From The Australian, Wealth:
Ed Charles | July 18, 2007
ONCE upon a time it was difficult to borrow money.
The major banks required a 20 per cent deposit and some evidence of financial prudence. Now, thanks to the influx of smaller lenders known as the non-banks, it’s possible to borrow more than the value of an asset.
The trouble is choosing the best product and which lender will give the best service.
“Because there are so many loans, low-doc, no-doc, full-doc, interest-only, honeymoon rate and so many banks, you should use a proficient mortgage broker who understands investment to help you through the maze,” says property investment expert Michael Yardney.
The idea behind building a property investment portfolio is to borrow the deposit and interest payments on the home loan and to use low or no-doc loans to finance 80 per cent of the cost.
Barry Hestor, a broker with The Money Depot, says the main thing influencing mortgage structure is the cashflow on property investments.
“Often investors start running out of cash flow that they can prove to a bank with payslips, tax returns or rental yields of properties.”
This is why most people turn to low-doc loans. Traditionally, banks have always calculated what you can borrow based on family income.
These new lenders, and some of the major banks now, will also take into account rental income from investment properties, which allows investors to build large property portfolios. Yardney says there is no sleight of hand here.
“I can look any bank manager in the face and say that I can service the debt if I have a line of credit with the National Australia Bank against my house for $60,000 that I haven’t used. What you have to be able to do is tell them you can service the debt.” Often a plan such as Yardney’s involves multiple loans.
Denis Orrock of Infochoice says, however, it helps to keep the taxation paperwork neat if all the debt can be with one lender.
“Some time ago it would have involved a lot of multiple loans, and that can be a little bit expensive and painful, but there are products out there that will allow multiple properties in the one loan.
“They are more complex in the way they are set up, but once they are set up it is to your advantage.”
Most major banks offer these as portfolio products, but it’s also worth looking outside their orbit. Rolf Schaefer, director of broker RJA Financial Services, says so-called professional packages are important to his clients in their early stages in the property game. His preferred option is the Westpac Premiere Advantage package.
“It’s very flexible and on top of that offers excellent customer service.”
Always, however, his starting point is what he refers to as the big six, which include ANZ Bank, the Commonwealth Bank, NAB, St George and BankWest.
Yet, professional investors require more streamlined and flexible products than those provided to mum-and-dad investors by the major banks, according to Hestor.
Macquarie Mortgages products are popular with mortgage brokers who work with investors, including Hestor and Schaefer, because of their perceived flexibility.
The lender offers a line of credit so home and investment properties can be separated under one loan, with interest-only payments for up to 20 years. It also offers what it calls Express options, which offer low-doc and no-doc loans costing about 40 points more than a regular loan.
One pitfall investors should be wary of is lenders that want to secure the loans against the whole property portfolio.
“That cross-collateralising means the banks grab more security than they need,” Schaefer says. “Normally we do not cross-collateralise. We put all loans and all properties on standalone facilities.”
At any one time in a portfolio, some properties may be rising and others falling in value.
If the bank has cross-collateralised, it means the portfolio may not as a whole have risen in value and therefore there is no equity available for further investment. If each property is treated individually, equity can be taken out on properties that have increased in value.
This is one of the reasons that Schaefer, for his own investments, prefers to have one loan per bank, although many of his clients will have two to three loans with each lender.
Investors with large property portfolios will have a balanced portfolio of borrowings transcending different loan types and lenders.
“We advise our clients sometimes to diversify their lenders,” Hestor says.
“With one lender you can sometimes limit your borrowing capacity. “If you have a multitude of lenders, you are starting afresh.”
One of the niches that Schaefer works is advising clients who are investing through trusts.
Banks need to allow investors to borrow the money, but for the trustee company to be on the title.
“That is a bit of a curve ball for most lenders.
“That’s why we prefer Macquarie and Homeloans Ltd, as they do understand that structure because they do it on a daily basis.”