For most of us, property will be the biggest financial investment we make, whether it’s just a home to live in or an investment portfolio.
So, if you need to borrow money to buy it, it’s crucial that you structure your loan correctly.
The right loan structure can prove the difference between a sound financial future with a fast tracked retirement and a long period of financial strain spent undoing bad decisions.
It’s important to engage the right professional help at the very beginning of the buying journey.
You will need to know what your financial situation is and how it will affect your purchase options, so the best place to start is with a mortgage broker.
Zinger Finance was set up to cater to ambitious property investors and its team of brokers are more like financial strategists, who can help you plan a strategy with the big picture and your end goal in mind.
They will know the lenders that will best suit your situation and will also know all the little things about borrowing that you’ve never heard of before.
IP or PPOR?
When it’s time to actually borrow, the first distinction to make is whether you are looking for an investment property (IP) or permanent place of residence (PPOR).
For an IP, a loan tailored to investors will be more suitable. This could mean paying interest only, so that the rental income covers the repayments and other costs. Choosing this structure allows you to maximise your tax benefits and cash flow to continue investing.
If you’re looking for a PPOR, a principal and interest repayments with the best rate, flexible loan features and a focus on building equity and offsetting interest payments may be the best option.
For the best outcome, you need to choose the right interest rates, loan features, loan term and repayment schedule. This balance is where the art of loan structuring really comes into play.
Interest rates – You’ll need to choose between fixed, variable or split interest rates. This decision will be affected by the lending market. For example, 3 years ago, when variable rates were below 2% was a favourable time to fix. The rate rises of the past 18 months have seen variable loan holders having to fork out thousands of extra dollars, while those who fixed have been paying the same rate the whole way through. Of course, now that rates have risen, the fixed rates on offer are currently much higher…closer to 6% in fact.
Fixing now could risk financial pain if rates begin to come down again, like many economists are predicting.
Some borrowers like to hedge their bets by fixing a portion of their loan and leaving the other portion variable. This is a split loan.
Loan term – This is the period over which your loan will be repaid. Shorter terms often mean higher mortgage repayments, but lower overall costs, while longer terms are easier month to month but could mean you are beholden to the bank for years longer than you’d like.
An investor choosing an interest only loan will usually be allowed a 3-5 year period before the bank will require them to start paying down the principal. If that doesn’t suit, the investor can seek to refinance an interest only loan elsewhere.
Repayment schedule – Structuring repayments to match your income and expenses is something to consider. Choosing fortnightly repayments over monthly is one example of how some borrowers make extra repayments and reduce their overall interest. That’s because you end up paying more than twice a month – there are 12 months, but 26 fortnights in a year. An extra couple of payments a year can feel quite manageable and save you a lot of money over the life of a loan. It should be noted that with the interest only repayments, most of the lenders will only allow monthly repayments.
Viable borrowing means low risk lending
A well-structured loan benefits both the borrower and the lender, by minimising chances of a default and therefore mitigating risk.
A lender will protect itself by setting interest rates based on your risk profile and coming up with a necessary loan to value ratio (LVR) that you need to satisfy.
It will also look at the property you are purchasing to make sure it’s resale value is up to scratch and that it’s not overexposed to similar property types or lenders mortgage insurance (LMI) in that particular location.