How to finance multiple investment properties in today’s market
The other week, I came across an article which confirmed a suspicion I've had what many investors may be going through with their home loans right now...
Written by business reporter Stephen Letts for the ABC news site, he referenced mortgage comparison website Mozo who found that, “Mortgage holders who borrowed near their limit in recent years where finding it increasingly difficult to refinance their loans and were “trapped” with their current lender.”
This is exactly what I’m seeing when I talk to new clients as well. In particular, for investors who have two or more investment properties. When APRA brought in their changes in late 2014, I would estimate that people’s borrowing capacities dropped around 40% overnight.
Where people are finding it most difficult is when their interest only loans expire and they are forced to move onto P&I repayments. To give an example, let’s say you’ve got three investment loans with interest only repayments. It may look something like this:
You then found out from your bank that the interest only period was expiring on all three loans. When you asked them to extend the interest only period for another five years, your bank said no as you failed their new serviceability criteria. This would mean that all three loans would switch to P&I repayments over a 25-year loan term:
That’s a difference of $1,650/m and for many investors, this would cause too much of a strain on their cash flow.
So knowing where we are right now, what can you do in the current market to continue to grow your investment portfolio without being hemorrhaged from the banks? Here are three things you should consider:
1. Obtain loans from different lenders
This is something that mortgage brokers have known for many years but is highlighted more in the current market. Staying with the same bank will allow you to negotiate the cheapest interest rate as the larger your loan, the stronger your ability to negotiate. However, at the same time, this will severely limit your borrowing capacity.
You see, different banks have different policies, which can change your borrowing capacity substantially. In particular in this current market, what I’m seeing are lenders changing their offerings to create niche policies in order to gain market share rather than simply dropping their rate. With cost of bank funding continually increasing, I think we’re going to see more of this over the coming months.
2. Take a blended approach with your repayments
Before APRA imposed their changes on the market, I think it’s fair to say that most of us were pretty lazy with our approach to structuring our home loans. The majority of us simply made our owner-occupied loan repayments P&I but left all investment loans interest only as we are able to claim a tax deduction against them.
Quite rightly, APRA have forced us to ask the question, when are we going to pay these debts off? And it’s true that the whole point of purchasing an investment property is for the rent to assist with funding our retirement.
As such, moving forward, it makes sense to stagger your repayments so that you have some loans with P&I repayments from day one. For your other loans that are interest only, make sure they expire at different dates so you don’t have such a sudden increase to your overall loan repayments.
3. Look to purchase a combination of high growth and high yield properties
Think strategically about making sure the type of investment assets you purchase match your family’s cash flow requirements. To me, it makes sense that for your investment loans that have P&I repayments, you might want to consider attaching them with properties that are going to give you a stronger yield, such as dual occupancy.
There is no doubt we are looking at a market that is going to be very different to what we have seen over the past few years. But like all things in life, change is inevitable and those that adapt and accept the new conditions will prosper.