If you are like most property investors you primarily focus on buying the best property that suits your investment criteria for the best price.
Again, if you are like many property investors, you probably have not given as much thought to how to best structure your borrowings. In my experience when it comes to selecting a loan, many investors just go for the cheapest interest rate or a loan product with the most bells and whistles.
The fact is that 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.
Faced with the challenge of selecting the best investment loan from a large group of lenders and literally hundreds of products, I asked finance strategist Rolf Schaefer of Metropole Finance how do you make sure you get it right?
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Here are five steps he suggested 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 other investors might decide to lock in a fixed rate so they know what to expect when it comes to out of pocket expenses each month.
If you are starting to build 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 means you can safely stash away any extra cash (for example to use as your investment buffer), while reducing the interest payable on your investment borrowings.
2. Work through the figures
Obviously before applying for a loan, you have to be 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 income and expenses. 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 purchase budget which will obviously determine 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 Rolf’s website by clicking 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. You can look at some calculators on this page and play with the figures to see how changing them affects you.
3. Find out who offers what
Once you know what type of loan will best suit your requirements it’s time to go shopping – online 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 your 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.
Now is a great time to take advantage of the opportunities this new property cycle is offering property investors. Make sure you maximise your opportunities by having the right loan that suits your specific investment requirements.
Michael Yardney is the director of Metropole Property Investment Strategists, a best-selling author and one of Australia’s leading experts in wealth creation through property. For more information about Michael visit www.metropole.com.au and www.PropertyUpdate.com.au.