Mortgage Experts Blog
Top 5 most common investment loan mistakes
Top 5 most common investment loan mistakes or problems that individuals face. Investment properties are a learning process filled with hiccups that help us make better decisions in the future. At least if you follow our advice regarding these 5 mistakes, you'll be able to get it right the first time.
1. Incorrectly structured loans - all properties tied together.
For many investors, cross collateralisation of properties seems like the easiest option when you have multiple investment loans. However, what many investors only realise after they have structured their loan in this way is that cross collateralisation can prevent further property investments and vastly limit future options.
Cross collateralisation is the term used to describe when two or more properties are used to secure one or more loans by the same lender. This can tie you to a particular lender and vastly reduce your flexibility when it comes to future investment loans. While having your properties tied together can be a temporary annoyance when you make the decision to sell, the real threat occurs when unforeseen circumstances see you needing to convert equity fast. If you plan to sell one or more properties in the case of job loss, illness divorce etc. you will find yourself at mercy of the lenders policies. Lenders send their valuers to estimate if your remaining properties are adequate security. Lenders often try to limit their risk by taking 100% of net sale proceeds and reducing the remaining loans. This can put you in serous finical strife if you were trying to liquidate your assets.
To avoid this situation, mortgage experts advises that you don’t cross collateralise unless completely necessary. Stand-alone security structures allow for greater options when making future decisions.
2.Searching without approved Finance
A common mistake for home owners and investors is searching for properties without pre-approval. The worst thing is finding your dream property and not being ready to make an offer before it has slipped through your finger or making and offer only to find out you cannot finance the loan. Finding out what price range you qualify for will also save allot of time if you’re looking in the wrong area.
After you have your finances in order and have researched price ranges in areas you are looking to buy. The next step is seeking pre-approval to avoid the emotional roller-coaster of choosing properties that you cannot finance.
3.Lender servicing issues
Property investors often face difficulty when proving investment loan serviceability. Lenders have to be diligent in what they deem an acceptable level of debt for a borrower. Investors often have a more complicated situation than first home buyers and based off many lender servicing models neutrally geared portfolios can be deemed as high debt load.
However, lenders are not uniform in there servicing models. Different lenders will allow negative gearing benefits to be used to increase borrowing capacity and some that will accept 100% of rental income (rather than the usual 80%). Other lenders will assess debts without a buffer and just consider actual repayments and interest rates.
Often the more properties you have the larger the difference in lender servicing models. Working with an expert to come up with a long term investment plan will only work in your favour. Mortgage experts have experience with many lenders and many different investor portfolio scenarios. You will only achieve your property investment goals if you plan a head and anticipate how the investment loan process will unfold
4.Thinking big banks will always be your best option.
Considering the recent APRA changes, mentioned in previous blog posts sometimes the big banks are not the best option for your situation. They may monopolise 95% of the market but this is in no way congruent to the best offer. Banks rely on consumers going with what they know and sticking with the bank they have been with for most of their lives. However non-bank counterparts can often provide just as good if not better deals given that they don’t have the same customer base as the big 5.
Rather than remain in your comfort zone it’s best to be open to new relationships with different lenders. Speaking to an experienced broker who can offer various options beyond the big 5 could sometimes save you money and hassle when getting your loan approved. All lenders are regulated by the Australian Prudential Regulation Authority so you know your money is safe.
5.Hassle with loan approvals due to complex structures
Loans in the names of companies, family trusts, unit trust, hybrid trusts, smsf trusts and property investment trusts can all cause headaches depending on the lender chosen. For this reason it’s always important to have the longevity of your investments in mind. While they seem good now, such structures can lead to limited future borrowing power. Always make a long term plan and speak to a professional if you are unsure of the consequences. Investment loans are not just about the final investment rate number or the biggest tax break. The most successful investors plan ahead.