One of the early decisions to be made when considering a property investment, is how do we finance it?
As mentioned in our previous blog, you may choose to pay it off quickly using any available funds you may have, or choose to make minimum payments, thus leaving valuable cash flow for other pursuits.
The most common type of investment loan is a principal and interest loan where the repayments are set to not only cover the interest for that period, but also to pay down part of the principal. The early payments on this style of loan only have minimal impact on the balance of the loan outstanding (depending on how long the loan is taken over) but as more principal is paid down the balance outstanding decreases at a greater rate. As mentioned in our previous blog, only the interest portion of these repayments is tax deductible, so over time the value of this deduction diminishes although the amount of the repayment may stay the same.
On the other hand a “line of credit” operates much like an overdraft (or credit card) and the balance outstanding can fluctuate up or down provided it remains under the predetermined limit. This can be a powerful tool for a disciplined investor who is able to use this flexibility to his/her advantage.
We strongly recommend that any serious investor should speak to a finance broker (or their bank/finance manager) to explore the various types of loans available to establish which one is the most appropriate one for them.
We recommend a finance broker to our clients. We have no financial involvement at all with him, but have always been happy with the service and advice that he provides.
We also recommend that this discussion with him be held prior to finding your investment property and that you go shopping armed with a pre-approval that sets the limit on how much you can spend.
If you don’t do this, it is important that you ensure one of the conditions of the contact when you purchase a property is that it is subject to you being able to raise finance!
SVS Management Group