Property Investment Tips

What method of financing suits you?

Home Equity Financing (a form of negative gearing)

It is relatively easy to re-finance your home at up to 75%-80% of its value and this can release thousands of dollars, which can be used towards purchasing your investment property. If you wish to use this type of financing make sure that the rental income will cover ALL of the mortgage payments which are to be used for the investment property. To work out the maximum amount able to be borrowed, most lending institutions will allow debt servicing of 75% of total rent received.

Equity Financing

If you have cash in other investments i.e. shares, fixed deposits etc, this may often be enough to act as the deposit on an investment property. If your cash equity is 20% or more of the purchase price it is then relatively easy to arrange a loan (mortgage) to cover the balance required to purchase.

Cash

Sometimes you may have enough funds to pay cash for an investment property without the need to raise a loan (mortgage). This option can be worthwhile especially where the rental yield is greater than the return on your cash. If you do have sufficient cash however it is worthwhile looking at the option of buying more than one property and letting the tenant finance the mortgage while you pick up the capital gain.

Mortgage Finance

There are many variations and options in the type of mortgage available. For example you may wish to have an interest only mortgage, a table mortgage or a combination of both.There are also many lengths of loan options available and we suggest that you talk to your mortgage broker, accountant and lawyer to see which would best suit your circumstances.
If you are obtaining finance the following issues will be of interest to you:

1. Fixed Interest Rates
Some banks offer lower fixed interest rates for terms between six months and five years. In return for this the bank expects to obtain your banking business and to provide you with life cover (at your cost) for the amount of the mortgage. Some banks also require house insurance cover to be taken with them. However, often there will be a penalty to repay loans early during the fixed rate period.

2. Variable Interest Rates or Floating Rates
The variable interest rate takes over after the initial fixed interest rate period is over and remains in effect for the balance of the term of the mortgage. Floating mortgages can be repaid without penalty.

3. Right of Repayment
Banks will charge penalty interest if you repay a fixed term interest rate mortgage early. A penalty may sometimes, but not usually, be charged in repaying a floating rate mortgage.

4. Variable Payment
Nearly all banks offer the facility to enable you to vary your fortnightly or monthly repayments above the basic minimum, to suit your budget.

5. Fast Pay
Dividing your usual monthly mortgage payment in half and paying fortnightly means you pay slightly more over the period of the year. Although at first it seems that little is achieved by this, the effect of this method of compound interest can, for example, result in a 25 year term mortgage being reduced to 18 years.

6. Combination Loans or Split Facilities
It is increasingly common for you to borrow part of a bank loan using a fixed interest rate and the remainder on a variable/floating interest rate. For example, if you anticipate you might repay $50,000 of a $200,000 loan advance over the next year, then a fixed interest rate for $150,000 and a floating/variable rate for your loan of $50,000 may be the best option for you. This will allow you to keep your borrowings to a minimum while still taking advantage of a fixed interest rate.

7. Revolving Credit Facility
For the same reason as taking out combination loans, revolving credit facilities are increasingly common. These give you a borrowing limit allowing you to draw up to that amount. These types of loan can have a higher interest rate but can also be taken out in conjunction with a fixed rate loan. They are quite useful if you wish to have the tax advantages of negative gearing without sacrificing your lifestyle. For example, if you borrow $150,000 to buy an investment property and need to pay $10,000 each year to fund the shortfall in rental property trading, a fixed loan of $150,000 and a revolving credit facility of $30,000 would allow you to fund this investment for three years, without having to use your income to fund the shortfall.

8. Tax Deductibility of Borrowings
The interest content of funds borrowed for the purpose of generating taxable income can normally be claimed as a tax deduction.
Consequently the money borrowed must be used to purchase the property that is rented. How the investor chooses to secure the loan is not relevant to tax deductibility of the interest on that loan. You should always ensure your finance is structured to allow a tax deduction for interest.

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