Find out how to get your property investment loan approved in the current market. Learn the difference between good and bad debt and get a strategy for debt reduction. Here are David Khalil’s top tips.
DPN’s Director of Finance has 20 years experience in finance and banking. He knows mortgages inside and out with particular interest in systems and processes.
If you’re ready to get your finance and start investing, it’s important to stay informed. When you instigate an effective process right from the beginning, you’ll have a strategy for wealth-building, rather than just a home loan.
How to structure your loan for debt reduction and tax effectiveness
The very first step is to consolidate your debts. This gives you a clear picture of your finances overall and enables you to have just one, manageable payment. Once you do this, you can move on to prioritising debt reduction, by eliminating personal debt first.
If you already have a home loan with an offset account, make sure you’re using it wisely. The way to do this is by offsetting all your wages and savings against your personal mortgage or non-deductible debt. What many people don’t know, is that investors have the ability to put their weekly rental income into their personal offset account.
How to get your investment loan approved in the current market
Due to the banking royal commission, it’s harder to get a loan in the current market. However, change always creates opportunity. In this case, if it’s tough for you to get into the market, it is for everyone else too. This means it’s a great time to buy, as long as you paint the right picture to the bank.
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To do this, follow what I call the three C’s - Credibility, Cash flow and Collateral. Firstly, you need to know your credit score before applying. Also, minimise credit inquiries within 12 months prior to your application, to establish credibility.
In terms of cash flow, the banks review your credit card and account statements. Therefore, now’s the time to tightly manage your monthly living expenses. Take a look at items banks may assess, including rent, entertainment, utilities and education costs.
With regard to collateral, aim to borrow 80% or less of the property value, to avoid paying mortgage insurance. This also helps you avoid another party, such as the mortgage insurer, being involved in the decision and potentially declining your application.
It’s a good idea to consider alternative lenders, outside the big banks. They may be more flexible, with innovative and competitive solutions for you. Once you have your loan, make sure you review your rates regularly and don’t be afraid of changing to a better deal.
There’s a big difference between credit card or car loan debt, and investment debt.
Are you afraid of debt? You’re certainly not alone. However, there’s a big difference between credit card or car loan debt, and investment debt. Because you get tax benefits offset against your taxable income, along with rental income to pay for your loan, investment debt is considered ‘good debt’.
Borrowing to invest is called leveraging, which means you use the bank’s money to invest in property. This makes sense, as you can’t save up as fast as house prices increase, so you need to borrow. Equity is a leverage tool that’s available. It’s the difference between the value of your home and the amount owing on the property.
As an example, if your home is worth a million dollars and you owe $500,000, you’ve got $500,000 of equity. This is what the banks will let you borrow against, as it equates to instant value that gives you leverage power. For an investment property, you can use equity as a deposit, making your step into the market a whole lot easier.
The information contained in this article is general in nature and has been provided in good faith, without taking into account your personal circumstances. While all reasonable care has been taken to ensure that the information is accurate and opinions fair and reasonable, no warranties in this regard are provided. We recommend that you obtain independent financial and tax advice before making any decisions.
This information is provided by DPN Pty Ltd ABN: 94 630 700 186 Australian Credit Licence 514759. DPN Finance Pty Ltd is an authorised credit representative 504129 and related entity of DPN. Credit for Dream Big 100% Offset and Work Smart 100% Offset is provided by Adelaide Bank a division of Bendigo and Adelaide Bank Ltd, ABN 11 068 049 178 and Australian Credit Licence 237879.