How investors can leverage current lending conditions

With the Reserve Bank of Australia’s next interest rate decision now less than two weeks away, many investors will likely be crossing their fingers for another rate cut. The reality – however, is that regardless of whether or not the RBA elects to cut rates further, the residential real estate market is currently positioned attractively for investors. To provide some insights into how current lending conditions can be maximised, I’ve decided to share the following piece by CENTURY 21 Home Loans’ Chief Executive Officer, James Green, which appeared in the March edition of CENTURY 21 Wentworth’s Property Investor.

Top finance and refinance tips for investors - part one

With interest rates at relative lows and further rate cuts potentially on the cards, many investors will likely be looking at their portfolio expansion and/or refinancing prospects. At present, interest rates are at levels not seen since the GFC - however, economic conditions, both domestically and abroad, are much stronger than they were during that period. 

Housing prices may be on the road to recovery, rents are steadily rising (it is actually cheaper to buy and undertake a mortgage than it is to pay rent in many suburbs across Australia), buyer competition is gradually increasing, and stock markets are hitting new highs. 

What this means, is that right now may be an ideal time to consider making your next property purchase or, at the very least, refinancing the loans on your existing investments. While Australia's real estate market does appear to be heading north, it remains very much at a point that is opportunistic for investors. 

In this two part series, I will share my top finance and refinance tips for investors looking to make the most out of current lending conditions.

USE A MORTGAGE BROKER 

The first thing that I would recommend is to use a mortgage broker to ensure that you are getting the best deal possible on your investment loan. Mortgage brokers provide a free service and usually have established relationships with over 20 lenders, including all of the major lenders. As such, mortgage brokers are often better equipped than investors when it comes to negotiating strong loan deals. 

For example, we recently worked with a client at CENTURY 21 Home Loans who had previously been using a private banker to secure his home loans. When the client came to us, he had over $10 million worth of finance and was looking to purchase a property for approximately $980,000. 

CENTURY 21 Home Loans conducted a home loan check on the client's behalf and discovered that he could save approximately 0.6 per cent on repayments by refinancing his existing loans. As a result, the client saved approximately $60,000 per annum in interest, which was the same amount as the yearly mortgage repayments on his new property purchase. When looked at in this way, the client essentially got the property for free - simply due to an adjusted rate.

REFINANCE YOUR INVESTMENT LOAN EVERY TWO YEARS 

Investors should aim to refinance their home loan every two years. Why is this? Because the banks that are the cheapest at a particular point in time do not usually remain the price leaders for very long, particularly in fluctuating interest rate environments like the one Australia has seen over the past twelve months. 

It's not just about price however; your personal circumstance may change in addition to lending criteria and loan products, meaning that the loan which was once best suited to your circumstances may no longer be the optimal option. 

Changing your investment loan every two years may lead to a number of potential benefits. Firstly, it could enable you to secure lower repayments on your loan.  Secondly, you might be able to secure a more suitable package for your current situation. And thirdly, it could potentially allow you to save thousands of dollars in interest through refinancing your loan at a lower rate. 

In most cases, you can do this for no cost which means that you can only stand to benefit.

UTILISE AN OFFSET ACCOUNT 

If you're considering taking out an interest only loan to purchase your next investment property and wish to fully unlock the potential of your borrowing, it would be wise to look into setting up an offset account. 

An interest only loan requires the borrower to meet the loan's interest repayments whilst leaving the principal amount untouched. However, with an offset account, the interest on the principle reduces in accordance with the balance of the offset account. 

Typically, monthly repayments are calculated by determining the balance of the principal amount, multiplying this balance by the current interest rate, and then dividing the resulting total by 12. However, the equation changes when you factor in an offset account; the balance of which is deducted from the principal, leaving you with a reduced interest payment. 

Offset accounts provide investors with an excellent way to reduce their interest bill without reducing their liquidity. This is important because it enables them to immediately redeploy the capital into new investment opportunities as they arise. 

Unlike the typical restrictions placed on a standard principle and interest loan, withdrawing funds from an offset account does not incur standard penalties usually associated with withdrawals.

UNDERSTAND HOW TO LEVERAGE INTEREST RATES FOR YOUR BENEFIT 

One of the most common questions asked by property investors is whether to fix, float or split a home loan between fixed and variable. 

When making this decision, the most important thing to do is review your individual circumstances and weigh up the advantages and disadvantages of the different loan structures available. After all, you don't want to lock in a loan that doesn't properly account for your current and future circumstances. 

If you are looking at securing a fixed rate loan, it is important to consider how long you intend to hold on to the property in question. Fixed rate loans are usually best for investors that intend to keep their property for a longer period of time. If, however, you're an investor who wants to sell in one or two years, a variable loan product may be better suited to your needs.

At present, short term fixed rates are lower than both variable rates and average rental yield rates. What this means is that you can potentially lock in a fixed loan product at a lesser rate than what your incoming rent is, which is more than ideal. In fact, I've recently seen some lenders offering three-year fixed home loans at 4.99 per cent interest. Conversely, the best variable rates on the market appear to be hovering around 5.17 per cent. 

The wider the gap becomes between variable interest rates and fixed rates, the more sense it will make to fix at least part of your loan. 

Understandably, some investors may be holding off on locking in a fixed rate product in the hope of further rate cuts. However, it is important to recognise that interest rates are currently at relative lows and potentially at the bottom of their cycle. Striking a good deal on your loan doesn't always mean securing the lowest rate; the vital factor is to lock in a rate below the historical average, and almost all of the loan products currently on the market offer this. 

It is worth noting - however, that most fixed rate loans limit your ability to make extra repayments. In such cases, if your circumstances unexpectedly change and you require early repayment of your loan, you could face some hefty early exit fees.

When all is said and done, nobody can guarantee you what loan facility will save you the most money in the long-term. The best thing that you can do for yourself is properly research the market and aim to make an informed and considered decision. To this end, a CENTURY 21 mortgage broker can be an invaluable resource as they will provide you with a range of options to help you select the best product and associated rate for your personal situation.

For more information on property finance options, contact a CENTURY 21 Home Loans broker today.


Posted by Charles Tarbey on 26/03/2013 at 12:00 AM | Categories:

2 Comments

Refinancing Australia

Refinancing Australia wrote on 09/05/2013 5:29 PM

i like this post..
a lot of info...
johnyang

johnyang wrote on 09/09/2013 4:07 PM

Great blog and can be said as a knowledge sharing and knowledge proving blog. providing all the proper information for the person who is going to get a loan or has taken a loan .This blog shades an good light on the mortgage brokers role while getting an loan.

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