Structure before rate
Investors chase rate. It is the wrong first question.
A loan a fraction of a per cent cheaper but structured badly can cost you the next purchase entirely — and the cost of a property you could not buy dwarfs a slightly higher margin. The question worth asking at every purchase is: what does this loan do to my ability to borrow again?
How lenders read rental income
You will not be credited with the full rent, and your existing loans count for more than you actually pay on them.
- Rent gets shaded. Lenders recognise only a portion, allowing for vacancy, management fees, rates and maintenance.
- Existing debt gets loaded. When you apply again, your current loans are assessed at a rate well above what you pay.
- Some lenders are kinder. A few assess other lenders’ debt at the real repayment rather than a loaded rate.
Cross-collateralisation
Securing more than one property against the same loan is simple for the lender and costly for you.
- Selling one property needs the lender’s consent, and often a full reassessment of what remains.
- The lender can direct where the sale proceeds go.
- Refinancing one loan can drag the others with it.
- A problem with one property puts the others in play.
Interest-only, honestly
A legitimate tool for an investment property, and a much more questionable one for a home you live in.
What it does for you
Lowers the repayment during the interest-only period, improving cash flow. On an investment property the whole repayment is interest, which is generally deductible.
What it costs you
You are not reducing the debt, so equity only builds if the property appreciates. The rate is usually higher, and the repayment steps up sharply at the end.