Property Investment Articles
This article describes the SECOND ELEMENT of the SEVEN elements to building a successful property portfolio so that you can reach your financial goals sooner”
Element 2. The Right Finance – “How to be confident that you have found the right loan and structure so that you can meet long-term financial goals and avoid serious costs – potentially saving 1000’s of dollars in long-term exit fees and interest rates”
The Right Finance
“How to be confident that you have found the right loan and structure so that you can meet long-term financial goals and avoid serious costs – potentially saving 1000’s of dollars in long-term exit fees and interest rates”
“Finding the right loan to meet your needs can be a very daunting task. With so many lenders to choose from and so many products within each lender, it is almost impossible for the average person or investor to sort between the products (including all the fine print). It is important that you are sure the finance you are choosing is the best one for your circumstances.’
We like to use the example of buying a car.
If you walk into a Ford car yard and describe all of the features you want in a car and the salesperson thinks to themselves, “Gee, the latest Holden Statesmen would be the best,”– will he tell you that? No! He will convince you that the latest Ford something-or-other meets your needs. It’s the same with the banks. If you walk into a bank, any bank, you will only be sold that bank’s products.
We would recommend that everyone who wants to take out a mortgage should use the valuable services of a mortgage broker. Whether you are buying your first home or investment property or whether you are building a huge investment portfolio you should consult a mortgage broker. The advantages of using a broker are twofold. Firstly, it is free – the bank pays the broker the commission – and secondly, the broker is aligned to scores of banks and will find the best for you. It is in the broker’s interest to find the best product because they want your continued business.
Brokers have access to over 30 banks and lending institutions, including all of the majors (CBA, St George, NAB, Westpac, etc) and many popular smaller and non-bank lenders (ING, Bankwest, Rams, Suncorp, etc). Mortgage brokers will help you find your way through the complex maze of product choices and help you decide the best one for you. Everyone’s situation is different and different products suit different circumstances.
Mortgage brokers also assist you with all of the paperwork, submit the loan, handle all the bank’s annoying questions, co-ordinate the process with your solicitor and real estate agent and basically take all the stress and pressure from you. They’ll ‘hold your hand’ the whole way through and deal with any complications that may arise.
May save you time in shopping for loans.
May save money if fully independent.
Sometimes, given the broker-lender relationship, a bank will accept a loan application that they would otherwise have rejected.
• You may pay more for your loan than necessary if the broker is not independent
.• They may charge excessive fees or undisclosed commissions.
• You may be persuaded to borrow more than you need, as this will boost their commission.
The cons can be easily overcome by using a broker aligned with Wholistic Financial Solutions as we ensure our brokers do are fully accredited, trained and ethically in all regards.
So, once you have chosen a product how can you be sure the ‘structure’ is right?
“It is very important to get the ‘right finance’ right from the start but it is also just as important to get the ‘structure’ right. It can be very costly, frustrating and time-consuming to act hastily and rush the finance part of the property transaction and not get it right. Realizing your mistake later can cost you tens of thousands of dollars in break fees, discharge fees, re-valuation fees, applications fees, fees, fees, and more fees.” For example, we are seeing countless clients who locked in at 8.5% for five years. They are now paying far more for their mortgage and are coming to us for advice about breaking out of the loan. We had one quote from a bank of break fees in the order of $66,000. The client is simply locked in and has no way out other than the pay these exorbitant fees.
Other clients we have seen have taken out what they thought was a very simple and easy to understand loan. However, when they have come to us to buy their next investment property, we’ve had to inform them that to restructure this loan they’d be paying deferred establishment fees in the order of $16,000. And not only that, they would have to refinance their whole portfolio because their bank had
‘cross-collateralized’ all of their properties across all of their loans. A very simple mistake that could be avoided with the right advice.
Another common example is the client who has taken a loan to buy their home with the intention of eventually upgrading to a bigger home. They did what they thought was the right thing and paid as much as they could off the loan. Then when they came to us for advice about buying their dream home and using the existing home as an investment property, we had to give them the unpleasant advice that they would now be fully taxed on all their rental income and their large loan for their home would be non-tax deductible. Another simple mistake that could have been avoided.
So, as we explained above, it is very important to use the services of a mortgage broker. However, you need to be careful about choosing the Right Mortgage Broker. The average mortgage broker is ‘transactional’ – they just get the best deal for you for that transaction. They do not normally consider your long-term strategy and whether the loan they are signing you up for will be the right loan for you 12-months down the track when you buy your next property. We have seen so many clients who were signed up for the wrong loan and are now paying the price.
To determine whether your mortgage broker is the right one for you ask the right questions.
Questions to ask your mortgage broker:
• How much does the service cost and when do I have to pay?
• Do you belong to an industry association such as the MIIA/MFAA and if so, does that association have a dispute resolution policy? (Ask to see it in writing. Disgruntled borrowers can also contact the Mortgage Industry Ombudsman on 1800 138 422.)
• How do you identify the best solution? Is it simply commission-based or do you use a software package? (Their criteria for selection should be logical and transparent.)
• How many lenders (and which lenders) do you represent? (Make sure the broker deals with a spread of lender types i.e. banks, mortgage managers and others.)
• How do you get paid? (Ask them to disclose all commissions and payments.)
• Can you provide comparisons of any loans recommended, including upfront and ongoing fees?
• Can you clarify the actual cost of the loan, including and excluding interest, fees and ongoing costs?
• Do you comply with the Privacy Act?
• Do you have professional indemnity insurance?
• How long have you been in the industry and can I read your testimonials from previous clients?