There are many different ways to structure your loan when purchasing an investment property,
and the way you choose to structure your loan will have a significant impact on the return
on investment that you achieve on your investment property, it is important to get your loan
structure right, and to choose the loan structure that is best suited to you.
Hi I'm Ryan Mclean I'm from positivecashflowaustralia.com.au where we teach people like you, how to find
and invest in positive cash flow properties all over Australia.
Principle and interest, interest only, variable rates, fixed rates, buying your own name versus
buying jointly with a partner and what about investing using trust structures.
All of these different loan structures will have an impact on the way you make money in
property and how successful your property investment is going to be.
Let's have a look at the different loan structures that you can use and then you can go and assess
which loan structures is going to be best for you, just a quick disclaimer that I'm
not a financial advisor please speak to a professional mortgage broker or financial
advisor when making a loan structured decision.
Let's first look a principle and interest versus interest only and then we will go on
and look at variable versus fixed interest rates.
What is a principle and interest only loan, principle and interest loan sorry?
A principle and interest loan is when you are paying the interest generated on the property
that the amount that the bank is charging you for having the loan, but you are also
paying down some of the principle, the principle is the amount of debt that you owe on your
mortgage., with the principle and interest loan you are paying the interest and you're
paying down a portion of your mortgage at the same time.
With the principle and interest loan you will usually sign up for a fixed term, what that
means is that you'll sign up may be 20 years or 25 years or 30 years and what that means
is that within that time frame that is how long it will take you to pay off the loan
fully.
The benefits of principle and interest loan is obviously that overtime your interest decreases
because the value of your loan decreases and eventually the loan is fully paid of meaning
you own the asset completely and your cash flow gets a boost because you no longer have
to pay a mortgage.
This can be great if you're risk adverse or if you don't want the fluctuations of a loan
because if your loan is completely paid off then you own that asset yourself and the bank
has no control over that.
Interest only loans are exactly what they sound like; there are loans where you only
pay the interest on the property.
In these circumstances the bank charges you the interest for having a loan and you pay
that interest but you don't pay anything off the principle.
If you have an interest only loan for five years then at the end of five years the value
of your mortgage is going to be exactly the same as what it was at the start of that loan,
because all you're paying is the interest and the bank fees.
The benefits of interest only loans for investors and why many investor choose interest only
loans is because interest only loans can maximize your cash flow in the beginning.
With the principle and interest loan you are paying interest and then you are putting extra
money on to the loan as well, with an interest only loan that extra money gets scaled back
and you actually keep that in terms of cash flow, your monthly repayments are going to
be smaller.
This can mean the difference between having a positively geared property and a negatively
geared property in the beginning; many investors choose interest only because it decreases
the amount of money they have to pay and increase their service ability of that loan and other
loans in the future.
Another benefit of interest only loans is that they maximize your tax deductions over
time, because your mortgages staying the same, ideally your interest is staying the same
expect when interest rates change and therefore you are claiming the full amount that you
can of that interest in a tax deduction, with a principle and interest loan over time your
mortgage goes down and your interest go down, what you can claim as a tax deduction goes
down overtime as well.
Interest only loans can be great for maximizing those tax deductions, many investors will
take the money that they would've spend on the principle of that investment property
which will lower their tax deductions and they use that money elsewhere.
That's something to consider but obviously speak to a professional before you go ahead
and make any of these decisions.
This is not to be considered financial advice but educational purposes only.
There we have the differences between principle and interest only, now let's look at fixed
versus variable loan structures, and we will go into part two and we will look at buying
your own name versus buying your jointly and we will also look at trust structures as well.
Fixed versus variable what are the differences and what are the benefits of each, first let's
look at variables which is the most common way people structure their loans.
A variable interest is just as it sounds its variable it can change over time, as interest
rates change in the market your interest changes as well, if interest rates are going down
then your interest rates will go down and the amount of money you have to pay will go
down as well.
If interest rates are going up then your interest rates will go up and then the amount of money
you have to pay will increase as well.
Variable rates are great because you're maximizing the savings if the market goes down and you
can also pay off more money on your mortgage than if you have a fixed loan as well.
If you get an extra influx or you get a bonus and you want to pay off your mortgage faster
than variable loans tend to allow you to pay extra money off your mortgage.
A fixed loan is just that it's a fixed loan, you fix the interest rate it can be for one
year, two years, three years, five years, five years is generally the maximum that people
do fix loans for, I'm sure there are some lenders there that offer a longer term fixed
loans.
With the case of a fixed loan, what that means is that your interest rates stay the same
but there are also limitations on your loans as well.
Fixed loans can be great because you know exactly what you are going to be paying every
single month, you can predict your cash flow in advance and what you will have to pay in
advance.
Fixed loans do have their limitations because you can only pay the amount that is set and
generally you can't pay on top of that or you're limited in the amount of money extra
that you can pay off your loan, it's much harder to pay off your loan faster if you
have a fixed loan versus a variable loan.
Another benefit of fixed loans is that if your interest rates go up then your loan is
set your loan is fixed and you are maximizing your benefits there because you are getting
a lot of interest rates than everyone else, there is fixed and variables I hope that gives
you some idea.
You need to look at when choosing your loan structure, you need to look at whether you
want to go principle and interest or interest only, and whether you want to go variable
or fixed, a lot of investor will start with interest only and then what will happen is
overtime the rents of their property will go up and their cash flow will improve, and
then they will shift from interest only to principle and interest and they will start
to move some of that cash flow to pay off the loan overtime.
A lot of investors do that go interest only and then move it to principle and interest
but what you do is up to you and then there's fixed and variable.
Some investors choose to go half or to fix the portion of their loan and make a portion
of their loan variable that they can still pay off some of their loan faster even though
they have a portion fixed.
A lot of investors go with that route as well but it's really up to you, I do suggest speaking
to a mortgage broker or to your financial planner, and to see which loan structure is
going to be best suited to you, this should give you some ideas and at least be your starting
point of what you have to choose from.
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Until tomorrow which is when the next episode is coming out stay positive,