February 02, 2014
Ok, so you have a fair degree of equity in your property and considering a new purchase in 2014? This may be your first time or one of many. The yield is attractive and based on your sums you are confident on getting a loan. Just roll the equity with your current home and all good? STOP, here are 4 things to think about:
1: Equity is only part of the picture that a lender will consider. What about your income and even restrictions on buying properties in certain postcodes? In fact recently one lender is capping rental yields for mining towns when assessing loan applications. In reality the property may yield more, but the lender will impose a cap as part of its risk mitigation. This will place more reliance on your income; then add any existing debt (including that of any joint borrowers), the LVR, your age (which can impact on the loan term) and also any dependants you have. All these influence your borrowing capacity.
2: Get wise about interest rates. By all means shop around for the best interest rate, a challenging task best done by a mortgage broker. But don’t be fooled by headline rates and expect you will automatically quality for the best rate in town. Low rates are generally reserved for strong deals that have a low LVR, coupled with a high loan amount, strong serviceability, together with an acceptable security. Then once you find the best rate that suits your particular situation, add 2% to the rate to ensure you can still afford the repayments. After all that’s how the lender will access your application, so you should do the same.
3: Getting the right product. Getting the sharpest interest rate may see you forfeiting other features, like making extra repayments or withdrawing extra repayments. Should you have a line of credit, or have some of the loan fixed or variable? all these factors and the appropriate interest rates are important for your future wealth creation goals.
4: Avoid cross securitisation. Crossing all your securities together involves combining all properties in a single structure with just one lender. The combined equity is then used to fund future investments. This may reduce your borrowing capacity, increase LMI (if you are borrowing above 80%) and reduce your ability to shop around with other lenders. You can minimise this structure by separating your properties into standalone deals. For example, its quite common to withdraw equity from one property (cash out) and use this towards the purchase of your investment and not cross the two securities together, giving you’re the freedom to choose another lender if you wish.
Please contact your local expert Julie Browne for a comprehensive analysis of your investment home loan.