Investment property finance: why loan structure matters

Start with the purpose of the loan

Investment lending should be structured around what the borrowing is actually for.

It is important to clearly distinguish between:

• owner-occupied lending;
• investment lending;
• personal borrowing;
• business borrowing.

The purpose of the funds can affect lender policy, pricing and the way the loan should be documented.

Deposit and equity influence the options available

The amount of deposit or usable equity available can affect:

• lender choice;
• interest rates;
• lenders mortgage insurance;
• borrowing limits;
• overall loan structure.

Using equity from another property may be possible, but the structure should be considered carefully rather than simply combining all borrowing into one loan.

Principal and interest versus interest only

Investment loans may be structured with principal-and-interest repayments or, where available and appropriate, an interest-only period.

Principal and interest

• reduces the loan balance over time;
• generally results in higher regular repayments than interest only.

Interest only

• generally reduces the repayment during the interest-only period;
• does not reduce principal during that period;
• can result in higher repayments when the interest-only period ends;
• may result in more interest being paid over the life of the loan.

The appropriate structure depends on the borrower's objectives and circumstances.

Offset accounts and loan separation

An offset account may reduce the amount of interest charged while allowing funds to remain accessible.

Where borrowers have both owner-occupied and investment debt, keeping loan purposes clearly separated can make administration easier.

Borrowers should obtain appropriate tax advice about deductibility and tax treatment. Morbanx provides credit assistance, not tax advice.

Lenders assess investment loans differently

Lenders can differ significantly in how they assess:

• rental income;
• existing debts;
• living expenses;
• other properties;
• interest rates used for servicing;
• loan-to-value ratios;
• property types;
• investor lending limits.

A borrower who qualifies with one lender may not receive the same result with another.

Think beyond the first purchase

If you plan to purchase more than one property, the structure of the first loan can affect future flexibility.

Things worth considering include:

• access to equity;
• separation of loan purposes;
• repayment strategy;
• lender exposure limits;
• future servicing capacity.