Investment Property Loan – the importance of getting your finance right for purchase

Date: 1 October 2011

There is some good news in the mortgage market for property investors: a clutch of banks are trying to outdo each other with deals on fixed rates. This is very good news for those investors who like fixed rate loans due to the fact that they can lock in rates and know exactly how much they need to pay on their mortgages going forward. All fixed rates, either one, three or five years are affected with some fixed rates are now well below standard variable rates.

At the time of writing StGeorge bank was offering a three-year fixed rate loan at 6.39 percent a substantial discount to variable loans which currently average 7.1 percent.

Interest rates however are just one of the factors to consider in getting your finances right for purchase. There are significant costs to consider and the investment property loan needs to work for you not against you: it’s there to build for your future so take care up front to get your numbers right. You want a mortgage that offers you flexibility, that is, the ability to run an offset account as well as the flexibility to fix rates when you feel it is right to do so. You may even need to seek the services of a mortgage broker to help you navigate all the choices available to you.

Essentially, the funds you’ll require to cover the purchase include stamp duty land transfer associated with the purchase; stamp duty associated with the mortgage, legal fees and disbursements including mortgage transfer fee, land transfer and registration fee, loan application fees (if any), incidentals including strata searches, pest and building reports, and minor repairs, renovation. Etc.

If you have less than a 20 percent deposit then the lender will charge you a one-off insurance premium that protects them for the risk they are taking on (the risk is you). This fee is usually ‘capitalised’, i.e. added on top of your loan but it can also be paid separately if you prefer. There is also a stamp duty charge on LMI which differs based on the state you are buying in.

In addition to the above-mentioned charges, there are also disbursements. These usually surprise the unsuspecting purchaser at settlement. Disbursements are a tally of what the previous owner (the vendor) has paid ‘year-to-date’ on the land/property and wants to recover from you.

For example, the vendor may have paid a year of council rates upfront but if the year is only half way through you will be required to reimburse them. This amount is calculated on a pro-rata basis and is the amount the vendor paid but is no longer responsible for.

Given that you will own the property for the rest of the year and will therefore be liable for those rates from the time you settle it is only fair that you pay these disbursements. The person doing your conveyancing usually gets a final copy of these disbursements a day or two before the settlement so they can tell you how much you need to provide on the day. Monitor these carefully!

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