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Choosing the best property investment loan – it’s all about you

There’s no denying it…not all loan products are created equal. Depending on your personal and financial circumstances, your long-term lending requirements and your goals when it comes to property investment, certain packages will be a better fit for you than others. So exactly how do you ‘try them on for size’ and come up with the best option?

Many property investors and homebuyers fall for the interest rate trappings offered by lenders and this is particularly true when we are in a low rate, competitive market like the one we are currently experiencing.

Rather than being completely blindsided by alluring low fixed rate terms and the like, you need to make your decision based on a number of factors. So to help you along the way and ensure you don’t jump at the first attractive deal that crosses your path, here are some tips on how to choose the right loan product for you:

1. Get real

Be realistic about the loan features you require. Essentially, the more features the higher the cost. Separate the ‘must have’ from the ‘nice to have’ features.

Redraw is a good example. Often people ask for an investment loan with free (or cheap) redraw. In reality very few investors make extra repayments on an interest-only investment loan (because remember that borrowers can only redraw ‘extra’ repayments).

If you do make the odd extra repayment, how likely is it that you will want to redraw it? Not that often is my guess. My tip is – focus on the features that matter.

2. How long will the loan be?

Consider how long you will hold the property and loan for. If you are only going to retain the property for a few years, think about using a discount variable loan to make the most of lower ‘honeymoon’ rates. If you plan to hold the property for the long-term however, choose the loan with the lowest ongoing overall cost.

3. When capital growth can cut

Break (or early repayment) fees can be an ugly side effect of good capital growth gains. Consider the example where you expect your investment property’s value to increase significantly in the short term. You plan to take advantage of this increased value by increasing your loan in three years and using this extra debt for a future property investment.

If the loan has break fees that are applicable for up to five years however, you may be up for additional costs. Just be sure to ask about break (or early repayment) fees before entering into the loan. Sometimes these might not apply to a simple loan increase, but it depends on your situation.

4. How flexible is it?

Most investors buy and hold property investment for the ‘long-term’. However an investor’s needs, perspectives, plans, goals and general approach to their portfolio can change over time. Therefore, it’s important to make sure that you maintain flexibility. Choose a product that will allow you to change the loan without any significant costs. This is one aspect to making the right selection when it comes to mortgage products that I cannot stress enough!

5. Forget about the ‘satellite benefits’

Pardon the pun, but don’t ‘bank’ on specific features of a loan product saving you money. For instance, some lenders and mortgage brokers will try to convince you that offset and line of credit products will save you thousands of dollars and allow you to repay your loan years earlier. This is often not true.

Ask these people for the assumptions they use in their whiz bang calculations and you’ll see that the savings they promise are the result of extra repayments rather than the actual offset or line of credit. Remember extra repayments can be made with most loan products, not just these two facilities that are frequently given way too much ‘credit’.

My advice is, don’t pay any extra for an offset or line of credit option. It’s not worth paying a lot higher interest rate and then relying on these ‘potential savings’ to materialise in order to compensate for that extra interest. If you can get a line of credit or offset for the same interest rate as a basic loan, then jump all over it. If not, always choose the cheapest option.

6. Make the first question count

Most borrowers miss that first crucial step in finding the right loan and jump straight to the second question: who is the best lender for me? In reality, the first question you should be asking is: which structure is the best for my situation and what products does it require?

Answer this one before you even begin to consider which lender can provide that particular product at the lowest overall cost. If you are struggling to answer that first question because you just can’t get your head around all of the marketing hype that goes with loan products, seek advice from a professional who can cut through the hard sell and tell it like it is.

For more information on how you can manage and maximise your property investment debt and uncover the best loan products for your needs, click here to contact us, or subscribe to receive regular post updates and industry insights.

Stuart Wemyss is a chartered accountant and founder of Property Tycoon Finance. Email: wealth@propertytycoonfinance.com.au

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