Targeting Property Investors: 8 Key Principles for Investment Lending

Targeting Property Investors: 8 Key Principles for Investment Lending

As we all know, Australians have a huge love of investment property. Over the past 20-30 years many middle-class Aussies have taken advantage of equity in their homes to build investment property portfolios.

For mortgage brokers, property investors are great clients for many reasons; property investors love property, want to keep coming back to borrow more, and tend to have a lot of their loans as interest only.

All of this means that they can be wonderful long-term clients for mortgage brokers. We urge that brokers think of property investors as part of their key target market, as it will assist brokers in building a sustainable mortgage broking business.

Vision Aggregation started its flagship broking business in January 2000, and has written thousands of investment loans for all sorts of Aussies who have wanted to use property as a wealth building tool. In line with our desire to share everything that has worked for us, here are our 8 principles of investment lending for mortgage brokers:

1) Think long term

With all your clients, it is critical that this is your first step, even if they are first home buyers. Have the discussion with your clients; what is their aim over the next 5, 10 or 15 years. How they answer that question influences your advice. If you start talking about their long-term plan, and structure accordingly, you are more likely to win these clients over and keep them for those 5-15 years as you are the one driving the plan.

2) Avoid cross-collateralising

Cross-collateralising is where a loan is secured by more than one property. A broker might secure multiple loans against multiple properties. They might do this for a perceived interest rate advantage or it is easier to get approved (one lodgment instead of two). But it is always best to keep loans separately and individually secured, and here is why:

  • Sometimes one property goes up in value, and the other goes down. In this scenario, it is harder to use this property’s equity.
  • It is easier to release equity from better performing properties.
  • It is easier to move particular loan splits to another lender if you need to find a lender with better servicing policies.
  • It is cleaner for tax purposes.
  • It is significantly better for property accumulation.

3) Don’t use cash deposits to buy investment property

If the clients have a home and a home loan, and are planning to live in that home for a decent length of time, and they have their funds sitting in offset account, advise your clients to not use that cash as a deposit on an investment property.  It is significantly better to use their property’s equity.

It is always more efficient for your clients to hold cash as long as they can. As your clients accumulate property, cash buffers will become more and more important.

4) High loan-to-value rations can be your friend

Normally, most investment property purchases are structured like this; 80% loan against the new purchase and 20% of costs (plus the buffer), equaling to 25% against the existing property.

Then, there are aggressive investors who want to buy 3 or 4 properties in the next 10 years. What advise can you give these investors?

  • Ask your clients if they consider using LMI (Lenders Mortgage Insurance) as an investment tool.
  • Are your clients using 90% loan against the new purchase?
  • If your clients are using 10%, plus costs, plus LMI, plus the buffer, this is equal to 17-18% against the existing property.
  • This all means that these aggressive investors are using less of their existing equity and are saving it for next time.

If your client has access to LMI waivers for investment purchases, then this is definitely recommended. Property investors will love you and come back!

5) Keep loan splits separate for purpose

We would like to approach this principle with the following example…

If your client is refinancing and buying investment property, then:

  1. Lodgment 1 / Split 1 home loan = refinance home loan.
  2. Lodgment 1 / Split 2 investment loan = 20% plus costs plus buffer = 25% against the existing home.
  3. Lodgment 2 / Split 3 investment loan = 80% loan against the new purchase.

With investment loans, it is necessary that you avoid having redraw facilities. The last thing you want is for clients to access redraw on their investment loan and buy a car or go on a holiday; it means that the investment loan now has a mix of purposes.

So, what structure can you advise your clients to maintain? Keeping things clean is not only easier for tax purposes, but makes it easier for your clients to move if they need to. Overall, this is more beneficial for your client’s portfolio building.

6) Principle & Interest VS Interest Only repayments

If your clients have a home loan and plan to live in this home for a long period of time, then it is much better to have investment loans as interest only, even though the rate might be slightly higher. When your client is building their investment portfolio, it is all about the cash flow. This maximises deductions on tax returns, hence is a better solution for tax purposes. This also allows your clients to have a cash buffer to pay down their home loan quicker, and optimises their future in property investment.

Remember, as a mortgage broker, you advise your clients. Thus, if they want to build a property portfolio, these factors will be important, but the final decisions are up to your client.

7) Loan terms

If your clients want to build a big investment portfolio, then a beneficial solution is to continue resetting loan terms back to 30 years for their investment loans. If you are to reset their home loans as well, it is essential to have a well-documented exit strategy in place. Make clear all these notes in your Statement of Credit Assistance.

8) Compliance considerations

Whatever your recommendations are to your clients, always maintain your compliance. Make note of the reasons for your recommendations in your Statement of Credit Assistance. Refer to the long-term objectives discussed with your client, and talk about all structuring considerations. Ensure that your clients fully understand why you are recommending your ‘investor-friendly’ structures.

How Vision can help mortgage brokers

At Vision, we are industry leaders in understanding how brokers can attract investors. We have built all sorts of industry tools to help mortgage brokers succeed in their broking businesses and for their clients.

If you enjoyed reading this article, click on the below links to find out more on how Vision Aggregation are solely dedicated to supporting our brokers…

Click here to access Vision Aggregation’s webinar on How To Make Investors Love You.

Click here if you would like us to send you our industry leading portfolio workbook.

Click here if you would like a demonstration of our unique PIERS software which will help you show your clients the benefits of building a portfolio.

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