Choosing a mortgage product may seem pretty straight forward these days as there are over 100 products available from various financial websites for comparison purposes. Clients usually think of the interest rate as being the main consideration when choosing the best loan products, however, there are other things that need to be looked at.
5 things must considered –
1) Comparison Rates vs Interest Rates
Most people just use the loan interest rate to compare different loans. Although this is a good start, it doesn’t take into account other costs such as establishment fees, approval fees, any upfront or ongoing fees that comprise the overall cost of a loan.
On the other hand, the Comparison Rate is an indicative interest rate that is designed to help people identify the ‘true cost’ of a loan. The Comparison Rate takes into account the interest rate and “ascertainable fees and charges” that relate to the loan, in an attempt to express some of the costs of a loan into a single (comparison) rate.
2) Loan Structures – Fixed vs Variable
Removing this uncertainty is what fixed rates are all about – locking in your interest rate and locking in your loan repayments for a certain period of time. So it’s often considered more suitable for PAYG earners with a fixed pattern of on-going income. However, choosing fixed rates may sacrifice certain loan features and flexibilities such as redraws, 100% offsets, and the ability to make additional repayments.
Therefore, for business owners, fixed rates may not be the ideal product due to the above limitations. Benefits such as flexible repayment periods and redraw facilities offered by variable loans are normally more attractive to business owners.
3) Investment structures & Tax implications
Once you have decided to purchase one or more properties, it is important to consider the best investment structures to use. An investment structure refers to the way your investments are legally owned.
There are four basic types of investment structures, each with its own advantages and disadvantages. They are Individuals, Partnerships, Companies and Trusts (including SMSFs). Many clients simply purchase properties in their own name or joint names, when other ownership structures may be more suitable.
Take the time to review all of the investment structure options before investing because getting it right at the beginning can have long term benefits, and getting it wrong can be disastrous. Also, the loan structure, features, limitations and benefits for different investment structures are different and need to be planned carefully before obtaining the mortgage.
4) Long term Wealth Management Plan
The loan product needs to be incorporated in your long term wealth management model. Say if you want to purchase another investment property in 2 years time or if you want to acquire a Business a year later, then it would be more suitable to choose a loan product/lender which gives you the flexibility for an equity release or a loan top up when in need for cash for future investments.
Furthermore, when you gradually build up your property portfolios, it would recommend not putting all the eggs in the one basket. Quite often, clients tend to continue with the same lender for the mortgages of their other properties for the sake of convenience or for the hope that the lender will reward them financially for their loyalties.
However, (and in some instances) the ugly truth is that after you are “locked in” with that particular lender, you could be forced to do whatever they ask you to do, and to start complying all the unfair charges & obligations. Eventually, it would become too difficult and expensive for you to move on to other lenders.
5) Experience and Exposure
Last but not least, you need to ask yourself:
• Does my mortgage advisor have the exposure in dealing with the above issues?
• Are they familiar with the tax structures and law?
• Have they given me the risk option or a plan B if I am not able to service the loan in 2 years time?
• More importantly, have they invested something themselves with similar structures or loan sizes?
You would want to deal with someone who has the particular knowledge and perhaps has that “first hand” experience in property investments or wealth creation strategy rather than just selling you an off the shelf product from the Banks.
How we can help
Linton Solutions is a “One Stop Shop” business hub, specialising in Asset Protection, Business Advisory, Mortgage & Finance, Direct Property Investment, Tax Consulting and SMSF strategies. We have significant experience in the property areas, including assisting you in sourcing the right property, going through the negotiation process with the Vender and advising the most tax effective structure for the purchase etc. Talk to us as early as possible – don’t leave these important issues for another day.