Smartline

Press Release: According to Smartline Personal Mortgage Advisers, there are many aspects to financing that your bank may not necessarily tell you about. 

“Quite often banks and their loan consultants take a ‘one size fits all’ approach to arranging an investment loan, but financing just isn’t like that,” Smartline’s Managing Director, Chris Acret, said. 

“With an understanding of what you want to achieve from your investing, a good mortgage adviser will help to develop a structure and select the products that meet your individual needs, and will provide greater scope to create wealth from your investment properties.” 

Smartline offers these top five tips when looking to finance the purchase of an investment property. 

1. LMI (Lenders Mortgage Insurance) can be your friend or your foe 

Mr Acret said investors who are generally using equity in their home often try to avoid paying LMI, as it can be very costly. 

“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% deposit rather than one with a 20% 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.” 

2. You can use a line of credit as a ‘working account’ to help manage your investment property’s cash flow 

Say there is a $500 a month gap between the income your investment property is earning and the expenses that you incur – that is a significant amount of money for people to personally fund every month. 

“With the approval of your accountant, you could consider using equity (most likely from your owner-occupier property) to establish a line of credit as a ‘working account’,” Mr Acret said. 

“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. 

However, Mr Acret warns the downside is that you are eating up some of the equity in your own property, so you need to be confident that your investment property will have good capital growth. 

3. Initial loan structuring is critical if you plan to make your owner-occupier home an investment property in the future 

If your plan is to eventually make your home an investment property, you could consider only putting in the minimum necessary deposit initially, keeping the remaining funds in an offset account. 

The aim is to pay minimal interest while you are 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. 

4. Avoid cross-collaterisation 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-collaterisation, but most people are generally keen to avoid putting up their family home as security for their investment property,” Mr 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-collaterise, use the family home as secondary security, not primary security. 

Mr Acret said it is standard bank practice to put the property with the highest value (generally the family home) as the primary security but good mortgage advisers will usually insist that the family home be only a secondary security. 

5. Selecting a basic loan or a professional package should be determined by your investing plans 

Basic loans are ‘no frills’ products that generally offer a lower interest rate with no or low monthly fees attached. They do generally have an application fee. In comparison, professional packages are a way of packaging a loan with extra benefits such as discounted interest rates and lower fees but generally have an annual fee attached (but no application fee). 

“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,” Mr Acret said. “Professional packages also tend to suit ‘stand-alone’ securities better. 

“However, the best choice depends on a range of considerations.”