PROPERTY INVESTORS

We specialise in assisting property investors with their loan needs.

In particular we focus on getting the loan structure right the first time, choosing which lenders to use in the right order (yes this is important) and finally getting our clients the best deal possible. 

We don’t just focus on the transaction right in front of us. With all clients we really try to get to understand their future goals and the likely use of their properties in the future. This helps us map out a credit plan for their property investing future. We also want to be informed when helping you weigh up interest only vs. principal and interest repayments.

Common property investor problems and how we can help

If you are facing any of the below issues feel free to give Mortgage Experts a call on 1300 711 054 or go to the Enquiry Form.

1. Incorrectly structured loans - All loans & properties tied together

By far and away the most serious of problems property investors face is their over reliance on one lender and the tendency for their lenders to tie up all of a client’s loans and properties via cross collateralisation. It seems so easy and simple to set up your loans this way but it can stop further property investment plans in their tracks and more importantly it can be downright dangerous.

We don't want to sound alarmist about cross collateralisation but we have seen some horror stories where lenders refuse to be reasonable with the use of sale proceeds. 

Most seasoned property investors come to realise cross collateralisation is a big mistake AFTER they have hit a roadblock with their lender.

In hindsight it is easy to see why it is not a good idea to give the lender all the power in the relationship. While this is usually just temporary annoyance for most the real threat from crossing properties is if something were to go wrong in your personal life (job loss, sickness, divorce etc) and you needed to convert equity to cash by selling one or more properties while you recovered. Or when you retire. Basically as soon as you are not financial and able to refinance your loans you are exposed.

It is then that you are then at the mercy of the lenders polices and their valuers estimates of your remaining security properties and this usually happens at a time when you are at your most vulnerable / least able to take your business elsewhere.

It is not uncommon for lenders to take 100% of net sale proceeds from a properties sale in order to reduce a borrowers other remaining loans even if the whole intention of selling was to keep some of the surplus funds while recovering from the mishap in the borrower’s life. Sadly the lender is trying to reduce their risk by doing this but we have seen this be the catalyst for a complete melt down of a couple’s financial position which led to their ultimate bankruptcy and the loss of the family home and we might add a major headache for the lender. If the lender in question had allowed just $50,000 of the net proceeds of the property sale (over $300,000) to be released to the borrowers the whole catastrophe would have been avoided.

Solution:

You can make you investing life so much easier for yourself if you take this advice…. don’t cross collateralise if you can help it. If a loan will work with two or more properties being crossed together then it can also be done as a stand-alone facility. More on this at loan structuring advice.

2. Overcoming lender servicing issues

This is probably the most common issue property investors face. Lenders (and brokers) have to be conservative to some degree in what they deem as an acceptable level of debt for any borrower. The tricky part is all lenders have servicing models which at every turn add a buffer here and a reduction there so in the end a neutrally geared portfolio can be deemed to be a high debt load.

Luckily not all lenders view things the same way. For example we have lenders who will allow negative gearing benefits to be used to increase borrowing capacity. We have lenders who will assess other lenders debts at the actual repayment + a margin of 20% or 30% rather than adding a buffer to the interest rate and calculating repayments on a principal and interest basis when the loan in question has interest only repayments.

While we don’t advocate stretching things to their absolute maximum we do feel that lenders are increasingly too conservative with property investors who have multiple properties, loans and a good income.

The difference between how much one lender will lend and how much another one will can vary by as much as a factor of 2 to 1 in certain scenarios. Generally, the more property investments you have the greater the difference can be.

Solution:

It is vital to plan ahead and to map out a likely sequence of property acquisitions, consequent loans and thus which lenders should be used in which order. This isn’t a perfect science as lenders servicing models do change and over time interest rates, rental income and your personal income will no doubt change too but having a broad plan is much better than attempting to achieve your property investment goals with no thought to how it will unfold.

3. Interest only expiry on Investment loans

The recent mortgage climate is one of increased rates for interest only repayments (although the gap is decreasing) and a discontinuation of never ending interest only periods. For some people the shrinking difference between Interest Only (IO) and Principle and Interest (P&I) repayments as IO rates went up incentivised them to make the switch and begin paying down their investment loans. However for others cash flow remains king. We can help analyse the true cost of IO and if it make sense for the investor. 

We have seen the rate differential between interest only and principle and interest loans converge again over time after initially looking like they would settle at as much as 1% pa apart. This may make it more palatble to renew the IO period on your investment loans. However the overall costs should be considered. 

On a side note the lender appetite for IO repayments on owner occupied home loans is still nowhere near where it used to be and these loans are now quite rare. 

Solution: Compare the pair - Interest Only versus Principal & Interests repayments

• $500,000 loan @ 6.50% pa with interest only first 5 years and 30 year term total = $2708 / month when IO, then $3283 / month when P&I.
• $500,000 loan @ 6.20% pa principal and interest over 30 years = $3062 / month.
• Difference in cash flow in first 5 years = $354 per month less for IO.
• Difference in cash flow, next 25 years = $221 per month more (assuming IO period is not renewed, loan not refinanced, and the P&I rate is applied to the loan after the first 5 years).

If an investor can easily afford to pay the extra repayments on a P&I basis, they may feel it more beneficial to switch to P&I and pay a slightly lower interest rate, a substantially lower interest cost over the life of their loan and build more equity. Assuming the above loan example and a 30 year loan compared to a 30 year loan with a 5 year initial IO period the P&I option would save about $45,000.

Interest only repayments should still remain popular amongst investors with non-deductible debt. If the investor expects the property to increase in value, they may want to maximise their cash flow by minimising repayments and paying down their owner-occupied home loans. Investors with a home loan may want to use the saved principal component for other uses such as accumulating it as a deposit for their next property purchase.

You can see why your plans for both your investment property and your investment portfolio may influence your decision to have your repayments as IO or P&I.  It's also important to stay up to with what’s happening with interest rates as you may have to re-adjust your strategy in the future.

4. Property investors with complex loan structures – hassles with loan approvals

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.

Solution:

Before you jump into a complex structure make sure you have explored the lending options first. There is no point having these structures if it restricts you from borrowing further.