In today’s market there are more finance options available than ever before, and with endless information at our fingertips, selecting a loan should be relatively easy. For the first-time property investor however, choosing the right loan can still often be one of the most complicated steps when investing. At times, it can even become a complete barrier to entry.
For example, one of the biggest mistakes first time investors make is to rely on the advice of family and friends instead of an unbiased property expert, and this can often cost them significantly in the long run. Adding to this, it really is becoming more and more difficult to receive approval on a loan, so it’s absolutely crucial to make the best choice for your specific situation or you risk missing out on getting a kick-start to your investment portfolio.
To help new property investors make the right decision, here are the 6 most common finance mistakes first-timers make, and how you can avoid them:
Going on spending sprees
A significant number of new investors today are applying for loans of 90% and upwards, and given this high level of debt, banks and insurers will look at purchases from past statements to determine the applicant’s consistency to determine their eligibility. Therefore it’s crucial to avoid any erratic purchases as this could very well lead to the loan being rejected.
Doing TOO much research
Conscious of making an uninformed choice, many new property investors will spend a great deal of time researching all options available to them at various banks. But while having an understanding of the market is important, if a person supplies their details with a bank regarding a loan (even if it’s just to enquire about rates) this can actually generate a ‘hit’ on their credit file. And strikes on a credit file mean that will banks assume the person has been declined elsewhere, making it harder to gain approval!
Forgetting to pay the bills
Forgetting to pay the odd mobile phone or credit card bill may not seem like a big deal, but any missed payments in fact place a default against a person’s record, and this is a big red flag when being assessed by banks and insurers. If you are aware of any defaults against your name, it’s crucial to be honest and address the reasons in your application. If you don’t, you risk being deemed too untrustworthy.
Believing that brokers have higher interest rates
It’s a long-held misconception that brokers will cost more than going directly through the banks as they add on a commission fee. But in reality, brokers make a profit from the commission they receive from the bank once a client’s loan has been approved. This means that from the applicant’s perspective, a broker provides an unbiased expert opinion, and it’s entirely free of charge.
Not having their current finances set up properly
When applying for a loan, your savings and credit card accounts are extremely important. What many new investors don’t realise is that their credit card limit affects their chance of getting a loan. So even if the card has zero debt waiting to be paid off, the limit itself is still considered debt by the banks, because this is how much you have the capacity to spend. Similarly, having all of your money in a single ‘everyday savings’ account is detrimental as it isn’t reflective of how much you’re actually saving to repay the loan.
Fixing interest rates at the wrong time
Most people fix rates when the rates are already on the way up, instead of when rates are historically low (i.e. the current time). If an investor isn’t planning on selling the property, they should consider and weigh up the options for fixing the interest rates for the long term. 5 year fixed rates are currently* at a historic low at 3.99% with CBA. (*March 2017).