Foolish Mistakes People Make When Borrowing Money.
Whether you are buying your first property or your tenth, you will need finance to secure the deal.
Since this is such an important part of property investing, it is surprising that so many people make foolish mistakes when it comes to borrowing money.
Here are some of the biggest blunders.
1) Focusing on the cheapest interest rates.
Sure, it’s great to save $10 or $15 a week on interest repayments, but if this comes at the cost of not being able to pull out equity later on, then is it really worth it?
Nathan says, if you focus on rates you may not get the best type of loan for your strategy. It may not allow the flexibility you need in order to move onto your next purchase.
Investors should focus on equity, capital growth and asset accumulation rather than saving a few basis points on interest.
2) Using a small deposit and paying LMI.
If you are paying Lenders Mortgage Insurance (LMI) it may hurt your position. You may not be able to take the property to another bank.
3) Negatively gearing an investment property.
This is often seen as a negative strategy by the banks. It doesn’t help your servicing position if you want to buy another property as it adds into your expenses and reduces your income.
4) Being loyal to one bank.
While you may have fond memories of that banking book you used to take to school once a week and those stickers and free piggy bank you received, your bank doesn’t feel the same way about you. To them, you are just another string of numbers – and they don’t tend to reward your loyalty in any meaningful way.
As an investor with more than 200 properties, Nathan has used around 20 different lenders to finance his portfolio. While he started at his existing bank, they were only willing to lend him enough for his first three properties so he had to look elsewhere.
Lenders come and lenders go – they are basically like vehicles that carry you through each stage of your journey. You just need to choose the best one for your needs at each different stage.
5) Cross-collateralising properties.
This is for the benefit of the lender and not for the benefit of the investor. If you cross-collateralise you will have less flexibility to refinance or sell off a property.
In fact, Nathan has seen people lose hundreds of thousands because of this. When they have sold off a property and made $350,000 or so, instead of being able to use this money for another deposit, they have lost it all to their other properties.
Nathan has never cross-collateralised his properties and the team at Zinger have never done this to their clients.
Sometimes it may be worded in a specific way in the loan contract and the unsuspecting customer doesn’t realise it is being done. This is why it is important to go through the terms and conditions and understand what they mean before you sign anything.
6) Fixing rates.
When you fix interest rates, you are taking a bet against the bank. The bank has a lot of money and people involved in making sure that they come out on top. So, is it really that likely you are getting a good deal?
Sometimes it can be beneficial to fix rates, however, if you want to break from the fixed rate term it can be very costly.
Say, you wanted to sell the property and the fixed rate was lower than the cash rate being charged. You would have to pay a break cost fee, which Nathan has seen some people pay in excess of $20,000.
This is enough for half a deposit, and could easily stop an investor from moving forward.
The same scenario would apply if you wanted to refinance for equity.
When it comes to financing properties, it is important to protect yourself. Having a full understanding of how your decisions will affect your position will help you prevent against making foolish and costly mistakes especially when borrowing money.
Have you ever tried to break early from a fixed rate term? Please share your experiences in the comments section below.