In fact, there are many aspects to financing that your bank may not necessarily tell you about. The following are some of the hidden truths your lender is unlikely to tell you about:
1. There may be better product options – either with that bank or another lender
Often there will be a better product available which is more suited to your needs – either with that same lender, or with many other lenders. Obviously a lender is not keen to point this out – it could mean more work for them or that you will move to another lender. Remember, lenders are generally looking at the transaction from their perspective, rather than yours. That is why we can play an important role; our focus is on working with and for you to understand your investment goals and find products and develop structures that will help you to achieve these.
2. There are ways to avoid LMI (Lenders Mortgage Insurance) – if you want to
The bank will tell you that if you borrow more than 80% of the property’s value, then you need to pay LMI. What they may not tell you is that structuring the loan a certain way, or using something like a family guarantee, could avoid or significantly reduce what can often be a major cost.
LMI premiums – which protect the bank in the event that you default, but not you – can differ significantly between lenders. Therefore, it’s unlikely that your lender will tell you that you a competitor may charge premiums that are only half of what they are charging. Having said that, some investors may be quite happy to pay LMI because it means they take less equity out of their home or it gives them the scope to buy multiple properties – they can buy two investment properties with a 10% deposit rather than one with a 20% deposit.
3. A line of credit can be used as a ‘working account’ to help manage your investment property’s cash flow
Say there is a $500 a month gap between the income your investment property is earning and the expenses that you incur – that is a significant amount of money for people to personally fund every month. With the approval of your accountant, you could consider using equity in another property to establish a line of credit as a ‘working account’.
For example, if you were to establish a line of credit of, say, $20,000, all the property’s income and expenses can be run through the account (providing a neat summary of all) and the $500 monthly shortfall is funded from the $20,000. The investor has the option to only fund the interest on the line of credit at a minimum, which in this example would be only about $27 a month and is also tax deductible.
The bank may not necessarily put forward customised arrangements like this to you, preferring to offer a standard ‘off the shelf’ product structure, rather than build a tailored structure to suit you. Just keep in mind that the downside to this strategy is that you are eating up some of the equity in your own property, so you need to be confident that your investment property will have good capital growth.
4. Initial loan structuring is critical if you plan to make your owner-occupier home an investment property in the future
If this is your longer-term plan, this needs to be considered and factored into your loan structure from the outset to ensure that the property can be turned into an investment property down the track.
As part of this strategy, you would generally look to put in only the minimum necessary deposit initially, keeping the remaining funds in an offset account, maximising the debt and minimising the interest payments that need to be made while it is an owner-occupier property. However, your bank may be keen for you to put the maximum deposit in from the outset and may not be proactive in providing advice on how to manage the loan so it is easily turned into an investment loan in the future.