Having a loan with interest only is undoubtedly the best option for investors because it allows them to keep more money in their pockets so they can reinvest.
That being said, the investor usually needs to tap into these savings when the interest-only period itself ends and he has to start repaying the principal of his loan.
In the past two years, credit restrictions have exacerbated tensions for investors in this situation due to the wide fluctuation of their loan types and interest rates. In addition, the management calculators used by banks to determine the ability of a borrower to refinance or contract additional loans are the most difficult that I have seen in real estate for 20 years.
In 2015, interest-only loans accounted for 40% of all mortgages. Due to the growth of the Sydney market, in particular, this percentage has increased to such a point that in February 2017, 60% of all loans requested were for interest only.
This represented a significant risk for credit institutions as speculative investors sought quick returns at the peak of the most expensive Australian market boom. This effectively triggered the loan changes in 2017, which I will discuss in more detail.
In 2018, the Reserve Bank of Australia made known its views on the $ 360 billion interest-only loans that are due to expire over the next three years. This posed a new risk in a climate of easing the median price of real estate and investor activity, especially for investors who did not buy wisely and were looking for quick wins.
The Truth About Residential Loans
Let's be clear: $ 360 billion is a huge number. But let me give you some context. Australia's total residential market includes approximately 9.5 million homes totaling $ 7.4 billion. As a result, these interest-only renewals represent less than 5% of all underlying assets in dollars. It is understandable that APRA had to act with regard to loan restrictions, but in this context, it is not the sadness that the media might hear about the availability of credit.
In March 2017, APRA restrictions required most lenders, including the four largest banks, to have less than 30% of their interest-only loan portfolio. A "correction" was needed and, to encourage consumers, banks offered very attractive interest rates to allow people to get their principal and interest back.
This 30% restriction was lifted in December 2018 and banks are gearing up for interest-only loans again. This is good news for investors. That's why I'd like to give some advice on what to do in this environment when your only interesting term expires,
I am a firm believer in the overall vision of real estate investing and believe that a long term approach is the safest and safest way to create financial freedom. Everything is repeated in the short term, from interest rates to loan criteria, including inflation, wages, rents and property prices in different markets across the country.
With regard to loans, the situation may be difficult, but things will not stay that way forever. An effective investment is to stay focused on what you can do now to improve your portfolio and stay focused on your long-term goals.
Because of the changes already mentioned, as an investor, you have probably been bombarded by loan offers from lenders who were trying to sell you at their competitive interest rates. However, low interest rates should not be your only priority. It is equally important to focus on the loan features that can help you minimize indirect holding costs. After all, being forced to adopt a principal and interest repayment on a loan of $ 500,000 to 4.5% annually will add $ 659 to your monthly repayment. And as any return of capital is not tax deductible, your holding costs will increase by the same amount. It is a lot of extra money, which is compounded as the more wallet you have is big.
Three Actions All Investors Must Take
You could do a lot better with your money than paying it in principal repayments of your home loan, for example, building up your portfolio when your capital and borrowing capacity allow. The three things you need to do now are:
Become aware of the expiration date of your interest free period.
Examine the structure of your loan and your refinancing capacity.
Engage an experienced mortgage broker in the financing of investments
Knowing when your interest period only will expire will give you as much control as possible. First, since banks are no longer required to limit loans to interest only, you are more likely to be able to extend your holding period only if you meet their management criteria more than any other time in both periods. last years.
However, the process of extending the period of your interest-only loan is more extensive than ever. Although a conversation with the bank or a "tick and flick" approach may have worked in the past, a whole new application process must now be undertaken. One of the bank's credit assessment teams will conduct a full credit review and you will need to provide all supporting documentation, such as proof of income, debts and expenses.
Although it is not more expensive than any other loan application process, it takes time. So be sure to consider this before the expiry of the term of your interest loan alone. However, provided you meet the service criteria, an additional period of up to five years of interest should be achievable.
Prevention is better than cure, so plan a reminder six to twelve months before the end of your interest-only period and review your loan at that time. This will leave you plenty of time to explore the market in search of your best option.
By being prepared, you can make the necessary changes to your financial situation to maximize your chances of meeting the bank's fitness for purpose requirements once your deadline has been set. Banks will usually want to have proof of their living expenses for three months, but they can take up to six months. It is therefore possible to prepare and minimize expenses for a short period, if necessary, with prior planning.
"Credit restrictions exacerbated investor stress [whose interest-only terms have expired] because of the large fluctuation of loans and interest rates they had" ] .
Possibility of starting anew
If you have left your loans in place and have not reviewed or modified them in the interest-only period, the end of your term, so your loan, is a great opportunity to review the structure. your current loan and possibly refinance it to a new lender – with a brand -new interest only period.
This also allows you to make sure that the loan features that you have already met your needs and that the most competitive interest rate is charged to you.
You may be surprised to find that banks generally offer the most attractive rates to new customers, not existing ones. Being ready to transfer your business to a new lender can often help to get a better deal.
Loans and their environment are constantly evolving. It is impossible not to rely on the latest offers and service calculators from all the different lenders, and the common belief that all banks evaluate your situation in the same way is not true. A lender may want to lend you, unlike others.
I can not recommend too much the benefit of having an experienced mortgage broker in the investment market who knows the best loans. Of course, they should have access to multiple calculators and lenders, but the optimal investment structures require specialized expertise, which may be different from that offered by a broker primarily experienced in obtaining low rate loans. for homeowners. Make sure your finance broker has great investment experience, and beware if his or her recommendations only concern you with the interest rate or if you do everything in the same bank for convenience.
Loan conditions change every week, so be persistent. If a lender tells you that refinancing is not possible, do not assume that your application will be denied at all levels. There are many lenders on the market and your mortgage broker can help you with this process.
All that is short-term cycle, interest rates to loan criteria, inflation, wages, rents and real estate prices on a many different markets
In the worst case, you do not meet the management requirements of the lender and your loan is converted into capital and interest. In this case, my advice is to constantly check your borrowing capacity and understand the refinancing options that are available to you at any time. This applies to second and third tier lenders who have very favorable service calculators compared to larger lenders. Their rates are slightly higher, but overall holding costs may still be more manageable than repayment of principal and interest, especially once the negative benefits of investment loans in terms of conversion are taken into account. account. These lenders are an option to consider.
As a safety net, it is prudent to have cash stamps. These can take the form of savings, private equity loan facilities or a line of credit, which will protect you if anything changes during your investment course.
This buffer will finance your investment if you spend a long time without a tenant or if you have to cover the cost of an unexpected and expensive maintenance of your property. As I said earlier, the main reason investors rely on their reserve is that the costs of holding their assets increase at the end of the term of the loan. It is much easier to rest easy at night if you know you have the cash to cover your loan repayment obligations. I consider a stamp as a non-negotiable investment.
"An Effective Investment is to Stay Focused on What You Can Do Now"
to improve your portfolio and stay engaged in your long-term goal "
As your wallet grows, an intelligent strategy is to spread the interest expiry dates only on your loans. In this way, no matter what the market, you will be protected and will not be caught in an unmanageable situation with multiple loans that may simultaneously pay back principal and interest if refinancing is not possible. The bigger your wallet, the more sensible this suggestion becomes.
As an investor with multiple properties, I always try to maximize my repayment term with interest, while maintaining a competitive interest rate and the variety of lenders I prefer in my wallet. I hope these tips will help you do the same and remember: Stay focused on the long term.
Michael Beresford is Director – Investment Services at OpenCorp
and successfully guided more than a thousand Australians in the formation of funds
more than $ 500 million in real estate wealth.
