Property financing can be a complicated endeavour. But understanding it shouldn’t be. We’ve taken our most frequently asked questions and put them down on paper.
1. Why should I use a mortgage broker? Wouldn’t it be easier to get finance through my bank?
Bank can offer you only the loan structure that is within their policy, not what will suit you the best. The available structures vary vastly between different banks. An average mortgage broker can help you compare mortgage products across different lenders including some of the banks you may be interested in dealing with directly.
A specialized mortgage broker for property investors can take it to the next level, helping you grow your portfolio with proper risk management and tailored property strategies.
2. What sort of services is a mortgage broker able to provide?
All mortgage brokers should provide at least the following: work out how much you can borrow, select the right product from the right lender for you, lodge the application for approval, and help you to settle the mortgage.
A quality investor specific mortgage broker will:
Define your finance strategy for your portfolio.
Work out your future potential capacity.
Manage lender’s risk.
Set up your finance for taxation and asset protection purpose.
Select the right order of lenders for your growth.
Provide you lending criteria to help select better quality properties. Inform you lending potentials on each property you want to purchase.
Update you on the lender’s attitude towards the property you want to purchase.
Update you regularly on what is new in the finance market to help you grow your portfolio.
Point you to the right direction for help in areas of investment taxation, asset protection.
Assist you with knowledge and experience in property related areas such as property selection, renovation and development.
Be an unemotional reference for your investment decision.
Observe the investor’s money pattern and become the investor’s trusted advisor.
3. Why is it critical for property investors to find a mortgage broker they can work with as part of their team?
Most mortgage brokers who are not in the space of property investing find it hard to understand the mindset of a property investor.
As a property investor, you need to come up with the capital, and your mortgage broker will come up with the finance, so technically you’re in partnership with your broker to build your property portfolio.
A good mortgage broker can also help you with property strategies, property selection, risk management, etc.
4. How does a mortgage broker for investors differ from a mortgage broker for someone just buying a family home?
A home owner’s mortgage broker focuses on saving money. Helping the borrower get into their home at the lowest cost is their main focus.
An Investor’s Mortgage broker focuses on creating money instead of just saving money. Helping the investor maximize the return on their money with the lowest risk is their main focus.
5. What sorts of costs are involved in purchasing an investment property?
Buying an investment property presents a lot of added costs that you may not have thought of. As a rule of thumb many investors estimate that these costs will be 5-6% of the price of the property. These costs include:
Stamp Duty – This is a State Government tax and there are two types of stamp duty payable in relation to purchasing property, i) on the property and ii) on the mortgage.
Finance Cost – this can include application fee, lender’s mortgage insurance (LMI), risk fee, valuation cost and settlement charges.
Lenders’ Mortgage Insurance (LMI) – You may be required to pay for LMI if you borrow more than 80% of the value of the property you are purchasing. It covers the lender if there is a shortfall after the lender exercises its right to sell the mortgaged property due to a borrower not complying with the terms in the loan agreement and mortgage. LMI does not protect you from having to pay what you owe on a mortgage. It does not pay out the loan in the event of the borrower’s death or injury, nor cover loan repayments in the case if illness or unemployment, and therefore should not be confused with Life Insurance or Mortgage Protection Insurance.
Valuation – A written report of the estimated value of a property, usually prepared by a registered valuer. This is required in most instances to obtain finance.
Insurance – it’s always a good idea when purchasing a property to consider getting insurance. Landlord’s Protection Insurance is the main insurance to consider when purchasing an investment property.
Depreciation schedule – a depreciation schedule is a report prepared by a Quantity Surveyor which outlines all the plant and equipment on your investment property that you can claim as a tax deduction. A depreciation schedule outlines the depreciation allowances that a property investor is entitled to. Come tax time, you simply present your depreciation schedule to the tax accountant completing your return.
Legal & Accounting fees – the entity in which you purchase the property and obtain finance in is an important factor you must consider from a tax and asset protection perspective. Appropriate advice and the cost of setting up entities like trusts, partnerships or companies will incur fees.
Conveyancer – Your main legal cost will be for Conveyancing, which is the transfer of property from one person to another.
A solicitor or conveyancer will help you:
Prepare or review the Contract of Sale. Organize a title search to ensure that it is the right of the vendor to sell the property and to discharge the mortgage.
Find out if there are any encumbrances or caveats on the title.
Carry out conveyancing on the property.
Protect your interests during the sale.
Calculate adjustments for taxes, council and water rates.
Arrange, attend and complete settlement of the sale.
6. Is there ever a point where you can’t help an investor find finance?
The investors’ income generally has a limit, when it reaches that limit, many lenders won’t lend them any more money; When your income runs out, you need to rely solely on equity, if you used up your equity, then you will find it hard to obtain finance from anyone, but if you learn how to create sufficient equity along the way, your finance can still go a long way.
If you run out of both your income and equity, then the remaining option is to use other people’s income and equity, and you can have certain control of the asset but not necessarily owning them, this way your finance is only limited to how much time and influence you have to put the deals together.
7. Should property investors work with a mortgage broker right from the start of their property investing career or should they deal direct with lenders?
Its better if you can find the right people to help you start but between picking the right people to help you and getting started, we recommend ‘getting started’ first. A lot of people won’t do anything until they know everything, the truth is that no one knows everything and we all have to start somewhere. If you can’t find the right mortgage broker to help you, by all means, go deal direct first.
Although you work a bit harder, at least you can get started and time is money. After dealing direct for a while, you find a great mortgage broker, then at least you get to appreciate it better, and it will help your partnership with your broker work better.
8. Why is there often a lack of understanding of the needs of property investors among finance professionals?
Finance professionals are trained to be conservative and saying ‘no’ to people who want to borrow money is safer for them. Investors are normally the most aggressive borrowers compared to the average home owners. They not only want to borrow more, but also don’t want to pay them back, i.e. paying the minimum forever.
Most lenders, especially banks want borrowers pay back the principal of a loan so that they can lend to someone else to make more profit; Investors want to hang on to the lender’s money (i.e. OPM) and pay them back as late as possible because it’s always cheaper to pay back later due to inflation.
9. What sort of evidence and documents does a property investor need to provide?
Different lenders ask for different levels of paperwork, some more complicated than others. As a general rule, assume that your identification, asset and liability evidence, income evidence, and credit worthiness evidence will be required.