When property portfolios start to grow, many investors make the mistake of securing the same mortgage they’ve always used with the same bank. Often, these mortgages aren’t tailored to help investors meet their goals, they’re standard off-the-shelf products replicated for thousands of customers.
We believe this is the wrong approach – your circumstances and your goals are unique, so your mortgage should be too.
Understanding your goals and circumstances
Figuring out what you’re trying to achieve by investing in property is the first step to making it happen.
Key questions to ask during this stage include:
- What would the ideal outcome of your property investments look like? In 5, 10, 20 and 30 years?
- How much spare income do you have to service your mortgage and cover extra costs like renovations and maintenance?
- Do you want certainty or flexibility with your mortgage repayments? Or both?
- Where are interest rates heading in the near future?
Tailoring repayments to your goals
Generally speaking, there are two options when it comes to making repayments on your mortgage:
1. Interest only
Ideal for investors who have low cash flow and own properties that are likely to increase in value. Also suited to those who are still paying down their mortgages on their own home. This is a great way to keep costs low while you wait to cash in a capital gain, but it may come with a slightly higher interest rate when it does kick in after the grace period.
2. Principal and interest
The standard mortgage repayment option, suited to investors who own property with high rental yields and who want to build equity over the long term.
If you’re not sure what’s right for you, speak to an experienced mortgage advisor for impartial advice.
Cross-collateralisation occurs when the bank uses more than one property to secure a loan or loans. In the short term, this can be a great way to quickly expand your portfolio but in the long term, it can cause serious headaches.
If your whole portfolio is cross-collateralised through one lender, that lender may limit what you can do with the proceeds of property sales, or restrict your access to equity. It can make refinancing much more complex and if you have several mortgages with one bank, they may even restrict your access to certain products (like interest-only loans).
It’s better to ensure that every loan for each property investment is separate, giving your lender less power over your portfolio.
Flexibility and protection
A variable rate loan means flexibility and a shorter commitment. With one of these, you may be able to make as many extra repayments as you like and avoid a break fee if you decide to refinance.
Fixed loans, on the other hand, provide certainty and protection against interest rate fluctuations. You make the same repayment every month, and you lock the same interest rate in for 6 months to 5 years.
Depending on your circumstances, you may prefer either of these or both. With a split loan, you can combine both types so that you can protect yourself against interest rates and have some certainty, while still having the flexibility to make extra repayments.
As you can see, choosing the correct mortgage structure can be complex. Don’t leave yours to chance – get in touch with an expert mortgage advisor at PTR Mortgages soon to make sure yours is structured to help you achieve your goals.