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4 things to think about in a low interest rate environment

One of the most valuable lessons we can take from our current economic climate is that to build a sustainable future fund in financial markets, which are anything but predictable, investors must be willing to innovate.

Those who adapt relatively quickly to changing times, while remaining safely within the parameters of a well-conceived investment strategy, will invariably climb to the top of the retirement food chain.

Particularly if they acquire carefully selected and structured property assets.

I doubt you’ll find too many people who took the opportunity provided by our current ongoing low interest rate environment to secure high growth housing investments, who’ll regret that decision twenty years from now; even if it meant stepping outside of their comfort zone to do so.

But it’s a delicate balancing act, between those aspects of your investment strategy that can be fairly flexible, and the immutable foundation on which you build your portfolio.

Then there’s the promise of future changes to our markets (and your own personal situation and needs), which must be accounted for when adapting to current circumstances.

Low rates don’t mean you can break the rules
Perhaps you can afford to purchase two investment properties right now, cashing in on low interest rates to do so.

But how will that impact your serviceability down the line? And can you afford the out of pocket expenses when interest rates begin to rise?

The best way to get the balance right – a carefully conceived investment plan that makes allowances for unforeseen market movements – is to remember a few basic rules of the game.

Given that most experts predict the current low rate environment will continue into the foreseeable future, here are four timely rules to remember when adapting your investment strategy for our present financial climate.

1. Be pro-active, not reactive.
Some property investors who jumped on the buying bandwagon at the beginning of the recent boom, securing ‘cheap’ credit to dabble in the housing markets, will have done so in knee jerk response to reports of rising real estate prices.

It’s likely most of these ‘reactors’ failed to plan their investment journey adequately, and will inevitably become one of the 90 odd percent who never make it past their first investment property.

Those who pro-actively established or continued to build their portfolios based on a carefully formulated wealth creation and investment plan however, are more likely to achieve their long-term financial goals.

When you have clearly identified objectives and an understanding of what’s required to reach them, you’re less likely to stray from your path and get caught up in schemes or structures bought into on a reactionary basis.

In other words, you’re more likely to make rational, calculated investment decisions as a pro-active investor and less inclined to get caught up in the hype that seems to constantly pervade Australia’s housing markets.

2. Waste not…want not.
Investors who follow a strategy rarely spend more than they can comfortably afford.

They know that short-term cashflow is as critical to the viability of their property portfolio as capital growth and in turn, only take on debt according to a carefully calculated finance strategy and structure.

Proper planning for your debt portfolio is as essential as optimal asset acquisition.

Don’t be tempted to over-capitalise or worse, structure your mortgages in messy, cross-collateralised products that waste your valuable equity and inhibit your future investment capacity, just for the promise of a low interest rate that will inevitably go up one day.

Again, this is about being pro-active rather than reactive to market forces.

It’s the difference between the investor who over-capitalises at point of purchase in a highly competitive market, and the investor who’s crunched the numbers and knows when to walk away.

Even if credit is going begging, the latter investor understands there’s a far bigger picture to consider. Sure, lower mortgage repayments can make things appear more affordable on paper, but that doesn’t necessarily mean the asset in question is a sound, long-term investment.

Remember, any excess capital spent buying an investment property can represent a sustained long-term loss of capital and cashflow.

3. Never stray from your credit comfort zone.
No matter what type of low interest rate carrot is dangled in front of you by a prospective lender, avoid the temptation to take on more debt than you can realistically afford.

Another good reason not to be lured in to less than optimal finance structures with the promise of low interest rates is that you need a loan portfolio that enables your portfolio to evolve.

To ensure serviceability, undertake financial modelling in the same manner as your lender would when assessing your loan application, using interest rate calculations at least 3 to 4 per cent higher than the current variable products on offer.

Importantly, assess any potential loan packages based on all of the facilities they have to offer and the degree of future flexibility they allow. Not just how low the interest rate may or may not be.

If you’re at all concerned about determining (and remaining within) the parameters of your financial comfort zone, it might be wise to seek the expert guidance of a specialist mortgage broker who understands property investment loan structuring.

4. Don’t forget to research.
You wouldn’t take off on a three-day road trip without first consulting the GPS and determining the optimal way to get from Point A to Point B, right?

A pro-active traveller might even consult the Internet for places to stop en route to make their journey as smooth and rewarding as possible – such as public conveniences, eateries and maybe some places of interest to visit.

Why then, do many novice investors think they can simply walk into the property game, snap up any old housing investment and become the next Donald Trump?

I understand it can be easy to feel a sense of urgency around acquiring another investment property when there’s so much incessant talk about cheap credit and housing booms, but reacting to this can be fatal to your future fund.

You must always invest according to facts and figures and stone cold logic. There’s no room for emotion when it comes to growing a viable property investment portfolio.

Whether you undertake the necessary due diligence on your own, or actively surround yourself with relevant industry professionals and investment mentors who can assist with this process, it’s essential to enter an investment with a complete understanding of all financial implications – now and in the future.

If you would like to speak with an experienced mortgage broker, who understands property markets and investment structuring, why not connect with one of the team at Financier Capital? We walk the talk, because our knowledge is your business. Click here to get in touch or call us on 1300 502 006.

5 ways a mortgage broker can help you to the top of the property ladder

Australia’s financial services sector has undergone some fairly radical changes in recent times, as it rides out an increasingly inter-connected, global rollercoaster of fiscal ups and downs.

And while the modern world transitions into a new economic era, the likes of which we’ve never experienced, it’s fair to say things like loan structuring and acquisition can become somewhat confusing prospects…even for pro-active property investors.

The lending goalposts are changing rapidly in today’s banking sector, as the ‘Big 4’ lead the charge to shore up profits in a continuing lethargic economic environment.

Then there are APRA’s regulatory interventions, along with warnings that lenders must exercise more caution when it comes to assessing ‘higher risk’ loan applicants.

Policymakers are concerned that many Australian investors might be wading into the shallow interest rate waters of today, only to find themselves neck deep when fortunes turn around tomorrow.

What might tomorrow bring?

No doubt what lies ahead will be something we haven’t yet experienced, because the nature of the modern day financial sector beast is such that market behaviour has become somewhat unpredictable.

Whether it’s to do with the real time exchange of global data and information through modern technology, or just the fact that things are speeding up all around us, who can say?

The key for investors to get through these unprecedented and unpredictable times is strategy and structure. You must have and retain your focus on both.

That’s not to say you shouldn’t re-evaluate and adjust your strategy and structure every now and then to accommodate market shifts and your evolving investment portfolio.

But overall, building wealth through real estate is a very personal journey and each investor will walk a different path to get there. You need to map that path for yourself.

Of course some will find moderate success on their journey, while other investors effortlessly climb all the way to the pinnacle of property ladder greatness.

How do they make it to the top without breaking a sweat?

With the help of the experts they engage in their respective fields along the way; the financial advisers, accountants, property managers, buyer’s advocates and mortgage brokers who help to shoulder the burden of making informed decisions aligned with the investor’s chosen strategy.

Indeed, a professional mortgage broker who understands the intricacies and long-term significance of optimal property investment loan structuring can prove a formidable ally when it comes to supporting your evolving property investment portfolio.

Here are five reasons why…

  1. Relationships
  2. Seasoned mortgage brokers have developed an extensive industry network, including a diverse panel of lenders, because we know that our respective clients’ needs vary greatly.

    Good mortgage brokers are almost like financial matchmakers, but with a better strike rate.

    We speak with a client to first establish where they are now, where they want to be in the future and gain a deeper insight into their specific circumstances.

    Then we leverage our relationships and introduce them to the most suited lender and product, all the while bearing in mind optimal debt structuring to ensure they achieve their future financial aspirations.

  3. Agility

    Not necessarily in the physical stakes, admittedly. But a good mortgage broker knows his or her way around the sector well enough to ensure your loan application hits the right desks in a timely manner and can often see you obtain pre-approval within 24 hours.

    We can eliminate much of the red tape and needless waiting by approaching the most relevant financial institutions.

    Importantly, we know what lenders are looking for by way of information about your serviceability and capacity to service a loan, and we know who will show more flexibility when it comes to things like higher LVR’s.

  4. Perspective
  5. When it comes to comparing loan products, many borrowers make the mistake of focusing entirely on interest rates. But product comparison for the savvy property investor extends way beyond simple percentages.

    Mortgage brokers understand that saving a few dollars with an initial honeymoon rate can actually cost you a lot more in lost profits over the life of your investment(s).

    We seek out the best deal for your requirements, not the lowest rack rate.

    Sure you might have to claim a little more at tax time on slightly higher interest repayments. But what if the lower rate the banks offered you meant sacrificing some of your buying power?

    What if it was conditional on a maximum LVR of 80%? Say you have a $60,000 deposit at hand, plus enough to cover acquisition costs. At an LVR (Loan to Value Ratio) of 80%, this means you’ll be approved for a loan of $300,000. Not going to buy you much these days, is it?

    But what if you forego that 0.25% rate reduction and extend your LVR to 90%? Yes, you’d likely have to pay an LMI (Lender’s Mortgage Insurance) charge of $9,000 odd (also deductible in most instances), but it would also mean you can spend up to $600,000 on a property.

    So you see, the different perspective a broker brings to the table can make all the difference to your success.

  6. Structuring
  7. A good mortgage broker always considers long term financing requirements when speaking with a new client. It never comes down to a simple case of, ‘What do you want right now?’

    Such a narrow focus can be detrimental to your future serviceability and restrict access to the essential equity and cashflow you require to sustain and grow your investment portfolio.

    Some investors blindly follow their banks’ lead, ending up in messy, cross-collateralised loan arrangements that not only diminish their borrowing power, but also sacrifice ultimate control over their assets to the lender.

    Brokers can implement an over-arching financial strategy that sees you approach just the right lender, to obtain just the right loan product, at just the right time for the benefit of your portfolio.

  8. Knowledge
  9. Not only do good brokers stay on top of all the latest loan products and industry changes to ensure you can access the best possible finance deal, they also have access to exclusive industry insights and market data.

    Clients can leverage this knowledge at no cost to assist in guiding the asset accumulation phase of your investment journey, as well as assist with optimal ways of releasing cashflow when your portfolio transitions to its income phase.

If you would like to speak with an experienced mortgage broker, who understands property markets and investment structuring, why not connect with one of the team at Financier Capital? We walk the talk, because our knowledge is your business. Click here to get in touch or call us on 1300 502 006.