Real Estate Investment Financing - Confused With Your Options?

Real Estate Investment Financing can be Confusing. After all not all loans are equal.

Let’s face it. You are unique. You are not your parents nor your neighour or best friend. You are you, and you have individual circumstances of family, income, investment requirements, lifestyle and your own dreams, desires, wants and needs and most importantly type of finance to fit your circumstances. Correct?

Knowing that one size of real estate investment financing does not fit all is half the equation. The other half is knowing what is available.

Loan Types and features

To understand real estate investment financing, the following some terms first need to be understood. The Uniform Consumer Credit Code (UCCC) regulates credit provided to consumers. Finance can be either regulated or non-regulated.

A regulated loan is one where:

The borrower ‘you’, are a natural person meaning you are an individual or joint individual, unincorporated association, sole proprietor, partner or Strata corporation.

And

The credit is predominantly intended to be used for personal domestic or household purposes. The word ‘predominantly’ when used in conjunction to a regulated finance product means more than 50% of that product.

All other finance products are deemed unregulated and are taken by non-individuals being organizations such as a company or corporation, a Corporate Trustee, Incorporated Association, Government Agency or Statutory Corporation.

If regulated, the UCCC ensures the integrity of conduct that is required in the writing of such products is upheld for individuals providing protection of false or misleading statements, and harassment by sellers of such loans either by phone or in person.

So your smorgasboard of Real Estate Investment Financing choices include the following:

1) Basic Variable Rate

2)Standard Variable Rate

3)Fix Rate

4) Line of Credit

5)Construction

6) Low Doc

7) Bridging

8) Professional Package

9) All-In-One

10) Combination or Split

11) Introductory or Honeymoon rate

And to explain these Real Estate Investment Financing choices...

1) Basic Variable Rate

Your Basic Variable Rate is an economy style no frills type product with minimum features. Consequently it is the type of finance that normally attracts a reduced interest rate for the term of the mortgage.

Purpose: Its purpose can be for personal use as you would if buying a car or for personal investment such as buying manage funds, your home or investment property.

Loan amounts: Minimum of $10,000 and up.

Term: Most commonly 25 years but can extend to 30 years.

Repayments in part or full: Extra payments or a full payout are usually allowed without attracting a penalty

Fees: Penalty fees do not usually apply for extra or full payout of this type of finance

Security: Your Basic Variable Rate mortgage must be secured by a registered first mortgage over residential property and land (either freehold or crown leasehold)

2) Standard Variable Rate

Standard variable rate or ‘Term Loans’ as they sometimes referred to as, are as the name implies, standard variable rate.

Standard variable rate loans for real estate investment financing are common in the market and are often structured with incentive type offer slanted to first home buyers like honeymoon rates for the first 12 months. Its risk for some is that it is open to any rate changes immediately.

Purpose: Its purpose can be for personal use as you would if buying a car or for personal investment such as buying manage funds, your home or investment property.

Loan amounts: Minimum of $10,000 and up.

Term: Most commonly 25 years but can extend to 30 years.

Repayments in part or full: Extra payments or a full payout are usually allowed without attracting a penalty

Fees: Penalty fees do not usually apply for extra or full payout of this type of loan

Security: Penalty fees do not usually apply for extra or full payout of this type of loan

3) Fix Rate

A fixed rate is what you'd opt for in you real estate investment financing if your after the certainty of fixed repayment amounts and they protect you form possible interest rate rises during the future term of the contract.

Purpose: Its purpose can be for personal use as you would if buying a car or for personal investment such as buying manage funds, your home or investment property.

Loan amounts: Minimum of $10,000 and up.

Term: Most commonly 25 years but can extend to 30 years.

Repayments in part or full: Your repayments can be fixed for a period up to 5 years with some lenders offering longer terms. At the end of the term you will renegotiate the loan at a new fixed rate or switch to a variable rate. Your repayments can be either principle and interest or interest only.

Fees: If you repay it early you may need to pay an adjustment and administration fee

Security: Penalty fees do not usually apply for extra or full payout of this type of product.

4) Line of Credit

A line of credit account is a must to consider when applying for your real estate investment financing needs because it allows you to bundle all your borrowings into one account and still have access to instant funds up to your line of credit. Provided you meet the minimum repayment on the account necessary being the interest and associated monthly fees, you maintain the option to pay as much off your line of credit as fast or slow as your circumstances enable you to. Some lines of credit enable you to capitalize the interest component up to your specified limit.

Purpose: Its purpose can be for personal use as you would if buying a car or for personal investment such as buying shares, home improvements or off the plan property purchases. One of its attractive features is the flexibility it offers for changing or unpredictable circumstances that see your need to obtain credit at short notice.

Loan amounts: Minimum credit limit of $20,000

Repayments in part or full: Your repayments can be either principle and interest or interest only.

Fees: Attracts a monthly fee of approximately $10 to $15

Security: Must be secured by a first mortgage over residential property

5) Construction

The need for your real estate investment financing to be structured well is paramount if you are going to build. This product is utilized by purchasers of vacant land or house and land packages. These are usually offered on the standard variable rate and you only pay interest on the used amount borrowed. As progress payments are made the interest owing is adjusted against the total funds used.

Typically, progress payments are made on four occasions.

When the flooring is laid When the framework or walls are up When lock up occurs On completion

NOTE: As you can see, your Real Estate Investment Financing choices are really quite involved (and there's still 5 options to go). This is where the value of a mortgage broker becomes invaluable.

However...,

6) Low Doc (no Doc)

While in the past, real estate investment financing was very hard to get for self employed persons, this product is usually the product of choice. It's chosen by the self employed person, contractor, small business or business whereby you have not yet completed or prefer not to present your financials either in part or in total. This might mean that you are unable to provide the usual income verification at the time of your loan application for either business or personal reasons.

No Docs are another option if you are self-employed or have irregular cash flow. In any instance you are not able to verify your income or sufficient income you will be required to "self certify" your income and be able to show evidence of business history for the past two years for most lenders.

To 'Self Certify' you will need to sign a statement of Declaration stating that you are able to meet a stated repayment amount and that the is for the purpose of business or investment.

A Low Doc attracts a slightly higher interest rate and lower Loan to Value Ratio (LVR) due to the increased risk that the lender is subject to. This could be as low as 60% as opposed to the standard of 80% pre any requirement for LMI.

You should note that a Low or No Doc will cause a hightened emphases on your ability to secure and service it. You should be advised that your application would be better served under a Full Doc displaying current and full updated figures. However, should you choose a Low or No Doc, the areas that will be of increased interest for your broker will be things such as your:

Asset and savings position Repayment history including Bank statements Any finance lending statements/car/personal/lease Rent statements Current business circumstances You should also receive a disclosure that reads similarly to the following...

If you are taking out a high LVR (particularly where the amount borrowed exceeds the value of the property) or a Low or No Doc or asset lend (where your lender does not require full evidence or any evidence of your finanial position), you are reminded to make sure that you are able to meet the repayments on your proposed borrowing without hardship.

You are also reminded that you must sign a Statement of Declaration stating that you can infact meet this condition.

In Summary of Low Doc / No Doc

Advantages

No need to provide financials Generally faster loan approval Non-traditional and irregular income sources are considered Traditional banking positions such as self-employed, citizenship, and stability of employment can be overlooked

Disadvantages

Higher interest rates and fees may be applicable You may expose yourself to over commitment of your self now or should your income vary Loan morgage insurance may still be applicable at lower Loan to value ratios

7) Bridging

A Bridging product is as the name implies. It bridges or provides you funds for a short period between transactions of property or finance. Yes real estate investment financing can be very flexiable and enable you to domany things.

This product will enable you to purchase a new property before selling your existing property. It is also useful if you want to finance the building of your new home while still living in the old one. Bridging loans generally attract a higher interest rate.

8) Professional Package This is a marketing and business building tool used by many lenders to attract and, keep and build business. In essence lenders will provide a discounted interest rate to you dependent on your profession, income or the amount of borrowings. This discount is usually up to a half percentage off the standard variable interest rate or, in some cases, off a fixed interest rate.

9) All-In-One-Loan All-In-Ones are a real estate investment financing product that enables you to combine your banking requirements into one package by providing a transactional account and a home mortgage together.

This will allow you to directly credit your income from any or all sources to the account and then withdraw your funds via ATM, EFTPOS, linked credit card or cheque book, when you need it.

The major plus for an All-In-One is that it enables you to reduce the funds that attract interest charges by keeping your funds in the account for as long as possible. The offset to this is that the interest on All-In-One products may be slightly higher and the mortgage may also be charged a monthly access fee.

10) Combination or Split As per its name this type of product allows you to split your mortgage into two components in relation to how it attracts interest. You can nominate a set percentage to be fixed which provides certainty, and the balance can be at a variable rate, which gives extra flexibility to pay more off your mortgage without penalty.

11) Introductory or Honeymoon rate This feature is often offered by lenders to market their business. The introductory rate is generally a reduce percentage rate of up to 1% that applies to your loan for up to 12 months.

The Introductory Rate may be fixed, variable or capped. Once the Introductory or Honeymoon period is finished the interest rate reverts to the standard variable rate.

So if you were confused about Real Estate Investment Financing, I hope this has cleared things up for you a little. However if you are still confused but see possible options for you then simpy call your mortgage broker to have them work through your requirements and make the appropriate recommendatiions.

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