Buying an investment property is about identifying a residential property asset that provides you with the right mix of rental return, capital growth and profit. If you choose the wrong property your investment strategy could go up in smoke. The same applies to choosing the right investment property loan. You want a loan that helps, not hinders your investment objectives.
This means that a loan that might be suitable for your home and lifestyle needs may be totally unsuitable for your investment property needs.
You need to ask yourself a number of key questions which include:
- How long do you want to hold on to the property before selling it? For example, if you intend to hold it for three years, it’s no good taking a five year fixed rate mortgage. You’ll be up for some hefty early settlement penalties which will eat into any capital profits you may make
- How much of your own funds will you contribute to the purchase price?There may be limitations on the amount your lender is willing to lend against meaning you’ll either contribute more of your own funds or look for other forms of security – like your existing home.
- What loan type do you need to maximise your tax strategy? For example, would you be better off with an interest only or amortising loan?
- Do you want to be positively or negatively geared? You may need to sacrifice flexibility for a low interest rate/low cost loan product.
- Do you want to pay the loan down quickly? In which case you should look at loans that allow lump sum and extra payments without penalty.
- What will your investment/ownership structure be? Will you own the property in your name or through a company or trust? You’ll need to make sure your lender is prepared to lend via these types of vehicles and whether they may require director or other types of guarantee.
My tip
The key is to make sure the loan supports your investment structure, goals and objectives. Be clear about what you are trying to achieve and when you want to achieve it.
