Show Me The Money!
How To Secure The Best Deal From The Banks
Every investor’s dream is having control over the banks, so they give you what you want, when you want it.
Only it’s not just a dream.
It’s very do-able.
The secret is to understand, and then play the game.
Mastering The Finance Game Is Even More Important Than Picking A Great Location.
The way you structure your bank accounts and loans can make the difference between buying a single investment property and then bombing out (like most investors) … and buying 10 or more with the full support of the banks.
It means virtually unlimited borrowing power.
And getting every possible cent back from the tax office.
It also means buying higher quality real estate so you can replace your income sooner.
This Is Why All Elite Investors
Have Mastered The Finance Game.
First up, the disclaimer.
Tada!
I’m going to talk a lot about finance here and how to get the best deal from the banks.
However, this is not specific advice to your situation. It’s just what I know works from my experience and for our clients.
But don’t follow this advice blindly because it’s all general, big picture concepts.
My only specific advice is that you understand the concepts, then apply it to your specific situation with the help of finance professionals.
Here’s what you need to know about finance to get ahead faster.
Borrowing Capacity
First up, you should understand your borrowing capacity, which is how much you can borrow.
There are all sorts of things which affect it, and here are the four biggest:
- Income – the more you make, the more you can borrow.
And this includes income from shares as well as the rent you get from your properties, including the one you’re buying. It can also include child support, pensions, commissions and work bonuses.
- Expenses – Obviously all your loan repayments are expenses.
And so are your living expenses.
Most banks have formulas for working out expenses like these, but they also look at your bank accounts too so being extravagant isn’t a good idea.
At large, they are assessing two things – money coming in and money going out.
Credit cards are counted as expenses too, and the banks always factor in the repayments if you maxed everything out, so pay them off ASAP and cancel them.
- The Bank – Each bank calculates borrowing capacity slightly differently. And you might find that one bank will give you more than another.
- Your Mortgage Broker – Getting a brilliant deal from the bank is tricky. So rather than deal with the banks directly, you should always use a mortgage broker.
They know which bank will give you the best deal, what you need to do to maximise your borrowing capacity and how to present your figures to the bank in the best possible light.
You might be surprised how much more a great mortgage broker can get you over a run-of-the-mill broker.
Your Deposit
How much deposit you have is important. The bigger the deposit you bring, the easier it is to get a loan approved.
However it also takes longer to save it, and this means being out of the market while you pull it together. This will work against you because you won’t own a growing asset while you’re saving.
Generally, the sooner you get in and buy, the better. Even if you have a lower deposit.
Be aware too that if your deposit is less than 20% you’ll need to pay LMI (Lender’s Mortgage Insurance). This is a fee which covers the bank (not you) in case you default on your loan.
If you borrow with a 10% deposit it’s roughly an extra 4% of the total loan. But it gets added to your loan so you don’t need it up front. And if it gets you into a great property sooner, it’s typically worth paying.
The Type Of Loan
There are three main types of loans for residential property.
The first is a Principal & Interest (P&I) loan. This is the loan you’d be most familiar with where you pay down the loan balance as you go.
Every month, the interest you owe on your loan is calculated. And your monthly payment includes this, with the rest going to pay down the loan balance.
These are easier to get from the banks because you’re paying down your loan balance, and the banks like this. However, the more you pay your loan down, the less interest you’re paying each month.
And since you can claim interest on your tax return, you might want to keep this high and pay down the balance of another loan like your own home.
The second is an Interest Only loan.
This is by far the most popular with investors because you only pay the interest, and nothing off the balance.
If you have a $600,000 loan at 6% interest, your interest is $36,000 a year … which is $3,000 a month.
And that’s all you pay.
Your repayments are lower than a P&I loan because you’re only paying the interest, and nothing towards the loan balance.
However, there’s one drawback.
The Interest Only period is limited to 10 years for an investment property. And then it switches over to a P&I loan.
This means (wait for it) when it switches over your repayments are higher because you have to catch up on the 10 years you didn’t pay anything off the loan balance.
And this means they can be harder to qualify for.
Having said this, in 10 years time your rents and your income would have increased significantly as well, so you just have to be aware of it and be ready for it.
And … There’s every chance you can refinance the property anyway and start your interest only period all over again.
With me so far?
The third is an investment loan
This is an interest only loan, where you can effectively borrow 100% plus the costs of your new investment property.
You can do this by creating a new loan against an existing property’s equity for the deposit and the costs.
Then a second loan for the bulk of the amount.
Both of these are interest only loans (although they don’t have to be if you don’t want) and the interest on both loans is tax deductible, until you sell the investment property.
Fixed and Variable Rates
The difference between fixed and variable rates is pretty obvious.
Fixed rate loans are loans where the interest rate is set in stone for the entire loan.
And variable rate loans are where you pay interest at the going market rate.
If you got in and fixed your rate when rates were rock bottom during Covid, you’d be laughing now.
But when rates are high, fixing them could be a dumb move.
And no, you can’t just switch from a fixed loan to a variable rate loan when it suits you. The banks will literally calculate how much money you’d save (and they’d lose) and make you pay it before you switch.
To give you an idea of how much this is – it’s a LOT.
The big benefits of fixing are that you know exactly what your repayments are which makes budgeting easier.
You also end up with lower repayments than people on variable rates when rates are high.
However, you also end up paying more than everyone else when rates fall.
Mind you, you can have a bet each way with a ‘split loan’ where part of it is on a fixed rate, and the rest is on a variable rate.
Offset Accounts
OK, this one is a bit tricky so I’ll just give you the general idea.
With a principal and interest loan, each monthly repayment is split into the interest on the outstanding amount, and some of the principal.
As the amount you still owe gets smaller, the interest on it is smaller too.
And since less of your repayment goes towards interest, more goes towards paying off the loan.
This gives you an incentive to pay more off your loan, so each month you’re paying less interest and more on the principal.
But what if you don’t want to lock your money away?
Introducing … the offset account.
The offset account is a separate savings account where the bank ‘pretends’ it’s paid off your loan.
So if you have $400,000 outstanding on your loan, you’d normally pay interest on the full $400,000.
However, if you have an offset account with $50,000 cash in it, the bank will ‘offset’ this against your loan, and you’d only pay interest on $350,000. The rest of your regular repayment would go to pay the balance down.
That’s it in a nutshell.
The thing to remember is when you use an offset account, the more you put in there, the faster you pay your loan off.
It’s all the benefits of paying off your loan … without paying off your loan.
And by the way, let me answer the #1 question we get about offset accounts.
Your offset account is your regular, day to day bank account and it works like one.
My advice?
Use an offset on your regular home loan (if you have one) instead of your investment property loan. Focus on paying this one down first, and keep the balances high on your investment property loans because you can claim the interest as a tax deduction.
Redraw facility
A loan with a redraw facility means any extra money you pay into it is available to ‘redraw’ later on.
It’s not like an offset account which is a savings account you use every day.
Most people use it by paying more than the minimum account, knowing they’ll be paying their loan off faster, but also knowing the extra money is available for a rainy day.
Different banks have different rules for drawing your surplus money back out again. Some make it easy but others have rules around minimum redraw amounts, and can make it a bit tougher.
Still, if you’re saving up for something major like a car, holiday or renovation, a redraw is a good way to force you to put the money aside, while helping you pay down your loan while you do.
Factors to take into account when choosing a loan
OK, now is the time to tell you this.
Do not ever go to a bank for a loan. At least, not directly.
Use a mortgage broker to get you the best deal, and to help you set things up so you can keep borrowing without getting rejected by the banks.
Some of the considerations include which bank you use.
Major banks like the ‘Big 4’ – the CBA, NAB, ANZ and Westpac may be more stringent with their borrowing criteria, but offer the best deals and best interest rates.
Mid tier banks like the Bendigo Bank, Adelaide Bank and Bank of Queensland may be more relaxed with their lending criteria, but may charge more fees and interest.
And then the smaller banks (also known as the lenders of last resort) will charge even higher fees and interest rates.
My advice is to stick with the big 4 and the mid tier banks.
Also, take the interest rate into account, but also don’t fall in love with a loan because of a slightly smaller rate.
Sometimes features like redraws, offsets, the ability to fix a portion of your loan and generous refinancing options can be worth a lot more.
There are also rewards programs you can access with different loans too which you can take advantage of.
Interest rates
It’s important to factor in how interest rates affect your loan.
When rates go up, so do your repayments. Unless of course you’re on a fixed interest rate.
This means you need to make sure you can make your repayments if rates go up.
Speaking of whether you can afford the loan, here’s something you might not be aware of.
The banks will assess your loan at an interest rate 3% higher than the actual rate, which means they factor this in.
But it’s still your responsibility to make sure you don’t get yourself in trouble, and you’re saving up for a rainy day. Or for when rates go up.
Your credit rating
Every borrower in Australia has what’s known as a credit rating.
It’s a number which tells the bank how risky you are or aren’t.
The better credit rating you have, the easier it is to get a loan.
Getting a better credit rating is pretty straight forward. Here are a few ways.
- Don’t have too much credit. Pay off and cancel your credit cards, store credit and so on
- Pay your bills on time. If you pay your bills late, eventually this could wind up on your credit report
- Don’t apply for new credit if you don’t need it. This is a surprising one. Each time you apply for credit, whether it’s a car loan, credit card or store credit, it’s lodged on your credit report. Too many applications is a bad look.
This also applies to applying for bank loans which is why you should use a mortgage broker to show you your options instead of applying with different banks to see what they offer.
- Keep an eye on your credit report. You can get your credit report for free online. Just google it. Get a copy every few months and make sure nothing bad has been added to it.
If it has, either pay off the amount, or if it’s an error, dispute it.
If you need help, get it
If you ever get into trouble and you’re going to be behind on your repayments, tell your bank.
They’re always happy to help so you don’t default.
Besides, it looks bad for them if they’ve got too many bad borrowers on their books.
If they can work with you instead, it works for everyone.
Budgeting, planning and building up a surplus will help you avoid needing help. But if you need it, don’t hesitate to ask.
The End Goal
The big advantage of knowing everything I’ve just covered is how it helps you go from one property to the next.
Get your finance strategy wrong, and you could end up getting rejected by the banks in the future.
And if this happens, you could be stuck on the sidelines, unable to borrow until you look good again.
The goal is to be financed with the top banks with the best interest rates and loan features.
And by getting everything right, you’ll always be able to borrow and keep investing.
This is how top investors get ahead.
They don’t let the banks be in control of them. They’re in control of the banks and always get what they want.
The question is … what do you need to be aware of?
If you want to invest successfully, you need to nail your investing and finance strategy in one go.
They’re both intertwined.
So let’s find out what’s possible for you, and what that would look like.
You’re invited to spend some time on a call with one of our Senior Property Wealth Planners to show you what’s possible.
They’ll help determine your ability to replace your income by investing in real estate.
They’ll map out an overview of what you should do, and when.
And of course answer any questions you have.
There’s no cost for this either.
We do it in the hopeful expectation that if you decide to invest, you’ll ask us how we can help you.
No obligation, no pressure.
First things first.
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