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Purchasing an Investment Property
Once you’ve built up enough equity in your home, purchasing an investment property may be the next step in your journey to build wealth. Investment Loans are essentially the same as Home Loans. However, careful consideration should be given to the structure of the loan because of the tax implications. If an investment loan is set up incorrectly at the start, it can be an expensive exercise to rectify at a later stage.
This is where the knowledge and experience of your Citiwide Lending Specialist can be invaluable. They will look at your overall situation and identify areas in which you can potentially save money by simplifying loan structures and maximising the use of assets. Did you know that by using the equity in your home, banks can finance up to 110% of the value of an investment property depending on your home value?
With the help of our Investment Loan / Negative Gearing software, our Lending Specialists will assist you in determining the best structure for your investment loan and avoid many of the pitfalls.
For more information call us on 1300 732 630, contact us using our Online Enquiry Form or contact your local Lending Specialist.
Building Wealth through Property
If it is your intention to create a portfolio of investment properties i.e. more than two investment properties, then you may want to consider carefully how you structure your loans. The natural thing to do is to go to your existing lender and simply apply for another loan. However, banks have a tendency to lump in all your properties together under separate loans, which may seem like a good idea on the surface, however you need to understand what is going on in the background.
Here are some of the disadvantages of having all your loans with the one lender:
- Most lenders will “cross-collateralise” your properties. What this means is that all your properties secure all your loans even though they are under separate agreements.
- If you ever have to sell a property, all the loans have to be reassessed. This means that you may be up for higher costs, i.e. several valuation fees and possibly a very expensive Lender’s Mortgage Insurance premium calculated on a large amount.
- If your financial situation has changed you may no longer qualify for the loans you currently have.
- Banks tend to limit their exposure per client which means that you may not be able to borrow as much as you need when your portfolio grows.
- Refinancing only one of the properties (e.g. for renovation purposes) means having all your loans re-assessed.
A more sensible approach would be to draw equity from one of your properties, use it for the deposit and costs of your new investment purchase and take the loan out with a different lender. Keeping your properties completely separate with different lenders will give you much more flexibility if and when you need to change things.
Also, when investors build a property portfolio, there is a great advantage from a cash flow point of view, to take out Interest Only loans as opposed to Principal & Interest repayment loans. Many lenders have restricted the use of Interest Only loans so you may not want to affect your cash flow on your whole portfolio.
Your Citiwide Lending Specialist will be able to provide you with more detailed information tailored to your specific situation.
Buying an Investment Property through a Self-Managed Superannuation Fund
Borrowing or gearing your Self-Managed Super Fund (SMSF) into property must be done under very strict borrowing conditions called a ‘limited recourse borrowing arrangement’.
A limited recourse borrowing arrangement can only be used to purchase a single asset, for example a residential or commercial property. Before committing to a geared property investment you should assess whether the investment is consistent with the investment strategy and risk profile of the fund.
Geared SMSF property risks include:
- Higher costs – SMSF property loans tend to be more costly than other property loans which must be factored into your investment decision.
- Cash flow – Loan repayments must be made from your SMSF which means your fund must always have sufficient liquidity or cash flow to meet the loan repayments.
- Hard to cancel – If your SMSF property loan documentation and contract is not set up correctly unwinding the arrangement may not be allowed and you may be required to sell the property, potentially causing substantial losses to the SMSF.
- Possible tax losses – Any tax losses from the property cannot be offset against your taxable income outside the fund.
- No alterations to the property – Until the SMSF property loan is paid off alterations to a property cannot be made if they change the character of the property.
Be cautious if someone related to the property you are planning to purchase offers to arrange your loan as sometimes unscrupulous advisers work in groups and recommend each other’s services.