70% and you’ll be approved for less if you buy in a country town.
9. You don’t necessarily have to save a deposit if Great Aunt Edna will chip in
One of the toughest challenges facing first home buyers is saving a deposit. Some believe if Great Aunt Edna gives them the funds, they’ll be able to get loan approval. However the banks use your deposit, and the means by which you came about it, as part of their assessment criteria for your loan application. And having the money given to you, borrowing it or selling something else to get it just won’t always cut it.
Get it right
Most lenders want to see a genuine savings history when it comes to your deposit. The theory is, if you have enough money left over after paying all of your expenses to save money, you should have enough to meet your repayments and manage your finances. Some lenders will accept rental payments in addition to your deposit to determine whether you can meet your obligations. But at the end of the day, budgeting and saving a healthy deposit will not only make lenders look at your application more favorably, it will give you a head start when it comes to buying your home.
10. I haven’t maxed out my credit cards, so I should be safe
One of the biggest mistakes first time borrowers make is not knowing what lenders look at when they assess your current financial commitments. Many believe if they have a credit card or two, it won’t make that much difference to their application, as long as they haven’t spent up big or missed their minimum monthly repayments.
This is not the case though, because the lender will actually consider the limits you have on your credit cards , not just how much you owe. This is because you could go out and spend it all tomorrow, in which case you still need to be able to afford your loan.
Get it right
One of the best ways you can avoid being turned down for a loan or getting less than you need is by reducing your credit limits before applying, or cutting up your cards entirely. The other bonus of doing so is that you’ll be less likely to notch up too much unnecessary debt.
11. Thinking you’re covered by LMI
Lender’s Mortgage Insurance or LMI is required by lenders when you borrow at a certain loan to value ratio.
For instance, if you have a 10% deposit, chances are you’ll be required to pay LMI, whereas if you have a 20% deposit you probably won’t. The common misconception surrounding LMI is that it protects the borrower if they can’t meet their monthly repayments. Unfortunately, this is not the case.
LMI protects the lender should you default on your mortgage. In the event that they need to sell your property to recover their costs, but the sale price does not provide adequate funds to cover your outstanding debt, the insurer pays the lender the balance, NOT you!
This doesn’t mean you’ll be off the hook either. The insurer, as well as the lender, will then chase you for the money you owe.
Get it right
LMI is not necessarily a bad thing, in fact for investors it can mean the difference between buying more property and making your own cash deposit stretch further.
If you want to be protected should you get into financial difficulty, there are products out there that can assist. Lenders themselves often provide the option of buying mortgage insurance and of course, there’s always income protection insurance should you find yourself off work for an extended period due to illness for example. But the onus to organize and cover the cost of these products is on you – the borrower.
While applying for a loan and trying to gain an understanding of how the mortgage market really works might seem like a daunting prospect, it is possibly easier now than it has ever been with lenders competing rigorously for your business.
The key to getting it right and potentially saving yourself thousands of dollars is to separate the property financing fact from fiction and not be too focused on what a particular lender is offering, but on whether their product suits your specific requirements now and in the future.
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