Looking beyond interest rates: are cheaper rates always the right option?
With recent RBA cuts taking the official cash rate in Australia to its lowest level on record, the allure of cheaper interest rates is inevitably at the forefront of mind for many investors.
Whilst this low interest rate environment is presenting a prime opportunity for borrowers to review their existing lending solution or secure better rates on new loans, it’s also an important time to remember that rates alone shouldn’t form the sole basis of comparison when choosing a loan.
Of course, favourable rates are an important factor in maximising interest savings, but when you’re looking to build your portfolio in particularly, overlooking other features that could bring benefits to your property strategy could also be equally costly to your long-term plans. So what are the other aspects you need to factor in when choosing a loan?
What are the lender’s policies?
Each lender has their own individual policies and methods when it comes to calculating and assessing a borrower’s eligibility, so before even applying for a loan and comparing rates, investors should first and foremost be considering how these policies fit in with their own needs and situation.
As an example, some lenders have strict policies around contract work when assessing income, and may require further information such as the length of time between different contract periods or the duration of the contract itself when assessing a borrower’s eligibility. Similarly, some lenders will look less favourably on self-employed or part-time roles, or may not even lend at all to borrowers that they deem higher risk such as employees who are still in probation periods.
Looking into these policies before you apply for pre-approval or submit a loan application is crucial in avoiding rejected applications which could affect your credit history and raise red flags with lenders who would otherwise be comfortable in lending to you.
Does the loan have the right features to support your needs?
If you’re looking to make multiple property purchases in future, your needs will likely expand far beyond rates alone to the specific features and flexibility that different loans offer.
Many investors will use features such as additional repayment facilities or offset accounts to reduce the amount of interest they pay across the life of the loan and minimise their debt faster. Whilst a basic lending product without these features might offer a cheaper interest rate in the short-term, someone who needs the flexibility of these features may actually be better off (both financially and strategically) in the long run opting for a more advanced product with a higher rate.
The potential tax implications of these different features are also important to understand when applying for loans. With redraw facilities, for example, there may be tax implications should you later decide to withdraw these funds for other purposes not related to the property, which may impact your ability to claim certain tax deductions.
What other fees are associated with establishing the loan?
Interest rates are inevitably a big factor in determining how much you pay over the life of the loan, but they also aren’t the only cost associated with mortgages. Whilst many borrowers will primarily focus on rates, application costs, annual lending fees and exit fees should also be factored into your decision when determining which lending product is going to be most cost effective. For example, if your strategy is to sell the property in the near future, it may be more cost effective in the long run to pay higher interest rates but with lower application and exit costs.
Fixed, split or variable: which option is right for your financial objectives?
Choosing whether to fix your loan is another important decision you will need to make when selecting lending products. This will again come down to your individual needs and financial capacity. For instance, are you anticipating a change in income or on a strict budget which requires consistency of repayments in the short-term?
Alternatively, do you plan on withdrawing equity in the near future to purchase another property? If you fix rates but then need to release equity before the end of the fixed term, you may be required to pay hefty break costs which could outweigh the money you save by opting for the cheaper rate in the first place. Whichever option you choose, it’s important to understand the implications so that you know you’re making the right decision to support your future plans.
Does the loan suit your property strategy?
Your property strategy itself should also form an important basis for the loan and lender you choose. If you have intentions to subdivide or develop the property in future, you will want to know ahead of time that your lender is going to support this. Policies around subdivisions and developments can vary from lender to lender, but the last thing you want is to have to pay unnecessary refinancing costs to move to a different bank because your current lender doesn’t support your strategy.
Looking beyond rates
Interest rates are undoubtedly an important element to consider when reviewing or applying for a loan. However, factors such as loan features, fees and (most importantly) your own investment objectives can play an equally important role in determining the right product for your unique circumstances.
With so many different aspects to consider, speaking to an experienced broker who understands your situation, your goals and the products most suited to your needs as an investor can be crucial to securing a lending solution that offers the benefits and flexibility you need to progress with your property portfolio.
If you are looking to secure finance for your next investment or would like a complimentary review of your existing lending portfolio from our specialist mortgage brokers, request an obligation-free consultation with one of our team via the Momentum Wealth website.