You’ve crunched your cash, balanced your budget and are ready to start working on your wealth. What could possibly go wrong? Well, nothing if you follow this list of insider tips on finding the right mortgage while artfully dodging some common traps and pitfalls along the way.
Top 5 Insider Tips
1. It’s not just the rate
Rates change over time, so it is important that you also understand the other features available on your loan. One of the best is the ability to be able to pay over and above to ensure you always have a buffer if a tenant moves out or an unexpected cost comes up. Make sure you check that you can use these extra repayments when you need them (banks call this “accessing redraw amount”). Remember, the “cheapest” rate now could end up costing you more in the long run.
2. Assessing your rental income
No doubt you will need the rental income to help pay the loan but not all lenders assess the rental income in the same way. Ask your lender what portion of this income they will use to assess your affordability to repay the loan.
3. Ask for the comparison rate
This is that other number next to the advertised rate and it’s really important. The comparison rate allows you to compare rates between banks and work out what the actual rate is after all the fees and charges are added back in. You might be in for a surprise because while the headline rate might be low, there may be a lot of extra fees and charges hidden in the fine print.
4. Push your lender to explain all the loan types, not just their favourite
Your lender may discuss “Interest Only” investment loans as traditionally, these have been the fall-back loan for investment properties. However, we are seeing Principle and Interest investment loan rates at all time low and these can be a great option for borrowers as they allow you to pay down the loan as well. In a low growth property market, this is super important.
5. Get your finance in order early
Having your finance ready and approved early can help you better negotiate the property purchase. Work with your bank to get a clear understanding of what they are willing to lend you. Ask them to be clear on what you will need to provide them so that you can go into the market confident on what you can offer.
Top 5 common pitfalls:
If something seems too good to be true, it usually is. So, when you see a great deal, approach it with caution and watch out for these five common traps.
1. The Interest Only period will end
Most Interest Only loans are for a set timeframe. This means that after the Interest Only period you will need to be able to make repayments on both the principle and interest. If you haven’t budgeted for this, you could be in for a nasty surprise so making sure you can afford the increased repayments is crucial.
2. Interest Only means interest ONLY
Interest only is exactly that: you’re only paying the interest. That means that you will still owe the entire amount that you originally borrowed at the end of the interest only period. If your property has decreased in value over the time, then you may find yourself in a very uncomfortable position.
3. Not all loans get better with age
Make sure you look at the amount you are going to repay over the full life of the loan. You may find that you are going to end up paying more in interest than if you had instead opted for a principle and interest loan.
4. The tax time headache
On the flip side, if you have a principle and interest loan for your investment property you will find at tax time you will need some help to determine what portion of your repayments are tax deductible. Make sure you get good tax advice, ideally from an accountant who you can trust, to prevent a costly mistake that could arise from claiming more than you should have.
5. What happens if the tenant moves out?
Nothing lasts forever and an important thing to remember with an investment property is how you are going to make your repayments should a tenant move out. Be prepared to have times when no rent is coming in, and budget for how you will be able to continue to meet your repayments during this time.
In summary, there are some great mortgage products out there including one that is just right for you. And you’ll find it faster once you ask your lender the right questions that will set you up for success in the market.
About Nick May
As General Manager of Customer Experience at Beyond Bank Australia, Nick is a value-focused and highly driven executive who thrives on influencing organisation success. With over 25 years of experience in the banking industry, Nick has been successful across many divisions within Beyond Bank Australia.