Faced with the prospect of selecting the best investment loan from literally hundreds of lenders and thousands of products, exactly how do you make sure you get it right?
Understandably, most property investors focus primarily on buying the best possible property for the best possible price. Many never even give much thought as to how they intend to structure their borrowings over the life of their portfolio and as a result when it comes to selecting a loan, they often go for the cheapest interest rate or a product with the most bells and whistles.
The fact is getting your loan product and structure right is a critical aspect to the success of your investment endeavours and it requires more than a cursory glance at the latest offerings from the big banks.
Regardless of whether you choose to undertake the process of trawling through the various products from the countless lenders out there on your own, or you seek help from a suitably qualified mortgage broker, you should always do a bit of groundwork to ensure that the loan you eventually end up with is just as good as the property you invest in.
Here are five steps you need to take before signing any type of loan agreement;
1. Determine your financial goals
This is a step that you should already have taken before you even start looking for an investment property, let alone a mortgage. Basically you need to secure a loan that will enable you to meet your financial goals.
Is a lower interest rate important to you, or do you require certain features that you might not get with a low rate product? This is where you financial goals will come into play.
For instance, if you want your portfolio to be cashflow neutral or positive, you might go for a lower interest rate to ensure your rental income will cover your repayments. Whereas if you are negative gearing, you might decide to lock in a fixed rate so you know what to expect when it comes to out of pocket expenses each month.
On the other hand, if you are starting your portfolio later in life and want to pay off any related debt as quickly as possible, you might need additional features that will allow you to do so; such as a product that lets you make additional repayments or one large lump sum payment without penalty.
Then there are loans with offset accounts, which mean you can safely stash away any extra cash (such as your investment buffer), whilst reducing the interest payable on your investment borrowings.
2. Work through the figures.
Obviously before applying for a loan, you have to be 100% certain that you have the capacity to meet the required repayments.
The best way to work this out is to write up a detailed budget, including all of your monthly living expenses and income. From there, you can determine how much you can afford to repay each month on your investment loan.
This exercise will give you an idea as to your buying budget and the type of investment property you can realistically afford, as well as helping you decide whether you should go for a loan with more features that will come at a higher price, or whether a competitive rate is your top priority.
You can download a budget planner and some other useful tools from our website byclicking here.
Many lenders offer useful tools, such as lending calculators, that can give you some idea as to how much you can afford to repay on your investment mortgage each month after all of your expenses are accounted for. We have a range of calculators on our site – check them out by clicking here.
3. Find out who offers what
Once you know what type of loan will best suit your requirements, it’s time to go shopping – on line that is. It has become a lot easier to compare lenders and their products, with a number of internet sites available that allow you to sift through a large selection of loans and the features you get with each.
Make sure you check the comparison rates particularly, which outline not only the interest rates applicable to each loan, but any other fees and charges that you might incur.
4. Talk to a number of lenders or an experienced broker
You’ve done the legwork, sorted through the various products on offer and you know what you can afford to borrow; now you need to make your move. You should have a short list of lenders identified from your internet research and if you’re confident that you can narrow down this list to pick the best lender and loan for your needs, it’s time to start talking to them personally.
However, if you would prefer to have a mediator on side acting as your go-between to help you determine who you should go with and which particular product, it might be time to call an experienced mortgage broker.
The aim of this exercise is to find out as much as possible about the loans, features and options you are considering. Additionally, a broker can tell you what criteria you’ll need to fulfil in order to secure the loan you want and how to make your application as attractive as possible to potential lenders.
Whether you go it alone or use a broker, ask as many questions as you need to satisfy yourself that you are walking away with the best possible deal.
5. Time to review
You’ve met with the broker or lenders and received a lot of information that you’ll need to digest. Now is the time to take a moment; consider all that has been discussed, go back to your initial budget and make sure you can meet the loan obligations, ensure that the loan is the best fit for your financial goals and finally, go over the loan documents thoroughly so you understand all of your rights and responsibilities.
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