Australian Property Investor Planning emphasises the importance of investment finance loans for property investors as a critical part of the process. When borrowers make mistakes, nine times out of ten, it’s due to choosing the wrong finance product rather than the wrong lender.
Most lenders offer the same suite of products. There is no doubt that there are differences between the same products offered by different lenders, but choosing the wrong product will probably have a greater financial impact than the wrong lender.
Property investors need to first decide which product is best for them and then decide which lender offers the best deal for the particular product, thereby comparing apples with apples.
Let’s look at the main products offered by lenders and in what circumstances they should be used.
The main types of products that you may consider using are:
Be realistic about the level of the loan features that you need. Remember that the more features a loan product has, the higher the cost. Separate the “must have” features from the “nice to have” features. Redraw is a good example. Often, people ask for an investment loan with free or cheap redraw. In reality, there are not many investors who make extra repayments on an interest-only investment loan (because remember that borrowers can only redraw “extra” repayments). If they do make the odd extra repayment, then how likely is it that they’ll want to redraw it? The tip is – focus on the features that matter.
Loan term. Consider how long you’ll hold the property or loan. If you’re only going to hold the property for a few years, then consider using a discount variable loan. If you plan to hold the property for the long term then choose the loan with the lowest ongoing overall cost.
Capital growth. Break (or early repayment) fees can be an ugly side effect of good capital growth. Consider the example where you expect your investment property’s value to increase significantly in the short term. You plan to take advantage of this increased value by increasing the loan in three years time (and using this increase for future investing). However, if the loan has break fees that exist for five years, then you may be up for more fees. Ask about break (or early repayment) fees before entering into the loan.
Overall flexibility. Most investors buy and hold property for the long term. However, an investor’s needs, views, plans, goals, etc. Can change over time. Make sure that you maintain your flexibility. Choose a product that will allow you to change the loan without any significant costs.
Most borrowers miss the first step to finding the right loan and jump to the second question: “who is the best lender for me?” However, the first question they should be asking is: “which product is the best for my situation?” Then ask which lender offers that product at the lowest overall cost. If you don’t know the answer to the first question, seek advice from a person who does.
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