Investing in property can be a great way to build wealth for the future. Yet so many people are unsure of how to proceed or how to ensure their application for an investment mortgage is approved.
Before you submit an application for an investment mortgage, take some time to consider some things that could affect your overall investment strategy.
Loan structure
Not all home loans are the same. Signing up for a mortgage to buy an investment property seems relatively easy, but it’s crucial you understand which loan type and structure will be best for your needs.
Some investors may choose to refinance the mortgage they have over their family home to raise enough equity to pay for a deposit on their investment property. Others may prefer to use their family home as security for the new rental property and borrow a larger amount over the new home instead.
It’s important to know how each option could potentially affect your overall investment strategy before proceeding.
Payment structure
It’s important to consider the payment structure you choose for your investment mortgage. Some property investors prefer to stick with making Interest Only payments, as only the interest component of any investment mortgage repayment is tax deductible.
However, when you pay only the interest charges incurred on your mortgage each month, you don’t reduce the outstanding balance at all. Some investors are fine with this strategy, as it helps keep payment costs to a minimum.
By comparison, choosing Principal and Interest payments means that each payment reduces your debt level a little each month. The interest charges are still tax deductible, but the amount paid off the mortgage balance is not. The benefit is that you’re reducing your debt and building equity.
Ownership structure
It’s common for many people to simply sign the contract to buy an investment property in their own name. Yet it’s important to consider the correct ownership structure carefully before proceeding.
Some investors may benefit from choosing to purchase as “tenants in common” rather than “joint tenants”. Others may be better off considering setting up a family trust, while you may find other advantages to purchasing in different entities, such as in a company or superannuation trust structure.
Before signing up for an investment mortgage, take the time to discuss the options available with a good mortgage broker. It’s also wise to talk with an accountant about how buying an investment property could affect your financial situation. Contact Mortgage Australia today for more advice on buying investment properties and managing your mortgage.