Property Investment – What You Should Consider
Take the emotion out When buying an investment property you should treat it as a business decision and not be emotional. A common mistake is that people buy a house…
There are no right or wrong answers when it comes to choosing a home loan – it just has to be right for you. But you must know what all the options are before making a decision. A basic fact to keep in mind is that the more flexible the loan, the higher interest you’ll pay. A variable loan which allows you to draw against repayments or offset savings against the mortgage will have a higher rate than a basic loan.
The interest rate varies throughout the term of the loan. The term is generally about 30 years. This is the most common type of loan. It is typified by the following:
Lenders now offer basic variable loans with lower interest rates, but with fewer features than a standard variable loan. The interest rates and repayments vary over the term of the loan. These are typified by:
Fixed rate loans protect you against interest rate changes for an agreed time, so you have peace of mind knowing your repayments won't increase. These are typified by:
The interest rate is usually low to attract borrowers. Also known as a honeymoon loan, this rate generally lasts only for a few years before it rises. Rates can be fixed or capped. Most revert to the standard rates. These are typified by:
This is a separate savings account attached to your loan. The rate of interest in your savings account is the same as the loan. Any credits to your offset account are deducted from your loan balance before the interest is calculated. These are typified by:
This is not a mortgage product rather a savings product and hence you should speak to specific lenders regarding this product.
A low-doc or no-doc loan is ideally suited for investors or self-employed borrowers looking to refinance, purchase or renovate. No tax returns or financial reports are required. These are typified by:
It allows you to pay off an investment and a home loan through a single account. Interest on the investment repayments are tax deductible, but the home loan interest is not. This basically means you can pay off your home loan quicker, allowing the interest to gather on the investment loan, and deduct it from your annual tax. These are typified by:
Note that this type of loan has been under scrutiny by the ATO and without sound financial advice it may not be appropriate for you.
Get a feel for what’s on offer across the wide range of financial providers around these days. Credit unions, building societies, mortgage originators, community banks and boutique online or telephone banks may offer better interest rates or lower fees than the big banks because they are anxious to win new business or they are non-profit organisations.
However not all loans or lenders are equal. Over 40% of Australians use a mortgage broker to assist them in evaluating which loan and which lender suits their current and future needs. So don’t be swayed by cheap rates or low fees, if the loan restricts your future borrowings or the features of the loan you want it may not be saving you money in the long run.
On a mortgage loan of $300,000 you can expect to pay at least $15,000 in fees. With mortgage insurance, this will rise to about $17,470.
Investment property finance can best be defined as a loan for the purposes of purchasing property that will be used specifically as an investment; ie the property will be rented out and will deliver rental income to the owner as opposed to the property being used by the owner as a primary residence.
A buyer seeking finance for an investment property may require this finance to be structured slightly differently than that for an owner occupied property. There may also be additional considerations if the investment property finance is for the purposes of extending an existing investment portfolio.
Home lenders entice borrowers to their home loans with attractive low introductory rates. These rates may be up to 2 percentage points below the standard rates for home loans and therefore look very attractive. But these "honeymoon rates" only last for six months to a year before automatically reverting to the standard rate offered by that lender.
By all means take advantage of these discounted rates but don't let them dictate your choice of loan. It is far more important to compare loans by flexibility of features and the standard rate that you will face for years into the future. The 'comparison rate' that lenders must publish for each loan is a much better tool with which to compare the true interest and fees costs of different loans.
A redraw facility allows you to make additional repayments on your mortgage, and then have access to the additional repayments if you need to.
However, the facility is normally only available on "Standard Variable" loans, which are more expensive than basic variable loans. Before you choose the more expensive loan, make sure you understand the conditions attached to the redraw facility as it may include a minimum amount and a fee every time you use it. Be aware that you can get the fully featured standard variable loans at a discount interest rate — these are usually called professional packages and annual fees vary between $200-$400 per annum.
