Selecting the Ideal Loan for Your Next Investment
Selecting an investment property loan requires careful consideration of your financial goals, budget constraints and property characteristics as well as loan terms.
When investing in property, your choice of loan could have a major effect on its financial outcomes – including whether or not you make a return.
By thoroughly considering all available loan options and selecting one that most aligns with your needs and financial goals, you can increase your chances of success.
Rory McCotter, Head of Secured Lending at HSBC Australia, emphasizes the importance of planning when purchasing an investment property – which means considering long-term financial goals as part of any purchase decision.
Here is how you can select an appropriate loan for your investment project.
1. Establish Your Budget
Before searching for loans, it is essential that you have an in-depth knowledge of your budget. This will enable you to ascertain how much borrowing power you have and what terms may be realistically expected of you.
Rory recommends when creating a budget it is crucial to keep all costs in mind.
Apart from the deposit, it is also wise to consider potential stamp duty costs that vary by state, according to Mr. Rea.
“In certain states, stamp duty rates for investment properties exceed those for owner-occupied properties.
“You should consider whether your investment property may be subject to land tax obligations, which vary by state.
Rory recommends once purchasing the property that once acquired, additional consideration should be made regarding landlord’s insurance and whether outsource property management will be the appropriate course for you. You should consider how much can afford in property management fees before making this decision.
2. Understand the various loan types There are various loan options available for investment properties, including fixed rate, variable rate and split loans.
Each loan offers unique eligibility criteria, interest rates and terms; therefore it is crucial to do your research carefully and determine which option best meets your needs.
“When purchasing an investment property, consider what loan type best meets both your current and future financial status,” advises Rory.
“Both variable and fixed rate options are available, and you could consider taking out longer interest-only terms of up to five years – rather than paying both principal and interest.”
Split loans may also provide the security of having both fixed and variable rate loan repayments as well as some of your payments being fixed.
3. Evaluate interest rates and loan features
Once you have identified potential loans, compare their interest rates and terms before making your final selection.
As a property investor, Rory notes that you may require various loan features from your lender such as offset options, variable and fixed rate rates or package loans with others, so it’s crucial that you do your research into which products feature in the package with your loan.
Consider whether it allows redrawing or offsetting, offers competitive interest rates and provides enough interest only options if that is important to you. Also ensure there are no annual fees or set up costs,” notes Reddy.
4. Tap Your Equity For an Increase in Loan Amount
It may be possible to leverage equity available from other properties as a source of increased borrowing capacity for your investment loan.
“Doing this could also help lower any Lender’s Mortgage Insurance fees,” according to Rory.
“To effectively calculate available equity is of vital importance. Your borrowing power may depend on factors like property type and location.”
With your lender’s support, it is advisable to speak to a financial advisor or accountant to identify which structures best suit your circumstances.
5. Review Lender Requirements
Each lender may have differing eligibility requirements; thus it’s essential that you do your research when it comes to finding a loan provider and understanding your borrowing power with them.
“Deposit requirements vary depending on the type of property, its value, and where it’s located,” according to Rory.
“Having mortgage insurance may enable you to borrow more.
6. Seek Advice From Financial Professionals Before making any financial decisions, it’s wise to consult a financial adviser or lending specialist.
Your financial planner or adviser can provide you with invaluable insights and advice based on their extensive knowledge and expertise.
7. Determine Your Priorities
Finding a great loan deal is great, but to truly protect yourself it’s essential to identify your priorities when entering into any long-term financial relationship – in this instance your home loan. It is also vital that your lender knows these non-negotiables in advance so that any agreement can be met on terms that work for both of you.
“Think carefully about how your everyday banking habits play out,” Rory advises.
“For instance, you should consider what is most important to you: being able to visit a branch easily or having a relationship manager you can depend on regularly? Additionally, take time to think about whether this lender could assist with future investment property purchases.”
