On managing mortgages: ‘There’s always room for negotiation’
Different lenders offer different rates to property investors, which is why you need to review your mortgages regularly in order to ensure that you are getting the most competitive rate possible.
Smart Property Investment’s Phil Tarrant have 19 loans for his 17 investment properties. He has five loans with one lender—the lowest interest rate he pays is 4.89 per cent while the highest is 5.19 per cent.
According to Aussie Parramatta’s Ross Le Quesne, the varying rates depend on several variables, including loan-to-value ratio (LVR). An 80 per cent LVR is considered a benchmark number for property investors.
If your initial LVR is lower than the said mark, you can forego paying for the lenders’ mortgage insurance, which “insures the bank that, should you default on your loan, they [can] flog your property”. On the other hand, if your initial LVR goes over the said percentage, you have to pay for the amount exceeding the 80 per cent mark.
The mortgage broker explained: “[If it’s] above 80 per cent [and you’re trying] … to get an interest-only loan … you're looking at in the mid-fives.”
“[With] principal and interest, at 90 per cent, you can still get some competitive pricing around the low-fours,” he added.
Negotiation
Once the equity of the property has increased, the investor may start negotiating for a better interest rate.
“[When the equity of the property starts to get] under the tier, that's a great time to say, ‘Well, [the] value is no longer sitting at a 90 per cent. It's sitting at a 70 per cent loan-to-value ratio, so you've got the argument to get the pricing at the 80 per cent mark,’ ” Ross explained.
A disparity in rates, even from a single lender, is common in the property investment landscape. Negotiating a better rate depends on your knowledge about regulations as well as your own financial situation and borrowing capacity.
According to Ross: “There's always room for negotiation … If you're not happy with paying that, we can look to switch to a different lender where you'll have a more competitive interest rate.”
“[Lenders are] aware of that and they want to remain competitive so there's always [room for] negotiation,” the mortgage broker added.
However, replacing your lender is easier said than done and lenders could very well take advantage of the fact.
Phil said: “There's a middle world ... where you've got to work out [whether it’s] easier to stay, negotiate, and see [or replace your lender].”
“Test the appetite of the lender to keep you as a customer or move on. It's an inexact science and there's a whole bunch of different reasons why you may or may not do this but that's what you need to do.
“If you're a serious investor you've always got to be chasing cash flow efficiency,” he added.
At the end of the day, as a property investor, you’ve got to work out the leverage and make sure it’s in your favor.
Tune in to Phil Tarrant’s portfolio update on The Smart Property Investment Show to find out how you can stay ahead of the game when attempting to get a loan from banks and lenders for a property, how a shift from variable rates to fixed rates could impact your portfolio, and how the future plans for your investment can impact the loan you require.
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