HOW CAN INVESTORS AVOID THE COMMON MISTAKES OF PROPERTY FINANCING?
A mistake in selecting an investment loan could become the most expensive lesson an investor could ever have to learn. For that reason, we want to make you aware of four common pitfalls in property financing.
- Not having a long term view
You need to ask yourself, "What is the aim of my investment"? There are generally four groups of investors.
As a "property portfolio builder", your focus is to pay off and own property assets. If you are a "property value appreciator", you would typically want to create wealth with a minimum cash flow outlay. These investors will look for a loan that offers a competitive rate in the short term and has minimal entry, ongoing and exit fees. There are also the "tax advantage minimisers" who are typically on high incomes and are looking primarily for the tax advantages from investing in property. These investors would typically seek out mortgages that are interest only, fixed rate and paid in advance. A final group is the "professional property investors", whose need to act quickly dictates nimble financing options. These investors might choose a line of credit for the flexibility of drawing money for their investments when needed.
In summary, knowing your individual objectives and hence your specific investor profile will help you to isolate the most appropriate financing options available.
- Not shopping around for the best loan
At Blue Key Finance we often say "anyone can offer choice, but it's sound advice that is the key". Interest rates should not be the only driver in your quest to find the best mortgage. The extra features on offer can help you meet your financing objectives.
- A financing decision based on rate only
Typically, it's true that an average mortgage with full features will have a higher rate than basic mortgage products with fewer features, so you need to decide if features and flexibility are important to you. These features may include:
Portability: This allows you to sell your property and move to a new one without having to refinance. This saves application and legal fees.
Switching: This allows you to change mortgage product type, for example, from standard variable to a fixed rate usually for half the standard application fee.
100% Offset: This allows you to have a savings account linked to your home loan account. No interest is paid to the savings offset account and instead less interest is charged to your home loan.
Redraw: This allows you to make additional repayments on your mortgage, and then have access to those additional repayments if and when you want to.
Top up facility: This allows you to borrow funds in addition to your existing loan facility.
- Not preparing for the unexpected
Typically property investors are borrowing near to their maximum borrowing capacity. At Blue Key Finance we encourage you to maintain a reserve to cover three months of your usual family expenses and any unexpected expenses. Unexpected expenses may include vacancy on your investment property, property maintenance, loss of job, medical or other emergency.
Landlord insurance has become popular in an effort to reduce some of the risks mentioned above. Some investors may also choose to have protection insurance against tenancy rental defaults and intentional damage or vandalism by a tenant.
The consequence of failing to acknowledge all these risks soemtimes forces investors to sell the property.