Mortgage Products…. What’s best for you???by Warren Davies

As a property investor there are many and varied mortgage products available.

Every investor’s situation is different and the choice of product can impact positively or negatively on your future borrowing capacity.

Most investor’s goal is to leverage both their own and other peoples money to increase their investment portfolio. In this article we will investigate how a Line of Credit can become a powerful weapon in every investor’s armory.

Using your home as part of your investment strategy

Beside the emotional attachment many people may have to their home, it can used in a powerful way to unlock capital and become a key element in their investment strategy.  Owning a home is an investment in the future.

Over the years you have been wise. You chose your home carefully and just as carefully managed your loan.  As your property increased in value and principle was paid off, now you have developed equity.

There's not much point having thousands of dollars tied up as equity in a home if it means missing out on good investment opportunities.

Now, how can a disciplined investor release this equity to build wealth?

A Line of Credit works like a very large credit card. Once you get over the emotion of having a credit limit equal to 80-90% of the value of your house, you can start to put that money to work in your investment strategy.

How does a Line of Credit work?

Establishment after successful application releases an available line of credit up to the value of 80-90% of the value of the property put up as security*.  

The facility operates as a loan and as a transaction account.

The facility enables you to direct income from all sources into your loan account.  Salary can be directly credited to the LOC. Funds could be transferred via BPay, or internet banking transfer. 

A credit card is commonly linked to the facility which when used correctly for all living expenses should never attract interest as an automatic sweep from your LOC pays the full outstanding balance on due date. This allows a major portion of your income to remain in your loan account longer. 

Are there other advantages with a line of credit?

Immediate and easy access to available funds is an optimal advantage. Your LOC can be linked to credit card, ATM, EFTPOS, on-line and telephone banking and cheque book access.

There are no limits on repayments and withdrawals up to your credit limit.  

The purpose of a withdrawal is unquestioned. You determine the use of funds.  Available credit may be used to take advantage of tax effective investment opportunities as they arise.

Some lenders will establish a LOC with no set term and many LOC facilities may run well into retirement. On the other hand, there is no early payment penalty.

The option of principal repayment is entirely yours.  The LOC is flexible and transferable. Should you decide to upgrade your home the facility is simply transferred to your new property.

I don’t need a mortgage facility. How can I use a LOC for investment purposes?

Another scenario where a LOC is often utilised is for an investor who wishes to borrow against the equity in a property for future investment use and they want to minimise the amount of interest paid on the loan.

When a LOC facility is established, it can have a nil balance and no interest is charged until such time as they actually make their investment, whereas a traditional mortgage will close when the balance is reduced to nil.

Let’s say you have a LOC for $250,000. This means you can use up the total of $200,000 all at once or perhaps invest $50,000 in the share market. If you did the latter, you would only pay interest on $50,000 as the remaining $200,000 untouched to be used at a latter date.

Some LOC will allow you to capitalise the interest until you either reach the limit of the facility or a set percentage of the limit. This means that the repayments can be added to the amount already drawn down.

The LOC could be linked to your on-line stock trading facility, or on-line payments made for brokerage,etc.  Income from dividends, options written, share sales, etc, can be paid into the LOC with minimum clearance times further minimizing interest paid.

Being Ready.

Having funds available to take advantage of opportunities is another optimal advantage.  The negotiating power of “cash-in-the-hand” is immense and can potentially secure contracts that would otherwise not happen.

Even if you don’t use it immediately having funds available sitting there ready opens up more opportunities for you the investor.

*Sometimes loans are split to have a portion of the loan as a principle-interest loan (which may be further split to take advantage of periods of fixed interest, etc) and the other portion as a LOC. In either case the Loan to Value Ratio (LVR) will not exceed the lender’s established parameters.

Warren Davies is a Mortgage Consultant with Investor Finance