The biggest finance mistakes made by first-time buyers

Many first-time buyers underestimate the fundamental role finance plays in property investment. Getting the right financial structures and lending solutions in place when purchasing a property can be crucial to your long-term success, and could mean the difference between achieving and missing your financial goals. Our Beginner’s Guide to Property Finance covers the essential aspects of securing and maximising lending opportunities as a buyer or investor, but here is a small insight into the finance mistakes to avoid when securing a loan.

Not preparing early

Whilst securing finance is the first step towards getting your foot on the property ladder, this step should start long before you apply for your first loan. As a property buyer, preparing your finances early is essential to maximising your finance opportunities, and failure to do so could leave you with limited lending options. Whilst budgeting to save up for that all-important deposit and keeping a record of your finances are vital steps in preparing for a loan, it’s also important to understand how your credit score, repayment history and existing debts could influence your borrowing capacity. This is especially the case with Australia’s recent move towards comprehensive credit reporting, which will see more financial information recorded in a borrower’s credit history.

Limiting your research to one lender

As a borrower, it’s important to understand that each lender and bank has their own policies and methods when it comes to calculating serviceability, meaning your eligibility for lending products will vary considerably between different lenders. In today’s volatile lending environment, it’s vital to research and compare loans from different lenders to ensure you’re selecting the best product and rates for your circumstances. As well as broadening your lending options, comparing different loans could help you make significant savings in interest, putting you in a better financial position to progress with your financial goals.

Choosing the wrong broker

Whilst many buyers recognise the benefits of using a mortgage broker to secure a loan, it’s also important to understand that not all brokers are equal. Mortgage brokers who lack training or experience in property can still structure your loan unfavourably or recommend a lending solution that doesn’t fully support your objectives. If you want to make the most out of your lending solution, it’s important to select a broker who has a strong understanding of property investment finance and the structures that support this. A good mortgage broker will take both your immediate situation and long-term property goals into account before recommending a lending solution to suit your needs.

Not understanding holding costs

Holding costs are a key financial obligation that many first-time buyers overlook when researching properties and lending solutions. As well as monthly mortgage repayments, buyers also need to consider additional expenses when it comes to assessing their financial limits, including costs such as property maintenance, land tax, energy bills and property insurance. Underestimating or failing to account for these holding costs before securing a loan is one of the most common factors that leads first-home buyers into debt, in many cases preventing them from moving forwards with their investment goals – or worse, forcing them into early sale.

As a buyer, it’s important to understand the difference between what you can borrow and what you can afford when selecting potential properties. By understanding your financial situation and the demands a specific property will place on this, you can ensure you’re not overextending yourself financially or researching properties outside your means.

Not reviewing your loan

Whilst you may have chosen the right loan for your circumstances when investing in your first property, this doesn’t necessarily mean this will always be the best lending solution available to you. In reality, your objectives, situation and (depending on your lending solution) the interest rates you receive will likely change over time. To ensure you’re still receiving the best rates and products for your circumstances, it’s really important to review your loan on a regular basis (preferably yearly) to ensure your lending solution continues to support your financial needs.

Download our Beginner’s Guide to Property Finance

If you would like to learn more about the steps and processes involved in securing property finance, our Beginner’s Guide to Property Finance covers a comprehensive range of topics and tips on how to maximise your finance opportunities as a property buyer. To find out more, fill out a form to receive your free guide today.

What type of property investor are you?

Every property investor is different, and it’s important to recognise that there is no single property investment strategy or investment type suited to everyone.

When building and expanding your property portfolio, you need to establish what it is you are aiming to achieve, and what it is you can feasibly achieve, to understand the right strategy and investment types to support this. Knowing your risk profile and understanding the limitations that accompany this is crucial to determining what type of investment suits you, as well as the results you can expect from your investment strategy. Here are a few essential points to consider to when determining the right type of investment for you.

Defining your risk profile

What are your property investment goals?

Before choosing the right type of investment for you, you first need to consider what it is you want to achieve from investing in property. In other words, what are you short and long-term goals? Are you hoping to get a steady income stream from your portfolio, or are you looking to achieve long-term growth? Outlining your objectives will help you build a clearer picture of the long-term plan you need to achieve your goals, helping to inform your investment decisions along the way.

Bear in mind that your property investment goals, and implicitly your risk profile, will likely depend on your financial situation and where you are in your investment journey. For instance, an investor who is at the beginning or peak of their investment journey is likely to have different goals than someone who is nearing retirement and perhaps seeking a steadier source of income to align with their cash flow needs.

How secure is your financial situation?

Your tolerance for risk and your ability to handle fluctuations in market conditions will depend heavily on your cash flow security and your financial situation. For example, an investor with a strong and stable source of income may be able to tolerate more risk and short-term losses than someone who has a more volatile source of income with low security. Similarly, an investor with low levels of debt and fewer obligations is likely to be able to cope with more risk (and have more borrowing power) than an investor with high levels of debt and multiple dependants.

How do you handle risk?

As well as outlining your investment goals, it’s also important to consider your tolerance for risk when determining the type of properties you’re suited to as an investor. Whilst high returns might be your ideal goal, you also need to consider whether you are willing to take on the risks that might accompany this investment strategy.

For instance, how would you react if your investments dropped in value? Are you willing to incur (and can you afford to take on) short-term losses for the prospect of high long-term returns? Or are you looking for reliable income, but willing to accept lower growth over time? By understanding your view on the relationship between risk and return, you can start to form a strategy that balances both your objectives and your needs as an investor.

Understanding your risk profile

• Conservative – Investors with a lower risk tolerance are more likely to take a conservative approach and invest in assets with lower volatility. These assets are more likely to maintain a steady value, but may not offer the same long-term prospects as higher growth options such as value add strategies.
• Balanced – Investors with a more moderate tolerance for risk are likely to invest in more growth options with moderate income potential. Investors adopting this strategy might take a more balanced approach to investment, offsetting the risk of high growth properties by maintaining some funds in income-producing assets.
• Aggressive – Those with a higher risk tolerance will generally take a more aggressive approach to property investment, focusing on high growth and value add strategies. This may include strategies such as property development and renovations, which focus on building equity and improving yields to allow for further investment. These strategies may present greater risk, but often with the potential for higher returns.

Getting professional advice

There are many different factors to take into consideration when developing an investment strategy, and whilst the above may give you an idea as to the strategy that might suit you, it’s important to seek professional advice when determining the right type of investment to fit your unique situation and goals. A professional buyer’s agent will be able to assess your personal circumstances, financial situation and long-term goals to help you identify a property investment strategy that supports your property objectives, whilst also aligning with your financial needs and tolerance for risk

If you would like to discuss your property needs with one of our experienced property experts, our Perth buyer’s agents at Momentum wealth would be happy to discuss your situation in an obligation-free consultation.

New strata laws passed through WA parliament

In the biggest reforms to WA’s strata legislation in over twenty years, new strata laws have been introduced that will impact the rules governing the termination of strata schemes in WA.

The Strata Titles Amendment Bill 2018 and the Community Titles Bill 2018 were passed through WA parliament in early November, and include a number of reforms aimed at improving the management and development of strata schemes. But what do the changes mean, and why are they being implemented?

What are the new strata reforms?

The new laws introduced under the Strata Titles Amendment Bill and the Community Titles Bill include a number of key reforms, including changes to legislation surrounding scheme management, rules to allow for faster and more flexible staged subdivisions, and the introduction of two new types of strata. However, the biggest reform to emerge from these reforms relates to the rules surrounding the termination of strata schemes.

Previously, a strata scheme could only be terminated and redeveloped with unanimous agreement from all owners within the scheme. However, under new legislation, a majority termination process has been implemented, whereby a scheme of five units or more can be terminated with the agreement of 80% of owners.

In order to safeguard owners and ensure all owners’ rights are taken into consideration, all termination proposals need to undergo a full review process by the State Administrative Tribunal (SAT), which will assess the benefits and drawbacks for related parties and ensure the termination process is correctly followed.

Why are the new strata rules being implemented?

There are a number of reasons driving the reforms to WA’s strata laws, but the overarching aim of the changes is to ensure strata laws remain aligned with the modern needs of WA communities and the State’s growing population.

In addition to providing better outcomes for property owners by implementing improved dispute resolution processes within strata schemes and setting out clearer obligations for strata managers, the reforms are intended to deliver new land development options to drive economic growth and facilitate WA’s expected population growth.

Given that the first strata schemes in WA were created over 50 years ago, the termination and redevelopment of these schemes is expected to become more commonplace. The new laws are designed to set out clearer and more transparent processes for the termination of these schemes, allowing for more straightforward redevelopment of aging strata properties. These changes could prove fundamental in supporting the gentrification of local areas and helping to facilitate better outcomes for future developments.

Momentum Wealth is a Perth-based property investment consultancy dedicated to helping investors accelerate their wealth through property. We have served investors for over 12 years, assisting clients in the research, financing, acquisition, development and management of their investment properties.

Five factors to consider when choosing a builder for your property development

Surrounding yourself with the right team is an important aspect of any property development, especially when it comes to selecting a builder for your project. Delays in construction timeframes, poor communication and low quality workmanship can all impact the profitability of your development, so it’s really important that you put careful consideration into the experts you choose to support your development strategy. Here are five key due diligence questions to ask when choosing a builder for your next development.

What projects does the builder specialise in?

The type of project you’re developing should be one of the main factors you take into account when choosing a builder. When it comes to selecting a company, make sure they have experience constructing similar property types to the development you have in mind. If you’re developing a single-storey house in a lower socio-economic area, for example, you will likely be choosing a different builder than if you were developing luxury apartments above 3 or 4 storeys in a high-end suburb. It’s really important that you choose the right builder for the type of project you’re developing, as this can have a huge implication on the quality and suitability of your end product.

What is the financial standing of the builder? 

Before contracting any builders, it’s important to check that your chosen company is financially viable. Selecting a builder with a poor financial standing could leave you in hot water should the company go into administration mid-way through a project, leading to delays in construction and potential loss of income.

To ensure the builder you select has a strong financial standing, get an insight into their financial position by asking for financial statements and researching independent credit reports. You may also want to visit their current building sites to speak to sub-contractors and ensure their current developments are well run. If a builder is consistently late in paying other contractors, this may be a sign that they are unreliable or in a poor position financially, which could lead to a compromise in the quality of your development.

How high is the quality of their finished projects?

Whilst experience can tell you a lot about a builder, nothing will tell you more about their commitment to quality than viewing one of their projects in person. As you progress through discussions with a potential builder, it’s always a good idea to conduct a walk-through of one of their recently completed projects to assess the quality of their workmanship and the level of finish. If the builder is confident in their previous work, they should be happy to show you around a completed development. This is also a good occasion to ask the builder any additional questions regarding build contract price and project timeframe to help you reach a decision.

What are their contractual conditions?

Whilst price will inevitably be a key consideration when selecting and negotiating your contract with a builder, it’s also important to consider the clauses contained in the contract itself. There are various different contracts that builders and developers use in Australia, and you need to ensure that these conditions are favourable to you as a developer. For instance, will the builder allow you to include clauses for penalties should they not complete construction on time? And what are the specific conditions surrounding the calculations of time extensions? Remember – the cheapest builder doesn’t always translate into the highest quality work, so it’s important to take all aspects of the contract into consideration.

What do previous clients say about them?

As well as speaking to sub-contractors involved in existing projects, a great way to gain insight into the reliability and quality of a builder is by speaking to clients who have dealt with them directly in the past. Delays in communication could set your project back considerably and cause delays in construction timeframes, so speaking to previous clients is a good way to find out how effective the builder is at communicating and keeping to project deadlines. If this option isn’t available, ask whether your chosen builder has any client reviews or testimonials from clients they have worked for in the past.

Mitigate risks with professional project management

Choosing a builder is just one of the many factors you will need to consider when completing a property development project. In reality, a huge amount of due diligence, research and planning goes into a successful property development, and even a small oversight during these stages could have a detrimental impact on your bottom line. In these cases, having an experienced development management team to oversee your project and identify the right professionals on your behalf could be fundamental in helping you mitigate risk and capitalise on the potential profit of your development.

If you would like to speak to our Perth development team about an upcoming project, contact our team today to organise an obligation-free consultation.

The common mistakes investors make during property negotiations

Negotiating is one of the fundamental aspects of property investment, but it’s also the one aspect that many investors dread. Strong negotiating can be crucial to maximising your profit; however, it’s also an easy process to get wrong, especially when you’re negotiating against a selling agent whose very job is to represent vendors on a regular basis. So what are the key mistakes to avoid during property negotiations?

Not knowing what the property is worth

Arguably the most important bargaining chip you can have when entering property negotiations is knowing the worth of the property you are investing in. This will form the fundamental starting point of your negotiation strategy by helping you determine what you should offer for the property (and the maximum you are willing to pay).

In addition to preventing you from overpaying for a property that won’t pay you back in profit, knowing an asset’s value can be key to helping you identify high potential opportunities when they arise. If, for example, you know a property is listed on the market significantly below value, this knowledge will put you in a stronger position to make a competitive offer on the property, in turn increasing your potential for success during negotiations. This can be especially important in a moving market when prices are fluctuating regularly, as even the most recent sales evidence may not reflect current market conditions.  In addition to thorough research into comparable properties and the local market, having a property expert appraise the property to assess its worth could be key to giving you the confidence and knowledge you need to leverage a profitable investment opportunity.

Letting emotions drive your buying decision

“Emotional buying” is usually associated with home buyers purchasing a property to live in; however, a surprising number of investors also let their emotions dictate their actions during property negotiations, and end up paying more than a property is worth as a result. This is often the case with properties that are attracting high levels of interest from prospective buyers.

Whilst emotions are an inevitable part of the buying process, it’s really important to assess a property objectively and remain level-headed during negotiations. Most importantly, however, you need to know when to walk away from a deal and look elsewhere. One of the ways you can reduce this emotional investment is to research the market and have alternative properties in mind as a secondary option. However, if you know keeping emotions out of your investment decision is not your strong point, you may want to consider enlisting the help of an experienced buyer’s agent to handle the negotiations on your behalf.

Giving your cards away too early

The key to being a good negotiator in any situation is being able to understand and leverage the motivations and needs of the opposing party. In property negotiations, however, it’s also about keeping your own cards close to your chest. If the selling agent knows you are only interested in that particular property, or that you are emotionally invested in the asset, they will often leverage this to secure a higher offer. Divulging your motivations early in the process could therefore significantly reduce your bargaining power moving forward.

On the other hand, knowing a seller’s motivations during property negotiations can give you a fundamental advantage when it comes to negotiating the price of a property. Have they already bought another property? Has the property been on the market for a significant length of time? Or do they need to sell the property by a certain date? Whilst this will ultimately depend on what the selling agent is willing to disclose, this information could be key to shaping your negotiation strategy and helping you secure the best deal possible on the property.

Don’t get caught – consider engaging a buyer’s agent

If you’re not confident in property negotiations or don’t have the experience and knowledge of the market to support your investment decisions, you may want to consider engaging a professional. A buyer’s agent can research properties and negotiate the purchase process on your behalf, with the benefit of local agent knowledge and ongoing experience in the property market. Having access to this objective and informed third party can give you a huge advantage during the negotiation process, helping you to avoid costly mistakes and make the most of opportunities for profit.

At Momentum Wealth, our Perth buyer’s agents have been helping investors grow their wealth through property investment for over twelve years. If you are planning to purchase a property or expand your existing portfolio, our property acquisition specialists would be happy to discuss your needs in an obligation-free consultation.

Split loans: the best of both worlds?

One of the key decisions investors will need to make when purchasing a property and applying for a new loan is whether to opt for a fixed or variable interest rate. However, an alternative option that property investors sometimes take when seeking to reduce their risk or capitalise on the benefits of both options is splitting their loan into separate components.

As the name suggests, split loans allow investors to separate their loan into different loan accounts, with most investors typically opting to fix interest rates on one portion of the loan whilst leaving the other component variable. So what are the potential benefits of this strategy?

The benefits of split loans

Security – Whilst the fixed portion of the loan allows investors to manage the risk of increases to interest rates, the variable component of the loan also enables them to take advantage of rate cuts should interest rates with their lender actually decrease. This can be particularly useful in times of economic uncertainty or volatility in the lending environment, as it allows investors to minimise the impact of rate fluctuations that work against their favour.

Flexibility with repayments – One of the drawbacks of opting for a fixed loan over a variable interest rate is the reduced flexibility this gives investors when it comes to making additional repayments. Many lenders will limit the number of extra repayments you can make on fixed rate loans, which can be a problem for investors looking to pay off their loan faster. By opting for a split loan, investors will have the flexibility to make additional repayments on the variable component, which can be an ideal solution for investors looking to be more effective with their repayments without fully compromising the stability of a consistent interest rate.

Additional features – By having a variable component in their loan, investors may also be able take advantage of additional features such as offset accounts and redraw facilities to help them better manage their mortgage repayments and pay their loan down faster. These features often aren’t accessible for investors with a loan that is fully fixed.

The drawback of split loans

Before applying for a split mortgage, it’s also important to understand the implications and potential drawbacks of splitting your loan. For example, if interest rates were to rise but part of your loan remained variable, you would be partially impacted by the fluctuations and would miss out on the potential savings you could have made by fixing your entire loan. Similarly, if interest rates decreased and part of your loan was fixed, you also wouldn’t be able to take full advantage of the lower rates available through the variable component. The case study below demonstrates how this scenario could work.

Case study – As an example, a borrower takes out a $400,000 loan over a 30-year term. They fix three quarters of the loan at 3.95% for two years, keeping the remaining $100,000 variable at 3.80%. In this scenario, their fixed monthly repayments would be $1,423 per month, and their variable repayments would be $465 per month, bringing their total monthly repayments to $1888.

If the lender were to increase their variable rate by 20 basis points to 4%, the borrower’s total monthly repayments would increase to $1,900, marking an increase of $12 per month. In this instance, if the borrower had opted to make the entire loan variable rather than split the loan, their total monthly repayments would have increased from $1, 863 to $1,909, marking a higher increase of $46 per month.  

If, on the other hand, the variable rate was actually to decrease by 20 basis points to 3.60%, the total repayments in the split loan scenario would decrease to $1,877, saving the investor $11 per month. In this case, if the whole loan was variable, the repayments would have decreased to $1,818 per month. Whilst the variable loan would have provided the investor with the lowest repayments in this situation, this scenario is wholly dependent on interest rates decreasing, which is extremely hard to predict as an investor.

Choosing the right option

Deciding whether a split loan is suitable in any given scenario will ultimately depend on your needs and objectives as an investor. Before deciding which option to take, it’s important to speak to a professional mortgage broker who can help you understand the potential risks and benefits of each option to ensure you’re making the best decision for your individual situation.

If you’re applying for a property loan and would like professional advice on the best option for your circumstances, our finance brokers would be happy to discuss your needs in an obligation-free consultation.

Six essential questions to ask before investing in a property development syndicate

Property development syndicates are gaining increased popularity amongst investors looking to diversify their investment portfolio and access large-scale development projects without the time and costs involved in developing an entire project themselves. However, investing in a syndicate can be a daunting and potentially risky process when you don’t know what to look for in a high quality investment. Here are six essential questions you should be asking to mitigate risk and identify a syndicate that suits your investment strategy.

Does the development syndicate match your risk profile?

If you’re considering investing in a property development syndicate, the first thing you will need to ask yourself is whether the syndicate aligns with your risk profile and investment property strategy. As opposed to yield-based commercial property syndicates, which tend to be suited to investors seeking a passive income stream, property development syndicates typically focus on generating higher profits within a shorter timeframe through capital growth and value-add strategies. Rather than receiving regular income distributions, investors will generally receive a final distribution upon the completion and sale of the development project, and will therefore need to factor this into their overall finance strategy. These syndicates are typically higher risk, but with the right management and strategy in place, can also offer significant rewards for investors seeking to build wealth quickly.

What size is the syndicate?

Another key factor that can determine the risk of syndicated investments is the size and scale of the syndicate itself. Most development syndicates will need to secure a certain number of pre-sales before construction can go ahead, with the target pre-sales generally being higher with larger developments. This can lead to longer wait times before construction, during which time the project will be exposed to market fluctuations. This is something you will want to bear in mind when researching different property syndicates to ensure the project aligns with your expectations and financial strategy.

How experienced is the syndicate management team?

A key due diligence question you should be asking before investing in any type of syndicate is whether the syndicate management team have experience in similar projects. For instance, what properties have they already got in their portfolio? And have their past projects generated successful outcomes? The syndicate management team will be responsible for everything from initial site research to acquisition and management of the development project, and will therefore play a fundamental role in the success of the syndicate. As an investor, it’s vital to do your own research to ensure the development project is in the best hands possible. As a rule of thumb, it’s always a positive sign if the syndicate promoters have their own capital invested in the development and are personally tied to its success.

What additional fees are involved in the investment?

When it comes to budgeting for a syndicated investment, one of the fundamental things you will need to know as an investor is the fees involved. Whilst almost every syndicate will require capital to cover capital raising fees, marketing fees and management, it’s important to note that not all developers are equal, and some will charge significantly more than others. When researching different projects, this is something you may want to ask the syndicate management team to ensure you are making a worthwhile (and most importantly, profitable) investment.

What is the strategy behind the property development syndicate?

Another fundamental element that will determine the success of any property development syndicate is the strategy behind the project. This is a crucial due diligence question you should be asking the syndicate managers before making your investment decision, as getting the end-product wrong can have a hugely detrimental impact on the overall returns of the development. Who will the development be targeting? Are there strong current and future demand drivers in place in the local market? Does the property type and size appeal to the project’s target demographic? And are there any future supply threats from competitor developments? These questions will help you determine whether the syndicate management team have completed thorough research and developed a strong investment strategy to support the success of the development.

Have thorough due diligence checks been performed?

In addition to researching the strategy behind the development, one of the fundamental questions you should be asking as an investor is whether the syndicate management team have completed thorough due diligence checks to assess the feasibility and profitability of the project. Failure to notice obstacles and warning signs early on, such as limestone underground that will hinder construction works or easements on titles, can be incredibly costly to fix further down the line, significantly reducing the overall profit from the project and leading to lower returns for investors. Even less tangible factors such as community opposition to a development can be accounted for and mitigated with the right due diligence and strategy up front. Before investing in a property development syndicate, make sure the management team have conducted comprehensive feasibility checks and consolidated prices to ensure you’re not met with any nasty surprises on completion of the development.

If you are considering investing in a property development syndicate and would like to learn more about opportunities for investment with Momentum Wealth, please request a consultation or contact Momentum Wealth’s Key Relationship Manager, Brad Dunn, on 0424 138 044. 

5 finance mistakes that can limit your borrowing capacity

When building a property portfolio, most investors will focus on the need to identify properties with high growth potential. However, your property portfolio will be hindered from the outset if you can’t get the funds to finance your investment journey.

Choosing the right financial structures and taking the right steps towards preparing your finances can be critical to achieving your long-term property goals, and failure to do so could severely restrict your ability to move forwards with your investment plans. Here are five common finance mistakes that can limit your borrowing capacity.

Cross-collateralisation

Cross-collateralisation is where a lender uses more than one property as collateral to secure a loan. This is a common practise amongst banks looking to maximise their security; however, unbeknownst to many investors, this set-up can also have critical implications on your future borrowing capacity.

As your debt levels increase with your chosen lender, many banks will restrict your product choice or even stop lending to you altogether due to increased risk. Unfortunately, the likelihood is that you would then also be unable to secure a loan from a different lender due to the lack of property titles available as security, meaning you may then need to refinance your loans to switch lenders.

In addition, crossing your loans could also restrict your ability to leverage equity from your portfolio for future investment purposes. For example, if one of your properties increased in value but the others had decreased, the equity from the first property would be inaccessible due to the value of the portfolio as a whole. To avoid these issues and maximise your potential borrowing capacity, it’s better to take out separate loans for each new property from an established line of credit, using multiple lenders where possible to maximise your product choice.

Choosing the wrong ownership structures

When it comes to applying for a loan, it’s really important to choose an ownership structure that aligns with your property investment plans. Choosing the wrong structure can have vital implications on your ability to achieve your goals, and it can also be an expensive mistake to fix retrospectively.

For instance, whilst buying property via a trust may be useful for asset protection, this ownership structure can also limit your future borrowing capacity due to the tax implications involved, with many lenders not allowing negative gearing claims for loan serviceability. Similarly, a lot of lenders won’t allow you to borrow through a Self-Managed Super Fund. After speaking to your accountant about the best structure to suit your situation, you will need to talk to your mortgage broker about whether you can actually get funding with that ownership structure, ensuring you understand the future implications this could have on your borrowing capacity.

Not understanding joint and several liability loans

Joint loans and several liability loans can be a useful option for borrowers looking to increase their serviceability, but it’s also important to understand the potential implications of these products. When borrowing jointly with another party, you will each be individually responsible for the debt (in most cases, 100% of it), but lenders will only take into account half the rental income when assessing your serviceability in future. This can impact your borrowing capacity should you wish to invest in another property outside of the joint purchase.

However, bear in mind that individual lenders will often assess this differently, and speak to a mortgage broker with a knowledge of property investment to ensure you understand the full implications of your chosen lending product.

Taking on too much debt

When determining your eligibility for a lending product, lenders will calculate your debt-to-income ratio to assess your ability to service the loan. One of the key mistakes that can therefore significantly limit your borrowing capacity as an investor is taking on too much unnecessary debt and expenses.

A key factor that often catches investors out here is their credit card limit. Banks will consider credit card limits as debt, and will take a monthly liability to mitigate their risk in lending to you. This can impact your perceived serviceability, and therefore limit your potential borrowing power.

When taking on additional overheads or applying for a personal loan, make sure you understand how these additional debts and expenses could impact your future eligibility for an investment property loan. If serviceability is becoming a problem, you may need to consider cutting back on unused credit cards and paying down existing debts to improve your potential borrowing power.

Making too many loan enquiries

Another fundamental finance mistake that a lot of investors make is submitting too many credit enquiries. Many borrowers don’t realise that these enquiries will be recorded in their credit report, which can then be viewed negatively by future lenders and adversely impact your eligibility for a further loan.

A lot of banks will often be reluctant to lend money to you if they see you have made multiple credit enquiries in a short time period.  If you’re thinking about applying for finance, consider speaking to your mortgage broker first to carry out a pre-approval and assess the likelihood of qualifying for the loan.

Maximising your borrowing potential

With banks tightening their lending criteria in light of recent movements in Australia’s lending environment, it’s never been more important for investors to understand the factors that can impact their borrowing capacity.

Preparing your finances early and seeking the advice of a specialist mortgage broker who understands the structures and steps that support your long-term investment is fundamental for those looking to make the most out of their investment journey.

If you are looking to secure finance for your next property or would like to discuss how recent changes to the lending environment could impact you as an investor, Momentum Wealth’s mortgage brokers would be happy to discuss your situation in an obligation-free consultation.

Did you know credit reporting is changing?

Did you know credit reporting in Australia is changing? If not, you’re not alone. Despite new credit reporting rules coming into force in July 2018, the vast majority of Australians remain unaware of these changes and how they will impact their potential borrowing capacity.

The new move towards comprehensive credit reporting, now compulsory amongst major lenders, will see more data being included on credit reports, and will likely have a significant impact on investors’ credit scores. But what do these changes mean? And is comprehensive credit reporting a good or bad thing for investors?

What’s changing?

Comprehensive credit reporting, also known as ‘positive credit reporting’, has been in play in Australia since 2014, but has (up until now) remained voluntary. Whilst remaining an opt-in process for some lenders, as of 1^st July 2018, comprehensive reporting became mandatory for the Big Four banks. The major lenders were given 90 days to supply 50% of comprehensive credit data to credit bureaus, with the further 50% to be supplied by 1^st July 2019. But what exactly is comprehensive credit reporting?

The move towards comprehensive credit reporting will see lenders provide more consumer credit information to credit reporting bodies. Under the previous negative reporting system, consumer credit reports would only include information such as previous enquiries for credit products and defaults on payments 60 days or more overdue. However, under the new system, credit reports will now include up to 24 months of additional repayment information, including repayments (made or missed) on credit cards, personal loans and mortgages. Other information included in the comprehensive reports includes:

• When a credit account was opened or closed
• The type of account held
• The credit limits of the accounts
• Up to 24 months of repayment history

How will these changes impact investors?

The inclusion of this additional data isn’t necessarily a bad thing for borrowers. In fact, for those who make repayments on time, comprehensive credit reporting is likely to be a good thing, as it provides a means for borrowers to build a strong credit score and show their positive repayment history. This could ultimately provide borrowers with better credit opportunities and could be especially beneficial for first-home buyers who were previously unable to show their creditworthiness.

Having said this, borrowers also need to be aware of how these changes could negatively impact them. Whilst previous reports would only include information regarding serious infringements such as defaults or bankruptcies, the new inclusion of an individual’s comprehensive repayment history could see those who miss repayments suffer from lower credit scores. Some of the factors that may decrease your credit score include:

• Not making minimum credit card payments on your credit card
• Late payments on credit cards, personal loans and mortgage of 14 days or more (note: this doesn’t apply for utility bills)
• Defaults overdue by 60 days or more
• Submitting multiple loan applications/enquiries

What can you do to protect your credit score?

Whilst the full effects of comprehensive credit reporting are yet to be realised in Australia, the changes have raised increased speculation as to the potential for a move towards risk-based pricing from lenders. Although this is yet to be seen, borrowers looking to benefit from changes to the credit reporting environment will need to take steps towards improving and protecting their credit position sooner rather than later. Now more than ever, it’s important for aspiring investors and borrowers to make their repayments on time and remain up-to-date with the factors that could influence their credit score. Those who do this could be in a significantly better credit position when it comes to applying for a loan in future.

In light of recent changes to credit reporting, our finance specialists will be offering an obligation-free consultation for investors looking to learn more about  their credit position. As part of this advice-driven service, our mortgage brokers will run your comprehensive credit report and help you analyse your results, offering key advice on how to maximize your borrowing capacity prior to applying for a loan.

Case study: the risks of cross-collateralisation

When it comes to growing their property investment portfolio, the majority of investors will look to leverage the equity from their current properties to fund the next step in their investment journey. What many investors don’t realise, however, is that the structure of their existing loans can have critical implications on their ability to do this.

Unfortunately, lenders will often look to structure loans in a way that is favourable to them as opposed to the borrower. In many cases, this often leads to a problem known as cross-collateralisation, whereby one or more existing properties are used as security for a loan. Whilst favourable for banks looking to minimise their own risk, this structure can lead to a number of issues for investors and their long-term goals.

In our latest case study, we highlight some of the key risks and restrictions associated with cross-collateralisation.

The problem

Prior to enlisting Momentum Wealth, the client had approached his bank directly to arrange loans for three properties – his home and two investment properties. When structuring the client’s portfolio, the bank had used the investor’s home as security for both investment properties under an overarching loan amount of $600,000. Unbeknownst to the client, this was about to pose a significant issue for his future plans.

Despite the fact the investor was able to pay off the mortgage on his own residence, this structure meant his home title remain tied up with his other investments. With his home used as security for his investment properties, the investor was running the unnecessary risk of forced sale or repossession of his main residence should he fall into debt and be unable to make his loan repayments.

Further to this, when the investor attempted to withdraw equity to purchase another property, he discovered he was unable to do so. Although he had the required capital to fund a further purchase, his equity was trapped in the complex loan structure, leaving him unable to borrow from the bank for his next investment.

The solution

Faced with this dilemma, the investor approach Momentum Wealth in search for a solution that would offer the security and flexibility he needed to progress in his investment journey.

By refinancing the loan, we were able to uncross and re-structure the client’s portfolio. Instead of using the investor’s home as collateral, our finance brokers set up two separate $300,000 loans against each specific investment property. This freed up the client’s home title and enabled the investor to access the equity he needed for his next investment property. Through doing this, we were also able to identify a more competitive interest rate for the client, saving him over 1% in interest.

The importance of loan structure

As an investor, it’s important to be aware of how the structure of your loan can impact your long-term investment plans and risk exposure. Having the right structure in place can be critical in giving you the flexibility and security you need to achieve your long-term investment goals, but it also holds fundamental implications for the protection of your existing assets. In today’s complex lending environment, especially, this is why it’s more important than ever to find a finance specialist with an understanding of your property investment goals and the structures that support this.

If you’re experiencing problems with your current lending solution or would like advice on financing your next property, our finance specialists would be happy to discuss your needs in an obligation-free consultation.

Is refinancing the right strategy for you?

As an investor or home buyer, choosing the right loan product can be crucial to your financial security and long-term investment plans. However, the lending environment and your own financial situation can also change over time, which means your original loan may not always support your ongoing needs. In these situations, many investors will consider refinancing their loan to achieve a better rate or gain access to products that better suit their circumstances. However, this strategy can also carry significant risk for those who don’t understand the costs and implications involved. So, when should you think about refinancing? And what are the factors you need to consider before doing so?

Why refinance?

Better rates elsewhere – The lending environment is highly competitive and will often fluctuate with changes in market conditions and lender’s policies. This means that what might seem like a good rate today won’t necessarily be the best interest rate for you in future. Many investors will choose to refinance when there are lower interest rates available with another lender. In addition to reducing monthly repayments, this could ultimately help you pay off your home or investment loan sooner. In addition, refinancing may enable you to access a greater range of features and add-ons, such as redraw facilities and flexible repayment plans. Reviewing your loans every twelve months, or when there are considerable changes in the lending environment, can help you ensure you are still receiving the best rates and products for your circumstances.

To leverage equity – Another reason investors might choose to refinance is to access the equity they need to progress in their investment journey. If you are planning to renovate or want to expand your portfolio by investing in another property, you will no doubt need to borrow more money to do so. If you’ve paid off some of your existing loan and your property has increased in value, refinancing may enable you to access the equity you need (and therefore borrow the money you need) to take the next step towards your long-term investment goals.

Your circumstances have changed – As an investor or home buyer, it’s important to ensure you choose the right lending solution to suit your situation. However, your situation can also change over time. If you are expecting a change that will have a significant impact on your cash flow, such as a drop in income at work or a reduction in household earnings due to pregnancy, you may need to re-address your financial situation to ensure you can continue to make repayments. If cash flow is a concern, refinancing may enable you to access a rate or lending product that is more suited to your current circumstances. For instance, if you require stability of repayments due to temporary life changes, switching to a fixed-rate loan could give you access to a more predictable repayment plan.

To consolidate debt – Some investors will choose to refinance their loan as a means of consolidating other debts such as personal loans and credit cards into one facility. This can benefit investors who are struggling with large interest repayments by potentially enabling them to bring together their debts and access lower interest rates to reduce their overall monthly repayments. However, since home or property investment loans typically have longer terms, you will also need to ensure the benefits of this outweigh your long-term costs by making additional repayments as quickly as possible.

To extend interest-only periods – With recent changes in the lending environment triggered by APRA regulations and the scrutiny of the Banking Royal Commission, some investors are finding it difficult to re-extend interest-only periods on their loan. If you’ve been unable to do this with your current lender after re-assessment of your situation (now standard practice amongst most lenders), you may be able to refinance to another lender. However, it’s important to remember that each lender will have their own unique policies, meaning your eligibility for certain products can differ vastly between different banks. To avoid submitting multiple enquiries, which could have a negative impact on your credit score, speak to a broker with an in-depth knowledge of different lender’s products and policies to help you identify the right product for your situation.

Consider the risks

Before making the decision to refinance your loan, there are also some key factors you need to take into consideration. Most importantly – will the savings you make outweigh the costs involved? Although refinancing may help you access a better interest rate, you will also need to consider upfront costs such as exit fees loan, loan establishment fees, break costs (for fixed rate loans) and, should you need to borrow more than 80% of the property’s value, Lender’s Mortgage Insurance. If your projected profit doesn’t exceed your potential losses, you will need to reconsider your strategy.

In addition, you also need to remember that property appraisals are an inevitable part of refinancing. Afterall, lenders will need to know your property’s worth before issuing a new loan. This is where it’s really important to get your property professionally appraised prior to submitting a new loan application, or to work with a broker who has access to these valuations. If your property has reduced in value, this will have a significant impact on your ability to access better terms on your new mortgage, and your broker may recommend against refinancing.

If you’re thinking about refinancing but don’t know whether this strategy is right for you, our specialist mortgage brokers would be happy to conduct a complimentary review of your existing loans in an obligation-free consultation.

MPF Diversified Fund No.2 open for investment

Mair Property Funds has opened our latest fund for new investment.

MPF Diversified Fund No. 2, which currently comprises three well-leased commercial assets, is structured to acquire a diverse range of commercial properties across multiple states, including industrial facilities, large format retail, offices and medical centres.

The fund follows the success of our raising for MPS Diversified Property Trust No.1, which closed in September 2017 after unprecedented levels of investor demand.

Mair Property Fund’s Managing Director, David Ellwood, says the success of the fund provides a strong reflection of the growing demand for commercial property trusts amongst investors.

“We are seeing increased enquiries from savvy investors looking to diversify their property investment portfolio into different asset types and locations”

“The lower capital required to invest in commercial property trusts, as well as the higher yields typically associated with commercial assets, are providing a  strong incentive for investors looking to reduce their risk whilst benefiting from a passive income stream,” he said.

MPF Diversified Fund No.2 is projecting initial income distributions of 7.5% for the first year, with average projected distributions forecasted at 8% per annum or more over a five-year period.

To commence the portfolio, we have purchased three assets, including a large format retail asset tenanted by a national liquor franchise, a new industrial facility based in Queensland, and a Brisbane-based medical laboratory tenanted to specialised medical equipment manufacturer, Aim Lab Automation Technologies.

The assets are 100% leased and offer a WALE of seven years, with minimum investment for the fund starting at $50,000.

Mr Ellwood says he is confident the assets offer strong criteria for long-term success.

“Our asset selection process has been heavily focused around targeting stable, high-quality assets with long-term potential for income growth”

“With strong tenancies in place across the first three properties, as well as the diversity of the tenancy mix and asset types, we are confident these properties are well-positioned to perform and deliver strong investment returns,” he said.

We are now actively seeking further assets to incorporate into the fund, with the aim to build a portfolio up to a total value of circa $60M.