In our last blog we looked at five structures all property investors should consider to ensure a stress free journey, you can read about it here. Our final tips are related to your finances and you should make sure they are covered when organising your investments with your financial broker.
1. Have your home loan and investment loans with different lenders
The worry of losing the family home due to an investment going wrong is a common and ongoing concern we hear every day from our clients; there is a strategy that can reduce the risk of this happening.
You must have your investment loan and your home loan with two different lenders, this is for three reasons:
- The lender will not be able to cross collaterise your loans and assets (figure 1.1). Basically, this is when the bank uses or can have access to the security of the investment property as well as your family home i.e. these assets can be used as cross-collaterals for all loans. By not crossing your loans this may assist you in protecting your home should bad times come around.
- When you separate the loans with two lenders you are minimising your risk of purchasing an overpriced property and/or being sold an overpriced property by a property consultant. We have all heard the stories and may know people who have gone through it, and ‘yes’, it does happen. Your risk is minimised here because if the valuation bank ‘b’ carries out on the investment property comes in lower than the purchase price, by default you will know about it because for the loan to be approved, MORE money is required from you, out of your pocket and not ‘existing’ equity. (figure 1.2).
- When you want to sell your investment property, if your loans are cross collaterised and the sale of the property does not cover the amount of the loan plus any equity from your home that was used to approve that loan initially, the shortfall will need to be covered, in cash, before the bank will release the titles.
2. Setup an equity or offset account
For peace of mind, consideration on ‘funding or cash flow’ needs to be given should there be any unforeseen events such as vacancy periods, maintenance issues or legal issues with either the tenants and / or property. Setting up your structure is crucial to you and your investment and this structure must be put together by a professional to allow you to capitalise on your investment as best that you can. This important move will more than likely reduce your anxiety by the simple fact that should an issue arise, you are covered.
The best way to do this is to take out an equity loan against your home; thus creating a ‘buffer’ account, i.e. an account with extra accessible funds if required. Whether you are waiting for an insurance payout due to property damage caused by tenants or a shortfall of funds due to the inability to find a suitable tenant, these funds will always be available. These accounts are never to be used for anything but emergency’s and should always be replenished after insurance payments etc have been paid out.
3. Interest only fixed Investment
Are you on edge every time you hear that the reserve bank is meeting? There is no need to be and one simple way of ensuring the amount you pay on your investment loan doesn’t change and cause you stress is to take out a fixed rate, interest only investment loan. Fixing rates is a big decision to make but if certainty is what you require, then this may be an avenue to explore. What this means is you will only pay an agreed ‘fixed’ rate of interest for the specified time with no increases or decreases in your interest payments. Always ensure to read and understand the terms and conditions paying particular attention to exit fees and restrictions on additional payments and consult a financial broker to assist you in picking the right product.
If you don’t have the time to do the research or just want someone you can trust to lead you in the right direction for investing in property, let us help you to get started today.
*This article is for general information purposes only. It is not intended as financial or investment advice and should not be construed or relied on as such. Before making any commitment of a financial nature you should seek advice from a qualified and registered financial or investment adviser.
PEB Property Group is a complete property advisory service for Perth families. Offices are located in Inglewood and Willetton, Perth, Western Australia and offer service in - Financial Planning · Finance Broking · Property Management · Property Sales · Property Investment · Development
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