Investment property loans.

Yes, most definitely!  A pre-approved home loan is a loan that a lender has approved prior to the borrower having a signed contract on a purchase property. The pre-approval is free and is valid for up to 6 months, depending on the lender. Without a specific purchase property, it cannot be an unconditional commitment from the lender, but it can certainly help to highlight things you might need to change to make sure that your future application is accepted, which will protect your credit file against a negative rejection when you make a full application.

If you are thinking of acquiring property, start the process by discussing your plans with an unemotional third party and get unbiased free advice from a good mortgage broker. That way you can work out the financial implications and the possibilities. You will find that a good mortgage broker is most certainly worth his or her salt! 

Besides the fact that their service is free, their advice on “all things property” goes well beyond the tangible service proposition of helping you sort through the best finance options. The fact that they have been through the process of acquiring property hundreds of times vicariously through their clients, means that they have a wealth of knowledge to contribute to you in your journey of a property purchase. That knowledge will either save you thousands or save you a few nasty headaches! Good advice will also help you sleep better!  This knowledge is the true backbone of the value of an experienced mortgage broker and in my opinion, is the reason why most Australians now use the services of a mortgage broker.

Advantages of a Pre-Approved loan.

• It’s FREE
• It’s valid for up to 6 months.
• It highlights things that you might need to change “now” to get ready for an application that will be approved “later”.  Lenders can get very pedantic on small things in your budget that most borrowers would overlook. If you make an early application for finance, your mortgage broker will help you get ready to have your loan approved in time for when you want to purchase. By applying early, you will be saving yourself the headache of a declined loan and the disappointment that goes with it.  
• It gives you a definite maximum purchase price.
• It protects your credit file against the negative history of a declined loan application.
• It potentially SAVES YOU BIG DOLLARS by giving you confidence in your house hunting which translates into better price bargaining with the agent.
• It allows you to move quickly when you find that gem of a house which will improve your chances of a successful bid on the home.
• It gives you the confidence to bid at auctions.
• Real estate agents have the ability to sway their vendors on which purchaser’s offer to accept and will definitely tell their vendor which offer looks more certain on finance. If you tell the agent that your finance has been pre-approved, your offer looks very attractive. 
• It shows your estate agent that you are serious about buying the home. Particularly in a sellers’ market, many agents won’t spend their time with purchasers if they are unsure of their ability to secure the finance. 
• The pressure of a 14-day finance clause is greatly reduced if you have been pre-approved.  Because the lender has already seen your application, the processing of your loan application for unconditional loan approval is much quicker. This ensures that you don’t lose the home by breaching the 14-day finance clause to secure finance.  
• No finance worries.  Another advantage is that you can focus all your efforts on house hunting rather than having to worry about finance at the same time.

If you have had any thoughts of buying property or if you have started looking but haven’t yet found the right property, a Pre-Approved Loan can be very useful. It will clearly identify your maximum purchase price and will give you both confidence and peace of mind.  

As an investor, your borrowing potential determines your potential success!  When you find that special property that will make you big profits, you want to be sure that you can finance it.  And the more money that you can get your hands on, means that you can buy more of those property gems and make bigger profits!  

Borrowing capacity is determined by income and living expenses and refers to the maximum amount of money a lender would be prepared to lend you. This surprisingly, varies greatly between lenders, which is why many borrowers use a broker who can quickly work out which lender will offer you the largest loan which enhances your potential success. Use our borrowing calculator as a guide to working out your approximate potential borrowing capacity.

Instead of having to find cash for a deposit on an investment property, you can simply use the equity you have in other property. 

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Your equity in a property is that portion of the property that does not have any debt attached to it, or it’s the value of the property less the bank loan.  For example, a property worth $900,000 with a mortgage loan of $500,000 has equity of $400,000.”

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To correctly structure your loans for tax purposes, you should not be using your cash at all if you still have any existing debt on your principal residence!  To maximise your tax claim, the deductible loan should be maximised whilst the non-deductible loan should be reduced to a minimum.  Therefore, all cash you might hold should be thrown at the owner-occupied home loan whilst the investment loan is increased to cover the full purchase price plus all the associated costs. 

Let’s look at a simple example.   Property investors owe the bank $500,000 on their principal property worth $900,000.  Cash in the bank is $120,000.   They wish to purchase an investment property with a purchase price of $650,000 and assumed costs to purchase of $50,000.

If they borrow $700,000 to cover the entire project so that they have zero cash outlay, the bank will lend them a total of $700,000 + the existing loan of $500,000 = $1,200,000 total loan, which will be secured against the existing principal property + the new investment property. Therefore, the LVR will be $1,200 000 divided by $1,550 000 ($650 000 + $900 000) = 77%.   Anything less than or equal to 80% is acceptable.

The existing cash in the bank of $120,000 could simply be deposited into the existing home loan of $500,000 which would substantially reduce the non-deductible debt of $500,000 to $380,000.  Alternatively, it could also be deposited into a 100% offset account which would have the same effect but render the funds totally accessible.

If you are borrowing 100% of the purchase price, what funds do you give to the Agent when you sign the contract?

With regards to the deposit funds required to be paid to the Real Estate Agent, one could use the cash in the bank as a temporary loan as an initial deposit and then pay these funds back with the loan on the investment property when the loan draws down for settlement.

Another way to pay the deposit would be with a Deposit Bond which is simply a security deposit guarantee to the vendor, (no cash) which guarantees up to 10% of the agreed purchase price if the purchaser defaults on the contract and fails to settle on the property.  No cash is given but rather a guarantee from an underwriter. At settlement, the purchaser pays the vendor 100% of the contract price and the Deposit Bond becomes obsolete.  

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Talk to us today to see how we can help you maximise your property investments using your existing equity.

Using your Super to invest in property can be an excellent way to increase your property portfolio. Not many people even consider using their super to borrow and invest directly in property.  But using your super to invest in property can be an excellent way to increase your property portfolio. The superannuation rules were changed in 2007 to allow people to borrow through their super funds for investment purposes. Lenders will allow borrowing up to 80% LVR on Self-Managed Superannuation Fund (SMSF) loans with the balance of funds to come from the Super Fund.

These changes now enable many people who don’t have the cash flow outside of super to borrow and invest directly in any kind of property, including residential and commercial. This allows investors to leverage further into property investments as a wealth-building Super Fund strategy for future tax-effective income.

Advantages of using Super to buy property.

• Gearing: Using borrowed funds to make greater gains is one of the most effective long-term wealth-building strategies available. The fact that your super fund can now borrow to buy property enables you to make use of this time-honoured strategy to increase your wealth without affecting your cash flow.
• Affordability: If you can’t personally borrow further funds to buy an investment property, you may still, however, given a reasonable personal super balance, be able to use the funds in your super to pay a deposit on a property and secure an SMSF loan to purchase investment properties within your super fund.
• Limits Cash flow requirement: When purchasing property using your super, the interest payments on the SMSF loan could be supported 100% by the rental income and your normal compulsory employer contributions to the fund. This leaves no extra burden on your current household cash flow. Buying property through your fund might be an excellent way for you to achieve your goal of owning an investment property or even owning your business premises.
• Asset protection: Buying property within your super fund can be an excellent way to reduce overall risk on your investment portfolio. Assets held in super funds are protected against some legal claims, depending on your personal circumstances.
• Choices for business owners: If you purchase your business premises through your super fund and then lease it to your business, the rent you pay to your super fund is tax-deductible to your business. Paying rent to your super fund is a great way to accelerate your retirement savings without exceeding the concessional contribution limits. The fact that you can transfer commercial property that you already own into your super fund allows you to unlock cash to invest in your business or other assets.

A few Disadvantages of SMSF property.

• You can’t live in the property, and neither can any family members.
• You can’t renovate a property purchased through your super fund if there is a loan. 
• Lenders' interest rates can be slightly higher than normal investment property loans and establishment fees are higher.
• The initial set-up costs can be high because the set-up involves trusts. 
• It must be properly managed because penalties apply if your fund contravenes the complex Superannuation Laws.
• Buying property using your super is generally only suitable if your combined funds have a minimum of approximately $200,000.
• It’s a long-term investment strategy.

Please note: The information provided is of a general nature only and does not take into account your personal circumstances. Therefore, we recommend that professional advice is sought through either a financial adviser or an accountant to help you decide if buying property through your super fund is right for you.

Whether an interest-only loan is the right choice for buying an investment property depends primarily on your existing debts, cashflow, interest rates, and how adding another loan will affect your tax obligations. 

The right answer to this question lies primarily with the age of the borrower!

• If the borrower is nearing retirement and has no other debt, then the answer is a general ‘no’.
• If the borrower is still in the asset accumulation phase of life, then the quick answer is ‘yes’. 

And here’s the simple reasoning: 

If you are borrowing money to invest in property, then you will be required to support, as a minimum, the interest payments if you are to sustain the loan.  Now if you already have an existing home loan on a property that is your principal home, the interest cost on that loan is not tax-deductible.  This debt is often referred to as ‘bad’ debt because you must make the interest payments on after-tax money.

Investment property loans on the other hand are tax-deductible loans, the interest cost of the loan is tax-deductible, and this debt is therefore referred to as ‘good’ debt.

Therefore, if you have bad debt on your principal home, then it makes financial and tax-effective sense to divert as much of your earnings or cashflow towards paying off the bad debt first before you start paying off the principal on an investment property loan.  If this investment loan principal payment is diverted to paying off the home loan, the bad non-tax-deductible debt will be paid off faster whilst the investment loan stays static because only interest payments are being made.  By dissecting your debt into these two quadrants, good or bad, a borrower can make very quick and prudent financial decisions and maximise their tax deductions.

Once you have all your ‘bad’ debt paid off and you have stopped accumulating assets, it then makes sense to convert your investment property loans from interest only into principal and interest loans.

If you’re not sure whether an interest-only investment property loan is right for you, contact our experts, who will be happy to help.

Lenders usually require self-employed borrowers to prove their income with 2 years of completed tax returns, However, some lenders have started to offer borrowers the opportunity to invest in property without having to use tax returns to prove and verify their income. Generally referred to as Lo Doc loans, this type of finance allows the borrower to prove their stated income by way of either an accountant’s letter or 12 months of BAS statements, opening up property investment opportunities that would otherwise not exist.

Who should apply?

• Business owners who don’t have their tax returns completed but have an accountant who will verify their income or alternatively can prove their income via BAS statements or business bank accounts.  
• Businesses that are experiencing high growth and therefore previous year’s tax returns don’t reflect their true income.
• Businesses with complicated business structures with a plethora of Trusts and Companies which means that the income becomes a nightmare to prove.

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So, if you’re either a self-employed business owner, a contractor or even a casually employed freelancer, and have a registered ABN but your tax returns are incomplete, we might still be able to help you finance that property a whole lot easier with a Lo Doc loan. 

Contact us today for a free assessment and find out if you qualify for a Lo Doc loan. 

When you sign the contract, a small initial deposit is required to be paid to the agent. However, you don’t have to pay the full deposit at this point, as the contract is still considered conditional. Once the contract becomes unconditional and you are locked into the purchase, you will need to pay the deposit balance. You will pay this to the agency, who will then pass it on to the vendor.

For investors borrowing the full purchase price plus costs, the initial deposit required to be paid to the Real Estate Agent at contract signing could be personal funds used as a temporary loan which would be reimbursed once the new investment loan is drawn down at settlement. 

Another way to pay the deposit would be with a Deposit Bond which is simply a security deposit guarantee to the vendor, (no cash) which guarantees up to 10% of the agreed purchase price if the purchaser defaults on the contract and fails to settle on the property.  No cash is given but rather a guarantee from an underwriter. At settlement, the purchaser pays the vendor 100% of the contract price and the Deposit Bond becomes obsolete.  

Please contact us or make an appointment to speak to a mortgage broker to arrange a Deposit Bond.

What’s most important for any property buyer is to ‘have a grip on’ when a contract is “conditional” and when it is “unconditional.”  

When you first sign the contract, it is considered to be conditional. Most property contracts will have a cooling-off period for the buyer that gives them the option of cancelling the contract for a small penalty if they change their mind. During this conditional phase of the contract, you usually have 14 days from signing the contract to ensure that your finance has been approved and to appoint a building inspector to carry out structural checks on the property. If you are happy with the building report and have secured finance approval, it means that you have met all of your ‘self-imposed’ conditions of purchase and you can proceed to the ‘point of no return’ when the contract becomes unconditional and at that point, you can no longer back out of the purchase. 

Take a look at the different stages of a property contract below for a better idea of the timeline and steps involved.

Here is a basic description of the stages of a property purchase and reading through this will arm you with the information that will give you peace of mind when making that offer to purchase. It will also help you ask the right questions of the real estate agent when you are drawing up the offer. 

Our Multi-Choice advisers will also give you plenty of support and assistance when it comes to understanding: 

(1) who the title owner should be (if you are thinking about asset protection), or 

(2) correct loan structuring for the most effective tax strategy, or 

(3) some assistance with how to make an offer. 

Before continuing, an important point to note is that an experienced mortgage broker will help you by communicating important knowledge surrounding property acquisition, knowledge built from years of practical experience, and it will certainly be of benefit to you. But you should only act on professional advice from your accountant for tax advice and a solicitor for legal advice, advice that you should seek prior to signing any legal contract.

Stage 1 – Get your Loan Pre-approved.

Before house hunting, it is advisable to make an application for a loan to have a loan approved for you before you have found the property or before you have a purchase contract on a property.  A Multi-Choice mortgage broker can secure a pre-approval for you with minimum fuss with the lender of your choice. You will be able to select from over 60 different lenders, from all the major banks that everyone knows to lenders that very few people have heard of.  The experienced mortgage broker will use dedicated software and of course their industry knowledge to help you choose the right loan.  You can either elect to have a loan approved for a specific sum or you can apply for a maximum loan. Please note that the maximum loan offered by lenders differs vastly from one bank to another. A Multi-Choice mortgage broker will very simply show you the maximum limits offered by different lenders so please contact us to put yourself in a strong position for your property purchase. A pre-approved loan won’t cost you a cent but will certainly give you plenty of confidence when you start house hunting and especially when you make an offer, it might even help you negotiate a better price!  

Stage 2 – The Contract is Conditional.

If you purchase at an auction the contract is unconditional from the moment that you successfully raise your hand at the auction and the auctioneer shouts ‘sold’. If not, most property contracts will have a cooling-off period for the buyer that gives the buyer the option of cancelling the contract for a small penalty. 

Once you have signed the property purchase contract it becomes a conditional contract, that is, if you have made an offer subject to certain conditions. 

The typical conditions made by buyers are finance and, building and pest inspections. The contract as depicted here is conditional upon a 14-day finance clause and a 7-day building and pest inspection clause. This means that you, the buyer, have 14 days to do your due diligence on the property before you are required to fully commit to the purchase.   Within 7 days you must make an appointment for a building inspector to conduct a thorough inspection of the building to check if there are any building flaws or possibly pest damage that is naked to the open eye.

Once you have received the building and pest reports from the respective professionals and you are satisfied with the condition of the house, you are ready to allow the contract to proceed to the unconditional status except of course if you are still waiting for the bank to give you the green light or the thumbs up on the finance.  Banks vary tremendously in the time it takes them to approve home loans, so if your contract is time sensitive, make sure that you are using a broker who fully understands which lenders to direct you to!  Losing a property because the bank was simply too slow in their processing could cost a potential fortune, never mind ‘drive the buyers to insanity’ because they lost the home they searched so hard for! Only once the bank has approved the loan that your mortgage broker lodged for you, should you go unconditional on your purchase contract because that means that you will then be fully committed.  It is the point of no return and you have essentially ‘bought the property’, except for the fact that the funds must still be transferred to the seller on the settlement date recorded on the contract.

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Please be sure to communicate with your conveyancer before letting the agent know that all is fine with the building and pest inspections and that your finance is approved.  

Another important point is that you are responsible for the property from this point on and you will therefore need to arrange an insurance cover note on the property being purchased.

Please also decide to act promptly with all the paperwork!  As soon as you have signed a contract the clock starts ticking!  The first thing to do is to email a copy of the contract to your Multi-Choice mortgage broker ASAP. This way there will be no time wasted in ordering bank valuations, if required, which can sometimes take up to five working days if the valuer is delayed. Waiting on unconditional finance approval with the deadline looming is no fun for anyone!

Also please note that a pre-approval certificate is still no guarantee that the bank will lend you the money!  It is an approval with conditions such as “the purchase property being deemed suitable as security for the loan” (which is normally not an issue if the property is in a major metropolitan area). In other words, you cannot go unconditional on a contract if you only have a pre-approved loan that the bank has not changed to a fully approved unconditional loan offer for the purchase of your specific property. 

Stage 3 – The Unconditional Contract.

Once you have met all your conditions of purchase you can then proceed to stage 3, the “point of no return”, that is, the point at which the contract is unconditional. At that point, the vendor usually will expect a large enough deposit that clearly evidences your intention to settle. Should you fail to settle as per the contract terms, you will be in breach of contract and the vendor could expect you to forfeit your deposit – in other words, the deposit is “hurt money”, funds that you stand to lose if you breach your agreement to purchase. The vendor is also entitled to pursue it further in a court of law for any perceived loss suffered by the vendor if the purchaser fails to proceed to settle. Therefore, make certain you communicate with your solicitor through this process and also with your Multi-Choice mortgage broker.

To summarise, do not go unconditional on the contract until you are absolutely certain that the finance is in place. The bank must have articulated its intention to lend you sufficient money for you to purchase the property and you must see this in writing before you give the go-ahead to proceed to an unconditional contract.