Various split loan combinations for property investors
Finance is so important at any time, but at the moment with the adjustments to loans and property investments in general, having a good knowledge of the various loans is helpful in making the right decision which will benefit your finance management.
About the only certainty we have at the moment (well, so we have been told) is that interest rates are going to keep going up. How much they will go up is anyone’s guess.
This means there are two considerations to make when setting up your loans on your investment properties. One is the interest rate you are expected to pay on a new loan and what you will be paying as time goes on, and secondly whether you want to pay down any of your loan as you make your repayments. Giving consideration to both these factors here are some split loan set ups for your consideration:
Fixed interest – interest only and interest plus capital repayments. This is where the interest is fixed on both loans but only one is paying off the capital as well. The interest only loan does allow for a slightly less repayment than if the whole loan was on fixed interest plus capital. The owner does have a set amount to find each payment and this can be a good financial arrangement for people who do not have excess cash each month and struggle with repayments changing from time to time.
Variable interest – interest only and interest plus capital repayments. An owner may go this way if they do not intend to hold the property for a long period of time as these loans are usually at a lower percentage initially than a fixed interest loan. The owner takes the chance that interest will not go up much before they sell the property.
Fixed interest and variable interest – fixed interest/interest only and variable plus capital repayments. This loan could be where the owner takes a larger portion of the loan on fixed/interest only to keep the repayments down, but also picks up the option with the variable interest on a small loan and still makes some capital repayments.
Variable interest and fixed interest – variable interest/interest only and fixed interest plus capital repayments. The reverse here is that an owner may take out a smaller variable/interest only loan but a larger loan with fixed interest and capital repayments which will have a set repayment for the term of the loan. This would be more ideal for the owner who intends to hold the property for a longer term and wants to pay down some of the loan as the time goes on.
Interest only – fixed interest and variable interest. This is where the owner opts to only have interest only loans, but one is fixed and the other variable. This way there is the advantage with the fixed loan if interest rates go high, but benefits if the interest rates go down.
Interest and principal – fixed interest plus capital repayment and variable interest and capital repayments. This is not such a popular loan because if paying capital off with both loan types, the reduction in repayment amounts, which is the most common reason for a split loan, is not dramatically changed.
When investing in property finance repayments are critical to the success achieved in the process. During the period that a property investor is growing the portfolio different loan types will be used, but interest only loans have become very popular, allowing the owner to either borrow more than initially planned, or repay less until the property can become positively geared.
Filed Under: Interest Rates
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