There’s more to a home loan than just comparing interest rates. Different products are designed to suit different types of people and a wide range of circumstances. While it’s tempting to get the home loan ‘out of the way’ and move onto more exciting things… The financial vehicle you choose will determine the effectiveness of your investment.
Here are a few things to look out for when choosing a home loan:
The Rate Advertised vs the Actual Rate
When comparing loans, remember that the advertised interest rate doesn’t take into account all the costs associated with the product. When speaking to your financial advisor or bank.. Ask them about insurances, administration fees and any other costs that you will incur.. Either in the form of cash or added to your mortgage.. As part of the loan agreement. Often these costs are laid out in long and complicated documentation, rather than being communicated as part of the initial comparison. While responsible lenders will tell you about additional costs, they may only break down the specifics later in the process, when it’s too late for you to change your mind. Ensure you review any reviews and complaints online to ensure they have all of their ducks in working order.
It’s not just costs that are important when selecting a home loan. Consider your overall portfolio strategy and your plans in the event of a market downturn or family emergency. Will you sell the property? Do you have plans to subdivide the block in the future? Are you likely to refinance the loan at some stage?
Tell your lender that you require a loan with flexibility and ask if there are any additional fees and costs associated with refinancing and making extra payments. Ask if there is an allowance for a “mortgage holiday,” where you stop making mortgage payments for a period of time if you should experience financial hardship. These types of options will help you sleep at night, and while they may seem inconsequential now, have the potential to be vital in the future.
Find a Well Structured Loan
A well-structured loan is one that you understand and is representative of your overall strategy. For example, you may elect to reduce your monthly mortgage payments by having an “interest-only” loan. As the name implies, this product allows you to make payments on the interest component only, without reducing the amount borrowed. In your particular scenario, this could make the property cash flow positive, freeing up additional capital for improvements. These renovations could give you the opportunity to expand your portfolio further.
No loan is designed with every investor in mind. Financial institutions can’t communicate all the benefits and shortfalls of every financial product they offer, so it’s up to you to find the best loan for you. Create a list of criteria, based on your plans for the property and talk to your financial advisor about how to best structure the loan. Taking time at the start to get it right, will mean less stress later on, and may end up saving you thousands.