What property investors need to know about online home loans
These days it seems you can get almost anything online, from the latest gadgets to this season’s must-have fashion accessory. And now you can even pick yourself up a home loan.
Online home loans have been around for a few years now but it’s only recently that borrowers have started to take notice of them. With low rates, minimal fees and the apparent convenience of an online application process, it’s easy to see how these products could be so eye-catching.
Online home loans seem to have many of the features of regular home loans, such as the ability to make additional repayments or pay interest only, but there are a number of potential drawbacks that borrowers – especially investors – need to be aware of.
Let’s start off with a biggie. The reason some people have been attracted to these loans is because of the cheap rate offered. Often when businesses try to build market share they offer discounts for a while. However when you read the fine print of most lender loan contracts, the lenders can effectively change interest rates to whatever they want when they want. You might put in a lot of work and effort only to find that your rate ends up being the same as everyone else’s. Unless a on-line lender is willing to put in writing a guarantee to you that they will always be cheaper than everyone else and will compensate you if they aren’t then the allure of the cheap rate may fade quickly.
To build a property portfolio requires proper credit advice on how to structure your loans and which lenders are most suitable to help you achieve your goals. An on-line lender will only be offering their own products which means the products from other lenders in the market won’t be considered. Also its likely that on-line lenders will not tell you how to structure loans which is the advice an investor needs to build their property portfolio. A professional Broker who is experienced in dealing with investors is able to access a wide variety of lenders and give you the structuring advice you need to build your property portfolio.
Online home loans typically don’t offer offset accounts, which are one of my favourite loan features. Offset accounts allow you to use any cash you have available to offset the interest on your loan, while giving you easy access to your money. Disciplined borrowers who funnel all their money, such as their wages and rental income, into an offset account can end up saving tens of thousands of dollars of interest over the period of the loan (you can read more about offset accounts later in our newsletter).
Many online home loans do offer a redraw facility, allowing you to redraw any additional repayments you have made. However, a redraw facility, unlike an offset account can cause problems when it comes time to submit a tax return. If you are redrawing money from an investment loan and using it for personal use (e.g. paying your phone or credit card bill, buying a car) you can jeopardise the deductibility of your interest payments. With regular use of a redraw facility, you could find that a large amount of interest you are paying on your investment loan is no longer tax deductible.
An offset account offers a much cleaner solution for investors who use their money for both investment and personal use. The money in an offset account can be used for any purpose without affecting the deductibility of the interest paid on the investment loan it is attached to.
With redraw facilities it can take 2-3 days for money to be made available, whereas an offset account is like an everyday transaction account with instant access to your money via an ATM card or the web.
Another drawback of online home loans is that you have to do a lot of the research yourself. Home loans are complex products and, although there is an abundance of information out there, few people would be confident to do their own detailed comparison. Some online home loans do offer telephone hotlines and access to online manuals and FAQ pages, but these can only be of certain help and don’t provide a comparison between different lenders.
Using the services of an experienced finance broker will not only help to make sure you are choosing the best product for your needs, but the broker will also lead you step-by-step through the application maze. Even more importantly, a broker will be able to consider your long terms plans. An online lender is not going to review your loans and goal regularly. The wrong loan could severely hinder your future investment plans or prove costly should your circumstances change. While Brokers aren’t tax advisers, a good Broker will be aware of the tax implications of your transaction. An online lender is not likely to consider that when providing a loan.
The idea of completing a home loan application online and alone could also be very intimidating. Think about all the paperwork that would be required, such as pay slips, proof of rental income, bank statements, details of other loans, tax assessments, and credit card statements just to name a few. Any mistake in the application could prove costly, including missing the loan settlement date which could mean penalties or worse still forfeiting your deposit and losing the property! First home owners would also need to handle their own FHOG application with an online home loan which most would not know how to complete.
A few other things to consider about online home loans is that most only go up to 80% LVR, so borrowers will need at least a 20% deposit. They can also be quite inflexible making it difficult to change products or switch the security in the case when you are buying and selling.
Choosing a home loan or investment loan could be one of the biggest financial decisions of your life. For people who have a lot of time on their hands and a very simple structure, on-line loans may be of use. However for a person looking to build a property portfolio, a specialist Broker is a vital part of your team that you can’t do without.