With the Reserve Bank electing to hold the official cash rate over July and RP Data-Rismark reporting that national housing values jumped one per cent in June, some investors may be looking to enter or re-enter the residential property market. For most of these individuals, this will require the borrowing of finance from a lender – something which, for some, may be an uncertain and confusing process.
In light of such, I have decided to share with you the following piece provided by Harry Bozin from Century 21 Home Loans:
Top tips for finding the right financing solution
By Harry Bozin, Century 21 Home Loans
Investing in real estate is one of the most important financial decisions anyone can make and for the majority of Australians, obtaining finance from a lender is a necessary part of the acquisition process.
Whether you're a highly experienced investor or not, getting the financing of your investment right from the outset is important because property investments are enduring commitments that not only need to be financially viable at the time of purchase, but in the long term as well.
In light of this, I have decided to share some of my top tips for securing appropriate property financing solutions.
1. Consider your long term objectives
It is important to consider your long term objectives when seeking suitable finance. By this I don't only mean your property purchase objectives, but your plans for family, career and lifestyle as well. I emphasise these factors because each and every one of them will impact on your long term capacity to repay debt.
The answers to these questions will ultimately put you on a path towards determining the right financing option for your long term needs.
2. Do your homework on financing options
The considerations associated with financing the purchase of a property go much further than simply getting the lowest interest rate possible. It can therefore often be beneficial to examine the different financing options that are available in the market.
As you explore options, you'll invariably come across two main types: fixed and variable rate loans.
Both have respective levels of risk and potential reward. While a fixed rate will give you security and certainty, it could also incur substantial costs if you needed to break the loan early. Conversely, a variable rate would increase your flexibility and could possibly help you save money, but your repayments are at the behest of any interest rate fluctuations.
Alternatively, if you are purchasing a property solely for investment purposes you may wish to consider interest only loans, which make the interest on your loan fully tax deductable. With a principal and interest loan, only the interest component is deductible, so it is always wise to check with your accountant regarding your own personal circumstances.
You may also look to tap into the equity in your existing property investment/s to secure a line of credit loan. If your home is currently worth $600,000, and you have $200,000 remaining to pay off on your mortgage, you have $400,000 worth of equity - a proportion of which you may be able to use to purchase other investments, depending on your personal credit circumstances.
Other financing options may include, but are not limited to, split loans, "no frills" loans, professional loan packages and self managed superannuation funding.
At the end of the day your financing solution should be based on your financial position, the features you require, the predicted duration of your investment and also current and projected market conditions. These factors - however, can be both both complicated and changeable, which means that it is often useful to seek professional advice from a mortgage broker, who can crystalise your options and help you identify a financing solution that it most suitable for your long term requirements.
3. Assess your costs
With any real estate purchase, there is a range of associated costs above and beyond the price of the property itself which, if unaccounted for, can stagger your plans and/or impact the viability of your investment. These costs should be factored into any decision regarding financing options, as they will help you to ascertain how much money you actually have to work with, and how much finance you will need to borrow.
One of the biggest initial outlays will be your deposit, which is usually five per cent of the purchase price. However, if you are borrowing 80 per cent or more of the purchase price you will be required to pay mortgage insurance, which is an additional fee.
In addition, you should allow funds for the loan application fee, valuation fees, taxes, stamp duty, legal costs, building and pest inspection expenses, and insurances.
4. Be resilient
One of the most disillusioning prospects an investor faces is rejection of their finance application. However, an answer of "no" doesn't mean you'll never get money again; it just means that in a particular instance your circumstances didn't meet the policy of the lender.
Given such, if your finance application is rejected, it is always a smart move to find out why. The reason could be that your credit file contains inaccurate information about your financial status, or that your existing debt levels are perceived to be too high. Knowing this information could put you in a position to rectify the default, pay off some debs and successfully reapply in the future.
Examining these aspects of finance is always a great place to start for anyone looking to build their portfolio. However, no matter what experience level you're at, the advice and guidance of an experienced mortgage broker can be invaluable in helping you to find the best financing solution for your needs.
For more information on finance options please feel free to contact me on (04) 1186-5959 or email harry.bozin@century21homeloans.com.au