Finance – The Secret Weapon Of Every Great Investor
If you could study all the top investors, there’d be some traits they’d have in common.
The ability to spot a bargain.
Do deals.
Negotiate.
Except there’s one trait which you might not suspect, and every successful investor has it.
It’s their in depth understanding of finance.
Yes, the type of loan you choose, the bank you go to and even the way you structure it can have an enormous impact on how fast you create wealth.
So while finance might seem a bit … boring, smart investors are exploiting the banking system to grow their portfolios much faster.
Think about this.
The banks have the power to lend you money for your next investment property.
Or to decline your application.
In fact, your financial future is all in the bank’s hands.
That’s why you need to know how the game is played, so you can win.
What I’m revealing to you here can put you in complete control of how rapidly your acquire wealth.
It’s what took me from a clueless investor to where I am today.
It’s what you need to master to get there too.
And once you do, the world’s your oyster.
There won’t be a bank which can stop you.
Here’s how you play the game.
Finance Rule #1. Use a mortgage broker
Never, ever approach the banks directly for a loan.
Instead, use a mortgage broker.
What mortgage brokers do is find you the best loan for your situation which includes your borrowing capacity, the best deal and the flexibility to let you grow.
They also know how to present your application to the bank so you won’t get rejected.
I’m not talking about anything improper.
What I’m talking about is making sure the mistakes which most borrowers make, aren’t on your application.
If you go to the bank directly without all this knowledge, it’s like taking a knife to a gun-fight.
You’ll be hopelessly out of your depth, and won’t get anywhere near as good a deal.
Plus you’ll waste countless hours trying to figure it all out.
The best part?
Their Professional Help Is Entirely Free
Yes, the best part is mortgage brokers don’t charge you a fee for their work. They’re paid a commission by the bank, and because this commission is typically the same regardless of which bank they choose for you, they’re entirely independent.
They’ll help you choose the right mortgage.
They can assess the mainstream banks and smaller lenders for you.
And they’ll work through any features you might want such as an offset or redraw facility, the interest rate, honeymoon periods, the ability to make changes to your loan, opportunities to pay your loan back sooner and the fees you pay on each one.
Be careful though because like any profession, some are better than others.
You need a broker who is experienced with investors, and who can map out a plan so you can continue investing without getting knocked back in the future.
And this is why we only work with a handful of mortgage brokers who understand our unique AllianceCorp approach.
You can get access to one of our brokers once we talk to you about your goals, and you can set up a time at the end of this article.
Finance Rule #2. Maximise your borrowing capacity.
I wrote about this recently so I won’t go into too much detail now.
You can click here to read the complete rundown on how to maximise your borrowing capacity.
Essentially, you should maximise your income and pay off any existing debts.
Plus make sure your credit score is squeaky clean.
Having a larger deposit can also increase your borrowing capacity too since you avoid LMI once your deposit is 20% or more.
And I’ll cover LMI in a second.
Finance Rule #3. Know what LVR and LMI are
You might not be familiar with LVR.
It stands for Loan to Value Ratio.
It’s just a measure of how much deposit you’re contributing as part of your purchase.
For example, if you’re contributing $80,000 to an $800,000 loan, your deposit is 10%.
And your LVR is what you’re borrowing, which in this case is 90%.
Simple enough.
LMI is another term which you might come across.
It’s Lender’s Mortgage Insurance.
LMI is a bit sneaky because it’s an insurance policy for the bank, so if you cant pay your loan, they’re protected.
It protects them, not you.
And you pay it.
It’s only paid however when you contribute less than 20% as the deposit.
If you pay a 10% deposit, you’ll need to pay it.
It can vary a lot, but if you have a 10% loan it’s between 3% and 4% of how much you borrow.
And yes, it can usually be added to the loan so it’s not an upfront payment.
Finance Rule #4. There are different types of investment loans
The two main types of loans are Principal & Interest (P&I) and Interest Only (IO).
With a P&I loan you’re paying down the balance as well as interest.
When you have an IO loan, you only pay the interest on the loan, not the principal as well.
IO loans are usually favoured by investors because your repayments are lower.
And any money you save can go onto your home loan where the interest isn’t tax deductible.
In other words, keep your investment balance high, and your home loan low.
One drawback though is that IO loans are Interest Only for a set period, typically 10 years for an investment property.
At that point it will switch over to a P&I loan, and your repayments will be higher than if it was a P&I loan from the start.
This is because it still needs to be paid off over the life of the loan, so if you pay less at the start, you pay more at the end.
And your loan application will be assessed at the higher rate of repayments which could affect your borrowing capacity.
Having said this, you can refinance your loan at the end of 10 years to another interest only loan, assuming you qualify.
Fixed Or Variable?
Also consider whether you should fix your rate or go variable.
Or a combination of both (you can do this).
Variable might be better in the long term, but knowing your repayments are locked in and won’t change can take a lot of stress off your shoulders, and lets you plan with more certainty.
Also, be aware of how redraws and offsets work, and how using them can reduce your interest bill and pay off your loan faster while giving you flexibility over how you use your money.
As I mentioned before, using these facilities to the maximum for your own home loan is often the best financial move.
Finance Rule #5. How Interest Rates Affect Your Loan
As interest rates go up and down, so too do your repayments.
Kind of obvious, right?
And your borrowing capacity changes as well.
It’s a good idea to factor in long term interest rate movements into your projections because as you know, rates move.
And when they do, they can move quickly.
If you’re on a fixed interest rate, it can be almost impossible to switch over to a variable rate if rates fall.
Effectively the banks will factor in all the interest you’d no longer pay if you switched, and make you pay this as a fee to change.
It’s not really worth it, so make sure you talk with a property strategist to map this out from the beginning.
Finance Rule #6. Consider Major banks, Smaller Banks And Non-Bank Lenders?
Believe it or not, there’s a whole world outside the big 4 Aussie banks – the CBA, ANZ, NAB and Westpac.
There are a multitude of smaller banks who still have a lot of clout.
These include banks such as Macquarie Bank, the Bendigo Bank, and the Bank of Queensland.
These banks could offer you better terms and conditions than the big 4, and your mortgage broker might recommend them instead.
They’re still big enough to be strong, stable institutions.
And may offer extra flexibility the bigger banks don’t offer just to get you in and keep you as a customer.
There are also non-bank lenders who can help out when the bigger banks say no.
They might offer a better deal, but may offer you a less attractive deal if you’ve been rejected by the bigger banks.
They’re what’s known as a lender of last resort.
Generally, when you work with a property strategist like us, you’ll avoid needing to use non-bank lenders.
Instead we will make sure each investment you make sets up your next one by using major banks.
Finance Rule #7. Refinance When You Need To
OK, here’s a quick maths lesson for you.
It shows you what refinancing means, and how you do it.
And if you’ve heard that you can use your equity to invest in real estate, here’s how.
Let’s say you bought your own home for $500,000.
And you borrowed $400,000.
Let’s also say you you’ve paid your loan diligently, and now you owe just $300,000.
And of course, over that time your house has increased in value to, let’s say $800,000.
We know that the banks will happily lend you 80% of the value of your home. That’s what they did in the start and they’ll do it again (assuming your application gets approved).
This means they’re happy for you to borrow as much as 80% of $800,000 which is $640,000.
Since you already owe $300,000, you keep this loan and can get another loan for $340,000.
And this money becomes the deposit for your next investment property.
This is how investors go from one house to two, to three and so on.
And when you have multiple houses going up in value for you, your portfolio grows quicker and quicker.
Finance Rule #8. Never Cross Collateralise Your Loans
One last rule.
Following along from rule 6, you might have heard that you can use your property as security for an investment property.
You can.
But you should never, ever, ever do this.
You must do it the way I showed you in Rule 6 because it keeps you in control of your properties, not the banks.
Once you start jumbling multiple properties together, you’re at the mercy of the banks.
If they want to stop you, they can.
And because it quickly becomes a huge mess, it’s almost impossible to untangle yourself.
Every time you want a new investment property, revalue a house or two, draw out the equity, and use this as a deposit.
Make Sense? Now Let’s Put It To Work For You
Now, I’ll admit it.
There’s a lot of information in this article.
And I’m barely scratching the surface.
I could have written 5 times more, and still have more to tell you.
However, it’s a really strong start.
And hopefully you see how you can use finance as a weapon to your advantage.
We have a small group of property strategists who know as much about exploiting finance to your advantage as I do.
And I’d like to offer you some time with them to discuss some innovative ways to grow your portfolio faster using these concepts I’ve just taken you through.
There’s no cost for this, and you can book your time by filling in the form below.