Whether you’re a first-time property investor or an investor with many years’ experience, getting the financing of your investment right from the outset is fundamental to success.
The considerations associated with financing the purchase of an investment property go much further than simply getting the lowest interest rate possible, or weighing up the pros and cons of fixed versus variable.
While these are certainly important elements in the investment loan equation, there are a few things to think about in investment property financing.
To get you started, we’ve pulled together five things to think about:
Think about Lenders Mortgage Insurance (LMI).
Investors who are generally using equity in their home often try to avoid paying LMI, as it can be costly. Others are happy to pay LMI because it means they take less equity out of their home or it gives them the scope to buy multiple properties. Know what’s right for you and your unique circumstances.
Consider using a line of credit to help manage your investment property’s cash flow.
Say there’s a $500-a-month gap between the income your investment property is earning and the expenses you incur. With your accountant’s approval, you could use equity (most likely from your owner-occupier property) to establish a line of credit and fund the monthly difference. Because you’re eating up some of the equity in your own property, you need to be confident that your investment property will have good capital growth.
Initial loan structuring is critical if you plan to make your owner-occupier home an investment property in the future.
Consider putting in the minimum necessary deposit and keep the extra funds in an offset account. The aim is to pay minimal interest while you’re living in the property, because there are no tax deductions during that time, but at the same time keep your options open. When you turn it into an investment property it still has a high level of debt on it for tax effectiveness and you have access to every available dollar in the offset account for the deposit on your new owner-occupier property.
Avoid cross-collateralisation as much as possible but if you do need to, never put the family home up as primary security.
Generally, most people are keen to avoid putting up their family home as security for their investment property. If you need to, use the family home as secondary security, not primary security.
Select a loan package based on your investing plans.
Generally speaking, someone looking to have their family home and one investment property may be better off with a couple of basic loans while someone looking to acquire multiple investment properties may benefit from a professional package. The best choice depends on a range of considerations, so seek advice.
Thinking about these aspects of property finance is a good first step. But, no matter what stage you’re at – novice or seasoned pro – the advice and guidance of an experienced mortgage adviser can be invaluable.
DISCLAIMER: The information contained in this article is correct at the time of publishing and is subject to change. It is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, Smartline recommends that you consider whether it is appropriate for your circumstances. Smartline recommends that you seek independent legal, financial, and taxation advice before acting on any information in this article.