As well as conducting your own research, property investors considering commercial property investments will benefit from the advice of a Smartline mortgage adviser with experience in this area.

Market competition impacts costs
With residential lending, there is a lot of competition in the marketplace and so lenders make their loan products more attractive than other lenders’ products.

Compared to commercial loans, residential loans have lower interest rates, and there are cheaper upfront fees and more options, like redraw and repayment holidays.

With commercial loans, however, the interest rates are higher – sometimes significantly – there are much higher upfront fees and ongoing fees related to loan reviews, which are required by lenders as part of their risk management and mitigation, and the loan to value ratios are much lower, which means borrowers have to come up with significant deposits.

From the lenders’ perspective, commercial lending exposes them to a far greater level of risk, which involves a variety of additional costs to be funded and obligations that must be met.

The differences between commercial and residential lending
Generally, commercial property borrowers can expect lenders to fund up to around 75% of the value of the property – but as little as around 65%, or less.

Some major lenders will only approve commercial loans over a maximum 15 years. This is based on the ‘usable life’ of a commercial property – this compares to 30 years for residential loans.

To illustrate the difference, let’s look at a commercial property valued at $800,000. You would require about 25% deposit – that’s $200,000 – as well as fees and charges of approximately 5% – about $40,000 – and other charges, such as the cost of a valuation and the application fee – that’s about another $2000. All up, you could be looking at around $250,000 to fund the purchase.

The $600,000 that you borrow from your lender then needs to be repaid over 15 years, requiring payments of about $5770 per month. 

Commercial property lenders will consider five years interest-only, but the maximum loan term is 15 years with the major lenders.

There are some niche players that will consider loan terms of 25 years whereby the loan is very much ‘set and forget’, meaning there is no need to conduct regular reviews and there are no ongoing fees. The major lenders, however, conduct annual reviews, which include a review of borrowers’ business financials.

Unique risks in commercial areas
Unlike residential property, commercial property is particularly vulnerable to changing economics, infrastructure and even consumer behaviour, and this must be factored into your investment plan.

Lenders also need to look closely at the risk associated with niche sites, as opposed to retail shop-fronts for example.

Add to that a higher interest rate and a loan term of around 15 years – or whatever you have negotiated with the lender – as well as the requirement by some lenders for regular reviews of commercial property borrowers’ financials, and you can see the risk factors, costs and commitment required to fund a commercial property investment are very different compared to residential.

If you’re considering investing in commercial property, it’s critical to work with a Smartline mortgage broker with experience in commercial lending to tailor a solution.

As with any property investment decision, if you’ve done your research and you have worked with a Smartline mortgage broker, then you can reap the rewards.

It’s important that would-be SMSF holders don’t ‘fly blind’ in what is a complex and highly regulated area.

Maximising super returns
Many people have a substantial sum of money sitting in superannuation but want to see it work harder. 

Generally, it’s not until later in life that we take a keen interest in how hard our superannuation is working – for many, it still tends to be viewed as a ‘set and forget’ investment.

The scope to have more control over the growth of our superannuation through an SMSF is now more accessible, and for individuals or couples with a combined superannuation balance as low as $120,000 to $150,000 the opportunity to invest in property is a very real prospect.

For example, a couple unable to afford an investment property directly but who have around $100,000 each in superannuation could consider purchasing property within an SMSF if they’re both still working. The $200,000 is a significant deposit – add to that the rent and 9% superannuation contribution guarantee and a lender would regard that as sufficient to approve a loan.

Have clear goals
It’s vital that you’re clear about your goals for your SMSF so that a strategy can be developed. 

One aspect to consider, for example, is the diversity of your investment portfolio. If you have one property valued at $800,000 sitting in your SMSF and no other investments, your exposure to one asset class may adversely impact on your retirement earnings.

Seek advice
In addition to working with professionals with a proven track record in this area – an accountant, solicitor, financial adviser or tax adviser – it’s important to have the support of a mortgage broker who has experience in assisting borrowers to fund SMSF property investments.

Those who work with a mortgage broker should expect to be kept well informed throughout the process, ensure they understand every aspect of the selection of the lender and the course of action taken, and to maintain close communication with the fund’s other advisers.

SMSFs are complex and, ultimately, the responsibility to comply with regulations falls on the SMSF trustee – that’s you.

As such, you should expect all of your advisors to keep you well informed and ensure that you understand every aspect of the work they are conducting on your behalf.

SMSF loan options
SMSF loans are very basic and don’t provide many of the features found in a traditional home loan, such as redraw or repayment holidays, but the lender option you do select impacts on your investment’s earnings. 

Ultimately, you don’t want to go into retirement with an asset that has debt against it, so you will ideally want to pay off SMSF debt before retirement.

Whether you select interest only or principal and interest repayments will depend on your unique situation and the advice of your tax adviser.

Generally speaking, however, those with bad debt – debt that does not generate income – will want to pay that off as a priority, so they may elect to make interest only payments on their investment property while paying off that debt.

Conversely, those with investment debt only may elect to make principal and interest repayments in order to reduce the debt as they head toward retirement.

Other considerations
If you buy an investment property outside of super, you can use the equity in that property to purchase another property – so, you could borrow 100% plus the associated property purchase costs.

However, within an SMSF you need a larger deposit.  It varies, but it will be around 25% as a minimum, as well as a ‘float’ where rents can be deposited and fund-related costs can be paid. Once the money has gone into this ‘float’, you can’t withdraw it.

Fee structures, legal costs and other imposts also vary considerably between lenders, potentially adding thousands of dollars to the cost to fund an SMSF.

Lenders’ requirements for SMSF loans are more rigid and complex, and vary from lender to lender, so the assistance of a mortgage broker with experience in this area can prove invaluable.

Life is full of change – much of it unexpected
While we certainly can’t foresee every potential change in our life and the impact this will have, it’s still possible to consider and allow for some possible changes and put strategies in place to manage these.

The average loan term with a lender is four to five years, and a lot can happen in this time. Just look at how different your own life is now compared with five years ago.

Anyone looking to take out a home loan should be thinking about the possibilities of the future and seeking quality advice from a mortgage broker about a home loan that will have the capability and flexibility to accommodate changes.

There are numerous significant life events that can impact on your home loan, including:

Having children – This can result in an increase in household expenses, and a decrease in income if one parent stays at home or reduces their work hours to look after the child or children.
Redundancy – It may take several months to secure a new job after having been made redundant, or it may be that the new job doesn’t pay at the same level.
Starting your own business – Depending on the business, you might require a lump sum to buy or get the business up and running, and it might be months or even years before you start to see a return on your investment.
Buying an investment property – You will need either a solid amount of equity in your home or significant savings for the deposit on an investment property and the lender might want to cross-collateralise, that is, use your home as security for the loan on the investment property.
Finding another ‘dream’ property – Despite never having any intention to move in the coming years, it might be that you one day see the house of your dreams and decide to buy it.

Anyone who could quite realistically be affected by one or more of these scenarios needs to be mindful of keeping their options open when taking out their home loan.

Plan to be flexible
There are no hard and fast rules or structures for best managing these scenarios, but it might be, for example, that a fixed or partially fixed home loan isn’t a good option for some people as it may result in substantial break fees if the loan is terminated early.

That’s why there is merit in working with an experienced mortgage broker when securing your home loan, to ensure the loan you end up with can cater, as much as possible, for any of these unexpected events.

A mortgage broker will have a good knowledge of the hundreds of home loan products on offer and will ensure that not only the product but also the structure of your affairs offers a degree of flexibility.

That’s good to know, because there’s a range of factors that can see a loan application being refused.  But, the trend indicates that the more information and supporting documentation you can provide, the better the chance of having an application approved.

While it’s certainly more challenging and time-consuming – especially for those who aren’t familiar with lenders’ conditions and requirements – it doesn’t mean that obtaining a loan is impossible.

It does highlight the importance of quality advice to give you the best chance of securing your loan and purchasing a property.

Considerations impacting lenders’ decisions
Credit scoring is just one consideration impacting lenders’ decisions and although it has been around for a while, the credit scoring formula is becoming increasingly complex and relies upon every piece of customer data – so it has never been more important to complete every single section of the application form.

In some instances an applicant might lose points for seemingly simple things like not having the ‘nearest living relative in Australia’ field filled in – even though it’s not mandatory.

While employment details and stability used to be the keys to a successful loan application – including employment history, having minimal unsecured debt, strong ability to service a loan, a clear savings history and a deposit – lenders now want to see evidence that applicants have a ‘reliable character’.

For example, lenders don’t want to see too many credit inquiries, which can lower your credit score.

Likewise, while an applicant’s net asset position <link to: Net Asset Position blog entry – yet to be published> has always influenced the way banks lend money, this has become increasingly important.

The rules are always changing
Lenders’ rules about how they assess loan applications are in a state of constant flux.

It’s not unusual for lenders to change their own requirements, and we’re seeing a definite trend toward the requirement for more and more detailed information.

Using the services of an experienced mortgage broker can be helpful for borrowers keen to cover all their bases and make a good impression on lenders.

The rise of the first homebuyer as ‘renter-investor’ shows borrowers are thinking outside the square to get a foothold in the property market without compromising lifestyle.

Not only do people want to live in areas that suit their lifestyles now – near beaches or cafés or in inner city lifestyle suburbs – but they’re also keen to live close to their workplace so the commute to and from work doesn’t eat into their valuable personal time.

With the cost of properties located in these ‘lifestyle areas’ out of reach for many first homebuyers, they’re taking a more creative approach.

Be vigilant and strategic
While all borrowers need to have a clear strategy and structure their lending accordingly, this is of particular importance for first-time renter-investors.

There are a number of considerations that first-time property investors need to think about. For example: What is your strategy? Are you looking to buy and sell an investment property within five years or are you planning to purchase and keep it as an investment offering growth over a long-term period of, say, 10 or 20 years?�
Will you then draw equity from it to use as a deposit for a home or another Investment property in the future?

It’s important to do your homework – ask yourself why and where you’re going to buy your investment property, and what the expected capital growth rates and rental returns will be in the areas you’re looking to purchase.

The answers to these questions allow you to run projections of what sort of gains you could expect to make if you sell in the future.

Of course you would also need to consider a range of costs including buying and selling expenses, capital gains, tax implications, and fees for professional advice.

Property investors also need to consider a range of factors that are best discussed with their mortgage advisor first and then with their accountant.

For example, if you purchase an investment property with a view to selling it within, say five years, you will have to pay capital gains tax. 

Conversely, if you’re going to hold the property for a longer period of time and draw on the equity to fund a home or additional investment properties, then you won’t need to pay selling costs and capital gains tax and, as such, your mortgage broker can help you to structure your lending to suit.

There are also a range of options available to minimise cash flow shortfalls when owning an investment property, such as making interest only payments, maintaining depreciation schedules, conducting regular rent reviews, and having tax adjustments paid back to you monthly.

Borrowers should discuss this with their mortgage adviser  and accountant so they can structure their lending and finances to their advantage.

Renter-investor approach not just for first homebuyers
Our living circumstances can change for a host of reasons: You may have received a job offer that requires you to move to an inner city location or you may just want to live in a suburb that offers the lifestyle you and your family desire, now. As a result you may decide to rent out your home and make it an investment property. 

Likewise, you may live in an area that is currently achieving good capital growth and yielding excellent rental returns for homes like yours, so you decide to rent a smaller property elsewhere in order to rent out your existing home.

There is a range of reasons for choosing to rent while putting your owner-occupier property on the rental market.

Seek advice
Lenders are keen to captilise on the renter-investor trend, with a number now offering investment loans on 5% deposits.

Regardless of your circumstances, seek the advice of a quality mortgage adviser to help you structure your lending and get the most out of your investment strategy.

Today, we’re announcing the launch of Smartline’s YouTube Channel.
http://www.youtube.com/smartlineadvisers.

Smartline’s YouTube channel builds on our existing property and finance-related tools, which we hope you’ve found useful. These include:

• Online calculators
• iphone app
• the monthly Smartline Report.

You can also follow us on Twitter (@asksmartline) and Facebook, and subscribe to the Smartline Blog.

In the meantime, check out the first of our YouTube clips, “What is a Mortgage Broker?“. You might like to forward this link onto friends or relatives who may not have used the services of a Smartline Adviser.

We’re keen to know what you think and if you have any topics you think we should cover in our YouTube channel. So, please get in touch via email clientrelations@smartline.com.au or phone 13 14 97, or contact your Smartline Adviser direct.

We hope you enjoy.

But that’s far from the truth. Those who have already sought assistance from their Smartline Adviser will know this to be true. So, if you haven’t yet worked with a mortgage adviser, get in touch and start saving.

All lenders are not the same
There is actually a good deal of difference between lenders on interest rates, fees and credit policies, and borrowers can potentially save thousands of dollars by doing a bit of homework and contacting their lender to, for example, request a reduction in their interest rate.

If you’ve shopped around and found better deals, you’ve got nothing to lose by contacting your current lender and asking: ‘what can you do for me?’

If you already work with a mortgage adviser chances are they’ve already done the running around for you.

Get organised
It’s important to ensure that your ‘financial house is in order’, as there is no point in asking your lender for a better deal if you’re always late making loan or credit card repayments for instance.

Save and keep credit in check
Borrowers have the best chance of success if they have a savings record, are up-to-date with all of their bill payments, and have resisted signing up for any additional debt.

This is increasingly important as more and more of your repayment history is being recorded on your personal credit file, which is carefully scrutinised by lenders.

Lenders look at the credit limit on your credit cards as a liability you may have in the future, even if you don’t currently owe a cent.

Get a home loan health check
A ‘health check’ with an experienced mortgage adviser who has access to information on loans from multiple lenders can prove very helpful.

Mortgage brokers have access to a vast array of products and services across a panel of lenders.  As such, they can tailor a solution to suit your unique personal requirements.

Often, just going to another bank for a better product offering may give you the leverage needed to negotiate with your preferred lender – and a mortgage adviser will do all of the negotiation on your behalf at no cost to you.

Property choice is critical
The best types of property for investors on low incomes are those at the lower end of the scale in price but with high rental returns.

This may mean looking to the outlying suburbs of the major capital cities and to regional areas, such as mining towns.

Steer clear of negative gearing
A low-income investor probably isn’t going to be in a position to be able to fund any shortfall, so negatively geared property isn’t going to be a good option – ideally it will need to be neutrally or positively geared.

Do your homework
As with all aspects of property investing, it’s critical to do your homework on the best way to finance your planned property purchase and get the best deal possible.

First-time investors should keep the following in mind:

• Consider the scope for depreciation, which could total thousands of dollars a year and make the difference between the property being negatively or neutrally geared.
• Applying to the ATO for a tax adjustment at the beginning of each financial year might make funding the property more manageable. For example, if your initial calculations indicate that you would receive a tax refund of about $3000 on your investment property at the end of the year, a tax adjustment will mean that your employer will take $60 a week less tax out of your pay, which could make the difference between being able to afford the property or not.
• Consider looking at Terry Ryder’s Cheapies with Prospects report or reports by Residex on where to find affordable and budget properties in Australia and those areas that provide the best rental returns.
• Repayments on your investment property loan should be interest only (as they are about 25% less than principal and interest repayments), minimising the amount required for loan repayments and maximising the chance of the property being neutrally or positively geared.

Think ‘outside the square’ and get advice
Plenty of people with a minimal income have gone down the property investment path by thinking ‘outside the square’ to make it happen.

See if you have family and friends who might like to invest with you, or maybe your parents are prepared to act as guarantor to get you started.

The first couple of years of owning a property can be the toughest, particularly if there is any shortfall in your income and expenses.  However, it should then start to get easier as rents regularly increase and any gap starts to decrease, to the point where the property then should be at least neutrally geared.

Once you can get the property to that stage, you then have the opportunity to consider buying your next investment property and accelerating your wealth creation.

Speak with your mortgage broker about your options.

 The guidance of a quality mortgage broker will shed some light on what could work in your unique situation, but here, we offer some thoughts to get you started.

 How much equity do you have in your home?

For those who purchased their first home in the last 5-10 years or so, it could be a case of ‘no-better-time-than-now’ to consider taking your first steps into property investment.

Many of these people have built up substantial equity in their home and may now be well placed to purchase a second property.

This – coupled with flat property prices, a buyers market nationally and increasing rental returns – could put many people in the ‘box seat’.

Let’s look at an example…

A property purchased for $300,000 five years ago would conservatively be worth around $400,000 now (assuming an annual increase in value of 5-7%). The couple that bought this property paid a 10% deposit and took out a home loan for $270,000.

After five years of repayments, the loan balance is now $245,000. With their lender allowing them to borrow up to 90% of their property’s value, they now have access to over $100,000 of equity.

They decide to purchase a second property – their first investment property – worth $400,000. They add approximately 7% of the home’s value to fund fees and charges meaning they require $428,000 to fund the purchase.

Assuming they take out a loan for 90% of the property’s value, the loan amount will be $360,000 requiring them to fund the shortfall of $68,000 against the available equity of $100,000 in their home, which they can do comfortably.

An investment property is not ‘double the cost’

Many people think that while they can manage their own mortgage, they’re not in a position to fund a second property, which they see as ‘double the commitment’. In reality that’s not necessarily the case with the benefit of having a tenant pay a large part of the mortgage and associated taxation deductions.

It pays to do your homework and get advice

As with any form of investment leveraging equity to invest in property should be carefully considered and thoroughly researched, as it is very much a long-term commitment that could impact on your ongoing cash flow.

While the equity might be there to fund the initial purchase, it’s important to be mindful of the ongoing servicing of the debt as a result of any shortfall in the income generated by the property and the associated expenses.

It’s essential for to speak with both an accountant and a mortgage broker  to understand the ongoing financial commitment.

A good mortgage broker should be able to assist in compiling an indicative cash flow analysis of your investment property over time, including loan repayments, strata fees, management fees, maintenance costs and property taxes.

Property investment isn’t necessarily for everyone, but for those looking to build long-term wealth, the equity sitting in their current home could provide the perfect springboard.

But, they shouldn’t be used as a way to help manage future higher minimum home loan repayments or other regular household bills. 

Why? Building up a buffer in your home loan – that is making extra repayments above the minimum – is a great strategy, as it allows you to pay off your home loan sooner and pay less interest. 

It’s also a great way to fully maximise the benefits of any spare cash you might have now but know you’ll need in the future. 

These facilities – and the money you build up in them – really shouldn’t be used to help cover home loan repayments as rates rise in the future as that’s not what they’re intended for. 

So, what is a redraw facility and offset account?

A redraw facility on your home loan allows you to deposit extra money into the loan, generally in the form of higher ongoing loan repayments, that you can withdraw again when you need it. 

Some, but not all, lenders charge a fee to activate the redraw feature and/or a fee each time you redraw, so these costs need to be taken into consideration. As a result, it’s probably best used as a facility to save money for a significant future purchase, such as a new car, holiday or renovations, rather than accessing funds from it on a regular basis. 

With an offset account, the balance is offset against your loan. For example, if you have $10,000 in your offset account against your $300,000 mortgage, you actually only pay interest on $290,000. The more money you keep in the offset account, the more interest you save on the loan. 

Your offset account can also be used as a savings account for a significant purchase, or is often used by people to ‘park’ funds that they may need to readily access in the future – for example, a couple starting a family some time in the next few years may take advantage of this facility. 

If money is tight or you have concerns, talk to a mortgage broker

It’s important that you don’t borrow to fund living expenses. That includes drawing back extra you’ve repaid to help ‘top up’ your repayments in the future at a higher interest level. 

At the very least, you should always be covering the interest component, even if you can’t make principal repayments.  

If you’re concerned about the potential for rising interest rates, then a better strategy would be to perhaps look at fixing at least some of your home loan at a level you can afford, to provide that certainty. 

If you do start to find it difficult to make your repayments, then you’re better off talking with your Smartline Mortgage Adviser about switching to interest only repayments for a period to buy you that ‘breathing space’.

If you can’t manage your ongoing financial commitments, including your mortgage repayments, then it’s time to restructure your affairs and/or change your lifestyle.

These features provide options

The thing to remember is that your home loan is always the cheapest form of finance. The key is to maximise the flexibility within the home loan as you go through the various stages of life.

Why not talk to a Smartline mortgage broker today about how you can use a redraw facility and offset account to save interest and cut months off the term of your loan.