When you are ready to start looking for your next investment property, you will most likely also be ready to start evaluating loan options for the purchase.
Whether you use a mortgage broker or not, it is still useful to research what possible loans will be available for your purpose.
It’s also wise to have your finance organised before making offers on a property. If you already have a few properties with loans, you may be comfortable with sticking to your existing lender, especially if they already know your financial situation and can offer up the finance easily.
But if not, here are some things to consider when looking at the large variety of finance options out there.
This is the most important factor that people look at when shopping around for a loan. The interest rate will ultimately determine how much your repayments are going to be.
Interest rates can vary by 1 or 2% between lenders, but are often not too different between the major banks for equivalent loan products.
If you can save 0.5% on your interest rate and your loan is for $300,000, then that is a saving of $1,500 per year in interest.
You can also negotiate on interest rates, never assume that the advertised rate is static. Some things you can use to negotiate a lower rate are:
- Larger than normal deposit
- High surplus of income, showing you can easily make repayments (and are therefore less risky)
- Higher than average loan amount (you should be able to negotiate a discount on loans over $1 million)
- The lender next door is offering a better rate, so it doesn’t hurt to mention that too
Loan Term and Repayments
Most people purchasing a home to live in will want to have their loan over 25 to 30 years so that the repayments are kept at a manageable amount. Keep in mind that the longer the term, the more interest you will pay in total over that term.
For investment purposes, you may want a shorter term. When you start looking at short term loans of less than 2 years, that is where you may get some resistance from lenders.
This is because they may not deem it profitable to hold a loan for that short a time. Typically very short term loans are used for bridging finance or development projects.
Loan to Value Ratio
The LVR basically determines how much deposit you will need to provide in order to get the finance. If you have a 10% deposit, you should not have too many problems securing an investment loan. But if you have less than 10%, you may need to seek out other lenders that offer 95% or better.
It is always better to have a bigger deposit to help reduce exposure, and since your loan will be smaller, so will the interest payments.
Find out more about Loan Value Ratio here.
Exit fees are penalty fees issued to borrowers when they want to exit their mortgage before a pre-defined period. Banks implement these to help discourage customers from refinancing to a different lender.
I personally think these fees are terrible and have had to pay them myself when I sold an investment property a couple of years ago. Even though I had held the loan for close to 5 years, I was still charged with an exit fee.
These fees will be charged, even if you just want to sell (and not refinance) so you are penalised just for cashing in your profits.
Fortunately, the Australian government is currently pushing to have these fees abolished which will make switching lenders much easier.
You may also want to investigate any other fees such as loan setup and ongoing account keeping fees.
A final element to consider is if the lender has good customer service. This is not major, but if you are dealing with the lender directly and not through a mortgage broker, you will want to be fairly confident that your issues will be addressed in a timely manner.
Especially when it comes time to sign off on the finance under a property contract, you will want proper and quick communication from your loan provider.
A lot of banking is done online these days, so face to face service may not be too much of a priority, but it can be frustrating when you call about a small issue and they take days to get back to you (believe me, it happens).
The world of mortgage finance can be complex and time consuming, but if you put in the time now to get a good deal, it will save you money in the future.