Property Investing/ Property Advice: Series 4 of 7; Series 4: FINANCE: Part 2
I believe you must engage a Buyers Agent with every property purchase, Using a Buyers Agents/Buyers Advocate and Property Advisor is key to more property investment success. These are extracts from my latest book “The Australia Property Investment Handbook 2018-2019″. In all good book stores now. Also Read Property Finance Made Simple and Property Investing Made Simple. Property investment, using buyers agents/ buyers advocates, is so important, and if looking in Melbourne for example, you should look for Melbourne Buyers Agents or Melbourne Property Advisors.
Investment strategists, property investment, buyers agents, Melbourne buyers advocates, Melbourne Buyers Agents, Melbourne Property Advisors
Principal and Interest (P&I)
These loans have higher repayments than interest-only loans, as some of the repayment is going toward reducing the loan principal (debt amount) over the life of the loan. At the start of the usual 30-year loan term the majority of the repayment is interest, but over time, the principle component increases as a component of the repayment. You will note in the next diagram, the amount of interest saved on a principle and interest loan, roughly $237,000
For a period of time, usually five years to 10 years, the borrower only has to make interest repayments on the mortgage, and does not need to pay back any of the money borrowed during this period. Investors have traditionally applied to the same lender or refinanced to a different lender to continue to only have interest only repayments, thinking that they will worry about paying back the debt in 30 years time, or certainty not in the next 10-20 years. This is a big mistake. See the next example of the difference in interest you will pay over 30 years with an interest only loan versus a principle and interest loan, roughly $237,000 more interest will be paid from you to the lender.
Yes, the repayments per month go up but you are not relying solely on the capital growth of the property to pay off the debt when you eventually sell the property.
Additionally, with principle and interest repayments you are reducing the debt and exposure to that debt. Eventually you may not even need to sell the property, you can simply live off the rental income from the property with no cost of debt against it. The more properties in this situation, the better. Remember to focus on reducing the non-tax deductible debt on your home as a priority. To break with tradition, this does not necessarily have to be done prior to reducing the debt against your investment properties. It all depends on your situation.
RULE: Over many years, whether you fix your rate or leave it as a variable interest rate, research has shown that you will break even and achieve nothing financially different either way.
Always bear in mind the costs associated with buying an investment property.
Lenders will need to see that you have the money to pay the difference between the loan amount and the purchase price plus costs.
- Stamp duty, conveyancer fee, lender costs (these could be application fees, legal costs, or sometimes valuation), possibly lenders’ mortgage insurance.
‘The process involved in applying for a loan’ diagram shows each step of what happens when applying for a loan. I will make some comments on some of the steps that are less self-explanatory.
Whilst the first step includes contacting a lender or a broker, the reference to contacting a lender would only apply if you simply want to increase your loan on your current facility, but other than that my suggestion still stands, never go directly to a lender.
My previous book, ‘Property Finance Made Simple’ will prepare you for what you need to provide to your broker for your loan application to be assessed more simply and quickly.
Credit checks are done whenever you apply for a credit card, interest free terms on a lounge suite purchase or similar, and every time you apply for a loan. The more you do this, the more you’re a danger to yourself. The danger is becoming less palatable to a lender. Use a broker to compare options for you.
Loan assessment can take a matter of hours or weeks, depending on the lender. Don’t rely on an answer from a lender one day before you want to go to auction. Do not apply for finance after bidding at auction or entering into negotiations on a property, as this is just mad. Always have a ‘subject to finance’ clause in a purchase contract if you can. Of course, you cannot have this if you are successful at auction.
A pre-approval as opposed to a conditional approval, is where the lender assesses everything to make you finance ready to find a property. Pre-approvals can be valid for 30 to 180 days. Ensure your finance clause does not expire prior to a valuation being done by the lender, on the property.
Valuation can be a computer generated one or the valuer may want to visit the property. The lender will decide. This can take a few hours or over a week, longer if there are plans and permits in place on the property.
From formal approval to the documents stage, being ready can take a few hours to perhaps two days. Once documents are returned the lender may normally require 24-48 hours to settle, unless there is a refinance involved. This can take more time as the outgoing lender that you are refinancing away from can often drag their feet to make more money on your loan, just because they can.
From submission of the loan to settlement can be as quick as a week, but normally it would take 3-6 weeks, depending on the lender.