Property Investor Tips
5 tips for financing a property
Posted on Tuesday, April 06 2010 at 3:44 PM
Financing an investment property shouldn't be treated as a 'one size fits all' approach but instead as a tailored approach determined by the individual's end goals, according to Smartline Personal Mortgage Advisers managing director Chris Acret.
Acret said banks don't usually disclose all options for property financing. He offers five tips to investors:
1. Lenders Mortgage Insurance (LMI) can be your friend or foe
Investors who generally use equity in their home often try to avoid paying LMI, as it can be very costly, said Acret.
"However, others are quite 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 – they can buy two investment properties with a 10 per cent deposit rather than one with a 20 per cent deposit," he said.
"It really depends on your plan – do you want a single investment property or do you want to try to purchase multiple properties as quickly as possible?"
"For those who only want to buy one or two and want to keep the costs down and make the process as cheap as possible, they will want to avoid LMI."
"For others wanting to grow an extensive portfolio, perhaps as quickly as possible, they will want to make every dollar count to help buy the next property and will view LMI as a way of doing that," he said.
2. You can use a line of credit as a 'working account' to help manage your investment property's cash flow
Acret said to reduce repayments each month, using equity from the principal place of residence (PPOR) property to establish a line of credit as a working account could be considered.
"If you were to establish a line of credit of, say, $20,000, all the property's income and expenses can be run through the account (providing a neat summary) and the $500 monthly shortfall is funded from the $20,000," he said.
However, confidence about the capital growth in the investment property is crucial, as this method will eat up the equity in the PPOR, he said.
3. Initial loan structuring is critical if you plan to make your PPOR an investment property in the future
In this case it's important to consider only contributing the minimum necessary deposit initially, keeping the remaining funds in an offset account, said Acret.
He suggested paying minimal interest while living at the PPOR, because there aren't any tax deductions during that time and when it becomes an investment property, funds in the offset account are easily accessible to use as the deposit on the next PPOR.
4. Avoid cross-collateralisation as much as possible but if you do need to, never put the family home up as primary security
"There are different schools of though on cross-collateralisation, but most people are generally keen to avoid putting up their family home as security for their investment property," Acret said.
"By having the properties 'stand alone' it provides a greater level of asset protection if something were to happen to the investment property or if it were to drastically fall in value.
"However, if you do need to cross-collateralise, use the family home as secondary security, not primary security," he said.
Standard bank practice involves placing the property with the highest value as the primary security, said Acret, which is usually the family home.
He added that mortgage advisers usually insist the family home remain secondary.
5. Selecting a basic loan or a professional package should be determined by your investing plans.
While the best choice of loans depends on the individual's situation, Acret said basic loans generally offer a lower interest rate with no or low monthly fees, but usually application fees.
Alternatively, professional packages include extra benefits such as discounted interest rates and lower fees. While they generally have an annual fee attached, there's no application fee. Acret said professional packages tend to suit 'standalone' securities better.
"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," Acret said.
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