Get the money honey
You’ve completed your research and you’re ready to buy your property. Magnificent! Here’s hoping you know how you’re not only going to fund the purchase, but also that you know the best way to structure your loan for maximum results.
Your first port of call is to speak to a mortgage broker. There is absolutely no point speaking directly to the bank as the people you speak to will not have the experience of a skilled mortgage broker. A good broker will select from a range of banks, and source the best loan after considering your requirements.
A great mortgage broker will take things much further, and be your financing advisor (very different to a financial advisor), saving you thousands in unnecessary interest payments and cutting your loan duration to the bare minimum. But the best will be efficient with your very limited time, and explain how the process works in an efficient and easy to understand way.
At Crave, we only work with the absolute best in their field. We spoke with Max Phelps from Golden Eggs Home Loans to obtain a succinct summary of the best ways to finance your next property purchase. Max is an experienced mortgage broker and property investor, building his experience by investing in property around the world.
Max also has a passion for finance strategy and ensuring his clients make the most of their finances, and has provided insight into three key approaches to funding your purchase.
Loan structures by Max Phelps, Golden Eggs Home Loans
1) Without property
If you’re in the lovely position of being able to purchase with cash, it’s still worthwhile talking to a mortgage broker as you may find a way to make your purchase while maintaining good access to your cash.
If you have enough funds to cover a deposit and purchase costs (stamp duty and legal fees) and good serviceability (a regular income to service a loan), speak to a broker to obtain the mix of accounts that will support your lifestyle and goals. Generally, you would be required to pay a 20% deposit from your savings, however if you do the numbers on a smaller deposit you may find you can borrow more. Your broker will help you stay within a realistic limit given your income and other personal requirements.’
2) Using one property to purchase another
If you already own a property, outlined below is an approach you might use to purchase an investment property utilizing the equity from your own home. Consider the following scenario.
The image below shows the optimum loan structure for this scenario, with red arrows representing the security, and green showing the income streams. I recommend using an offset and ‘cash’ account attached to the home loan. I explain how an offset works in a video which you can access by clicking here. This will allow you to lower the amount of interest paid each month as the bank will calculate monthly interest on the offset balance minus the loan amount. You can use a line of credit account in a similar way for the investment property.
Loan structures need to be tailored to your specific needs, however the example below provides a basic framework. If you would like more information on this, it’s best to ask your mortgage broker or contact me directly.
3) Getting help from others
If you don’t have a property to draw upon and can’t cover a large enough deposit to meet your needs, the first option is to continue saving or purchase something at a lower price point.
The other alternative is one that is increasingly being used in Australia, which is to access equity from family or friends. This strategy is used more frequently overseas. For example, in the UK 70% of first home purchases utilise their parents’ equity to support their purchase. In Australia, close to 30% of Queenslanders obtain support for their purchases, while in NSW it’s less than 2%.
Using the same scenario as above, the loans are structured in a very similar way with the exception of the home being owned by one group – ‘the parents’, while the second property is owned by ‘the kids’.
There’s a few different ways this structure can be achieved, but I recommend using a ‘limited guarantee’ which will limit the exposure to the parents or the party acting as the guarantor. This means that if the property value totally tanks and the bank needs more than the agreed guaranteed amount ($100,000 in our example) to cover their loss, the bank can’t chase mum and dad for more than $100,000.
The upside of this approach is that if all goes well, the ‘kids’ can pay down their part of the loan and revalue the property in 12 months with a view to eliminating the guaranteed amount from their parents.
Establishing your loan structures in an effective way is a key platform in building a successful property portfolio. The lending environment in constantly changing, therefore it’s important to obtain advice from specialists who will provide you with the best possible information.
Once your loans are established, you will need to review these on a regular basis, ideally annually or when you make a new purchase. Using this approach, you can consider issues such as fixing all or part of your loans, or adjusting the way your accounts work with each property and ensure you are in the best position
Max Phelps is the founding Director of Golden Eggs Home Loans and a member of the MFAA. Golden Eggs specialises in helping people build an investment portfolio over time, providing financial education and mortgage broking assistance. We are experienced property investors who can help to structure your finances to meet your long term needs, providing advice around fixed vs variable, principal and interest vs interest only and offset vs redraw, whether on a first home that could be an investment in the future, a second home whilst keeping the first as an investment, or building a portfolio using equity from a long term family home.
M: 0419 624 790