Choosing the right mortgage crucial for investors
If the financing is wrong, investors can potentially end up losing their own home and their investment property as well. Plenty of inexperienced property investors don't do their homework on the finance or get sucked into packaged finance options that can easily go wrong if the deal isn't fully understood.
“I've seen plenty of investors get in trouble simply because they don't understand how the financing works,” says mortgage broker Jennifer Schelbert. “Property spruikers and marketing companies often sell new investors over-valued investment properties, convince them to finance it with a loan deal they set up based on the equity in the investor's own home and charge the unsuspecting investor plenty for the privilege of ripping them off.”
“Seventy per cent of accountants and financial planners recommend investors look at interest only mortgages because only the interest is a tax deduction.” That can work if the investment property appreciates in value and can be sold later for a good profit says Schelbert. If there is no capital growth, the investor can find themselves in a bit of trouble down the track.
Fixed rate and interest only loans are particularly popular for investors because it allows them to know with certainty the costs of the investment for a set period of time. The repayments can be budgeted for and matched to the rental income. Most lenders offer interest only loans for terms of up to five years. At the end of the five years the loan gets reviewed by the lender and the period can be extended if the account has been kept in order and the value of property has increased. There are a couple of mortgage lenders that offer ten year interest only loans.
Most lenders will lend up to ninety five per cent of the value of the property, but a lot less than that if the investor wants to avoid mortgage insurance. Some banks will allow eighty per cent of the total rental income to be used as part of the overall income that is used to determine the amount that can be borrowed and how much the borrower can afford to repay, others allow only seventy five per cent of the rent to be counted as income. “Those kind of details can make a difference in getting a deal across the line,” says Jennifer Schelbert.
Source: Herald Sun