Common mistakes investors make with loans

With the RBA keeping the cash rate on hold, the loans market is becoming increasingly competitive. As investor activity continues to heat up, we speak to mortgage brokers as well as a tax accountant on some common mistakes investors make with securing a loan – and how to avoid them.

Mortgage broker Mortgage Choice spokesperson Jessica Darnbrough says one of the most common mistakes investors make is not taking enough time to shop around for the loan that best meets their needs.

“It’s really important to compare home loans and decide on the one that suits your needs – not just now but the future, especially if you are creating a property portfolio,” she told Property Observer.

She also notes that investors tend to dismiss smaller lenders, as well as non-bank lenders.

“Credit unions and building societies, they are really competitive. In this economy, all lenders are hungry for business,” she said.

She warns that while investors can be lured to a product that offers the cheapest rates, they also need to consider loan features that may be useful.

“Take the time to think about loan features as well as pricing – everything about the loan product. It’s really important to do your due diligence,” she said.

She adds that investors often enter the market with the goal of creating a property portfolio, while the loan product is at the back of their minds. It is important to consider the loan product when taking out a loan as well.

Darnbrough recommends speaking to a mortgage broker before taking out a loan as they will be better-placed to advise which loan you should take out based on your needs and investment goals.

“Do your due diligence. Sit down and put together a five to ten-year plan for yourself and your property investment options. Ask yourself what you want to achieve, and work around a loan.

Don’t put it off, but don’t race into things either. The timing’s good at the moment, it is a good time to jump on the property investment ladder. Think carefully and act wisely,” she said.

Non-bank lender Resi’s chief executive Angelo Malizis agrees with Darnbrough.

“Investors first and foremost only chase rate and don't look enough at the flexibility and features of the loan. Especially when it comes to investments, it's important you get the right type of product,” he said.

He adds that loans with the lowest rate are often simple loans with basic features, which may not be ideal for investors who require some loan flexibility.

“It’s better to compromise 10 basis points of rate to get the right flexibility and features in your product,” he emphasises.

He reiterates the importance of looking around and considering both big banks and non-bank lenders.

“Non-bank lenders have been around for a long time, and they are able to provide additional time and energy to go through what a client needs,” he said.

Another mistake investors often make is poor loan structure, especially with mixing personal and investment debt.

“A number of times we've seen investors who have already got a loan against their own house create redraw. They think they can expand on that loan – mixing up personal debt with investment debt. That makes the ability to track expenses and investment costs for tax purposes a nightmare. It could make a part of the debt non tax-deductible, making it uneconomic,” he said.

A loan structure is very important to optimise your investment, according to Malizis.

“A number of people do a lot of research on the underlying property they are going to purchase. They have researched all the cash flows but they quickly get financed without looking around, resulting in a sub optimal loan structure,” he said.

In his experience, he has also seen cross-collateralisation with loans, where multiple properties are put up to secure more than one loan.

“The problem with that is, if you keep on adding properties to your investment portfolio and you've got one large loan, when you sell one of those, the bank can control where the funds go. You’ll lose flexibility potentially if you use one big loan to fund your investment properties,” Malizis said.

Malizis also advises against having all your loans with one lender, as the lender could drastically change their lending policies, rendering your investments less effective.

“Once you start getting to theee or four investment properties, consider your next investment purchase with a different lender. Of course, make sure it doesn't overall significantly increase your cost,” he said.

“Having some risk mitigation and diversification as you add properties to your portfolio is a smart strategy. Having two or sometimes three lenders is sometimes a prudent thing to do,” he added.

When it comes to repaying your loan, Malizis recommends paying the minimum amount on your investment property and using cash to reduce any personal debt you may have – be it a credit line or a home loan.

If you believe you have got the wrong home loan, it is not too late to go shopping for a new one that would better suit your needs.

“We are in a very competitive lending market at the moment. The trend we have seen is the cost of switching loans are far less today than they were in the past. It is never too late to switch. There are significant incentives offered for switching loans,” he said.

He added that lenders are now offering to pay valuation fees, legal fees, and even give you cash for switching lenders.

Lastly, Malizis states the importance of reviewing your home loan at least once every 12 months, just like you would review the performance of your properties.

“‘Are they provided the same benefits?’ ‘Are there better products that will better satisfy their needs?’ Those questions should be asked,” he said.