There’s a lot to know about investments, such as how to choose the best investment loan that meets your needs and goals. A good investment loan can make property investment a much smoother process.
Investment loans vary depending on what you are looking to achieve and can be either very simple (like your standard home loan) or something more complex that helps you make effective use of tax, gearing and repayments. You can also make good use of loan features such as redraw, offset and additional repayments to help manage your investment loan.
Investor borrowers are the most sought-after customer by banks and lenders due to their equity position and borrowing history. It is important that you use this position to secure the right loan for your finance needs at the most competitive offer.
The range of investment loans and loan features available to suit both new and experienced investors is now quite extraordinary, ranging from simple home loans to more complex loans that allow you to manage tax and repayments.
Which investment finance method you choose will depend on a number of factors, including whether or not you are carrying existing personal debt in the form of an owner-occupier mortgage or personal loans and other debt. Generally speaking, it is better to pay off personal debt first, minimising investment debt as much as possible during this period.
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Always seek advice from your accountant on investment and taxation rules for your particular situation prior to making a decision on investment methods.
Residential Property Investment Loans
Borrowing options available to investors are now very similar to loans for owner-occupied purchases and include both variable and fixed rate home loans with the option to make principal and interest or interest only repayments.
Two options that may particularly appeal to property investors are the Line of Credit loan, and the opportunity to make Interest Only repayments.
This is the most common type of home loan. Most lenders will allow a maximum term of 30 years. Most of your repayments in the early stages of your loan pay off the interest while most of your repayments in later stages of your loan pay off the principal (the original amount borrowed).
You can take a table loan with a fixed rate of interest or a floating rate.
You pay the interest-only part of your loan and none of the loan itself, so the payments are lower and can make it easier on your cash flow. It is quite common to take an interest-only loan for a year or two and then switch to a table loan after that.
Revolving credit loans work like a giant overdraft. You pay can go directly to your loan account and bills are paid out of the loan account when they’re due. By keeping your loan balance as low as possible as often as possible means, you pay less interest because lenders calculate interest daily.
You can make lump sum repayments onto your loan and re-draw any money up to your pre-approved limit.
This takes a highly disciplined borrower because there is the risk of always drawing back to your limit and never repaying the original loan amount.
This is similar to a Revolving Credit facility where you have the flexibility to redraw any extra repayments you have made on your loan, but the safety net that your maximum loan facility reduces over a period of time to make sure you repay all the loan at the end of the loan term.
Any extra repayments you make on your loan will help reduce your interest charges and therefore save you a substantial amount of interest over the long term.
Any extra repayments you make will be available for you to redraw at any time without penalty.
This is when you fix your interest rate for a period of time and can be from 6 months up to 5 years. Some lenders may offer other options but these are the most common.
The benefit is that your repayment is fixed and provides certainty for that period of time.
If interest rates move down, your repayment does not as it is fixed for that period of time. However, if interest rates go up, your repayment does not either.
Keep in mind that if you are at a fixed rate and choose to repay your loan while you are still in your fixed rate period, there may be penalties charged to you by the lender.
This is where your loan moves with the current interest rate market. So if interest rates go down, so does your repayment, and if interest rates go up, so does your repayment.
Floating rate loans provide a little more flexibility and should you decide to repay your loan, there should be no penalties for doing so while you are on a floating rate loan.
When purchasing a property you would normally sign a Sale and Purchase Agreement. In this agreement there are two important dates, one is the Finance Date and one is the Settlement Date. If you require mortgage finance, then the Finance Date is the date you need to confirm to the seller that your finance is in place and your sale then becomes unconditional, and any deposits agreed to in your Sale and Purchase Agreement become payable.
Settlement Date is the date you legally take possession of the property you are purchasing. On this day, your funds to purchase the property are transferred from your Solicitors Trust Account to the sellers Solicitors Trust Account and the Title of the property is transferred into the purchasers’ name. Any mortgages will be also be registered on the property title.