All About Finance
At PPS (Property Point Solutions) our aim is to guide our investors through the process of buying a property or development site and demonstrating the different financial options available on the open market.
Every client will have a different set of variables and therefore depending on financial circumstances a certain type of loan will apply to one person but not necessarily another.
With this in mind here are some different options which may suit.
Types of Loans
The main feature of a loan is the method of charging interest.
The usual options are as follows:
· Variable Rate Loans
Commonly known as the ‘typical loans’ where the interest rate will vary according to fluctuations in the market variable rate of exchange.
· Fixed Rate Loans
These loans have a fixed rate that has been agreed for a fixed period of time for Example- 5 year Fixed Rate. During this period whatever the market fluctuation on the variable exchange rate your loan rate will not change.
Split Rate Loans
For investors who find it difficult to decide which type of loan is the right one with regards to Variable or Fixed loan. They can therefore split the loan and have part of the loan at Variable Rate and part of the loan at Fixed Rate.
Pre Approval Loans
This is where a person submits an application for a loan prior to finding a property to buy.
By obtaining a pre approval, the process of securing the loan when a property is found is shortened.
The loan although not yet drawn down has been unconditionally approved up to a certain agreed amount.
This gives the investor the power to purchase quickly with the full confidence that they have the funds on hand to complete the transaction.
This gives the investor the power to ‘snap up’ the deal when a bargain arises and fend off all competition.
· Principle & Interest (P&I) Loans
This is what would be deemed a standard loan with repayments calculated on the basis that each repayment is calculated on the basis of joint principle and interest being repaid simultaneously. As a result the loan balance will decrease with every payment.
· Line of Credit
These are like a super credit card whereby the lender will give an approval to purchase up to an agreed limit. These funds can be a useful tool for investors looking to use equity in their existing property portfolio to fund future acquisitions.
· Construction Loans
As the name suggests these loans are used to construct developments or property
· Lo Doc or No Doc Loans
Typically these loans are for self employed persons who have difficulty in producing the normal documentation that a lender requires to prove income. The lenders would therefore often charge a higher rate and would limit the borrowing to approximately 80% as these are deemed medium to high risk loans.
These are special loans to fund purchases by Self Managed Superannuation Funds.
· Unit Trust
This is similar to a Family Trust except the right to income and capital is fixed according to each person’s interest in the trust.
It is a structure that is often a good choice when friends (or other groups) buy property jointly because it can be easier for a buyout of an existing participant.
· Family Trust
This is not a very common loan but one that is useful in some situations.
A Family Trust is a structure where a deed governs the distribution of income and capital from the trust over a period of time. Typically the trustee has the discretion to distribute income and capital to any family member and to change the pattern of distribution year to year. This means that if a family member goes into bankruptcy or gets into financial difficulty the property will be typically protected by the very nature of the Family Trust which acts as a protectorate for the entire family unit.
· Individual Name Loans
This is a fairly common approach, especially for investors and usually used for investors buying their first property.
If the property is negatively geared, the person would be content in the knowledge that reasonable tax deductions will follow through. Any profits can be realised without the restrictions that apply with some other structures For Example SMSF.
· Joint Name Loans
It is relatively common to buy investment property jointly with similar tax deduction advantages to buying in individual name.
An additional advantage is that two or more buyers often have a higher income and may be able to pay off the loan quicker, thereby saving interest on the loan.
It is not uncommon for friends to buy properties together, with the goal of keeping thwem for a number of years. If you are buying with friends, make sure you set the ground rules up front so that all parties fully understand the private terms and conditions from the beginning which will avoid disagreements that may occur at a later date.
· Company Loans
This method of purchase is not as popular as it once was simply because of the taxation downside from a capital Gains point of view.
Purchasing property through a Self Managed Super Fund is a developing structure which has significant taxation benefits that can be achieved by investing through a SMFS
With so many options available it can be difficult to work out which loan or lender is right for you so our advice is please choose carefully and seek advice from your solicitor, accountant, or financial planner.