We understand Investment Loans
As financial advisers we know the risks and benefits of gearing
An investment loan will multiply returns. However, that can work for or against you. If an investment has a negative return over the term of the loan, it's going to send your return plummeting.
On the other hand, a growing investment being funded with a loan could multiply your positive return several times over. If it’s done with tax management strategies in mind, you could even utilise negative gearing to improve your tax position now. Plus also achieve a tax concessional capital gain in the future when your income is lower. That's a win-win-win situation.
Investment loans need good advice. Get the best at GraceFinancial.com.au.
Naturally, in these matters you need carefully worked-through advice - both the investment side and the loan side. Grace Loans, as a division of Grace Financial Services, a financial planning practice, can help you in both these areas. We’ll even advise you not to get a loan if it's appropriate. But, we are also very aware of the power of gearing into quality products with a character suited to investment gearing.
Investment Loans FAQs
How much can I borrow?
The number one most asked question, with an answer that’s different for each person. Because it's all depending on what your income is and the value of the property(ies) that you have to use as a security for the loan. (See the answers for "Serviceability" and "LVR" below)
What is a "LVR"?
LVR stands for "Loan to Value Ratio." It’s calculated by dividing the loan amount by the value of the securities involved. Lenders limit the amount you can borrow according to this LVR rule. Generally, most people can borrow up to 80% LVR (that’s 80% of the value of the property) without penalty. In some cases, by paying for "Lenders Mortgage Insurance" (See "LMI" below) up to 95% can be borrowed, or even 97% where the cost of the LMI becomes included within the loan amount ("capitalised LMI").
What is "serviceability"?
Your ability to generate enough income to cover loan payments is described as "serviceability." Each bank has its own way of calculating how much income you need. The interest rate will be higher than present rates in the calculation to allow for rates going up in the future causing undue stress on your financial situation. Credit cards and loans not being refinanced will have payment amounts increased to cover the amount owing as if the facility was fully drawn. That means that if you have a credit card with a very large credit limit it will be harder to qualify for a loan.
Part of the equation that most people ignore is what they spend their money on. With your broker being required to make reasonable enquiries into your spending, including examining bank accounts, to verify your estimates of your living expenses. While the banks will have minimums for each family situation, they want it to be adjusted upwards to match your particular situation. Where you have obligations such as insurances, pay TV and club memberships, those amounts will all need to be added on top of their minimums or your other normal living expenses.
What is "LMI"?
"LMI" is "Lenders Mortgage Insurance." This insurance doesn't protect you, it protects the lender. Many lenders will ensure all of their loans, only passing this cost to you when you’re over 80% LVR (see LVR question above). A few lenders will go up to 85% LVR without charging you for LMI, and several of the major banks will allow up to 90% LVR for certain medical professionals.
LMI costs vary according to the LVR and amount borrowed. With slight variations from one lender to another. It's not unusual for a borrower to be charged something on the order of $10,000. Part of your mortgage broker's preliminary assessment will be to provide an estimate of what the LMI charge will be for the recommended lender. Your broker should also be able to show you how the LMI varies from lender to lender in your particular situation.
Is loan interest tax deductible?
That's a great question, to answer that you’ll have to head over to GraceFinancial.com.au, our financial planning website, and learn more about tax-deductible investment expenses there.
What documentation do I need to provide to apply for a loan?
It varies slightly from bank to bank, but for PAYG income earners this would be typical:
- Your last two payslips
- Your last Notice of Assessment (Find it at MyGov - ATO) or Group Certificate (from your employe)
- ID verification with Drivers Licence & Passport or Birth Certificate + proof of change of name, if applicabe
- Medicare card
- The last six months of statements for all transaction accounts and credit cards
- Rates statements for existing properties being used as security
- The contract for properties being purchased (unsigned but with purchasers' names and purchase price)
For self-employed borrowers, generally you’ll need to have your ABN for two years, and most lenders want two years of financial reports, tax returns and Notices of Assessment too.
Your first consultation is free, so there's nothing to lose in having a chat. And you won’t miss out by ignoring the opportunities. Call us today on 02 4905 0250 or get a head start with our online loan application form.