Your Property Portfolio Is Growing. Is Your Loan Structure Keeping Up?

As a property portfolio grows, lending can become more complex.

An investor with one property may have a single loan to manage. As a portfolio grows, investors may have different loan facilities, repayment types, ownership structures and property security arrangements.

Interest-only investment loans, separate loan facilities and different property security arrangements may be relevant as a portfolio grows. 

Understanding their costs, risks and lending requirements can help investors review their existing finance arrangements.

How Interest-Only Investment Loans Work

With an interest-only loan, required repayments generally cover the interest charged for an agreed period rather than reducing the principal.

However, the loan balance generally does not reduce during the interest-only period unless additional repayments are made. When the loan changes to principal and interest repayments, the outstanding principal must usually be repaid over the remaining loan term. This can result in higher required repayments.

Interest-only loans may also have different interest rates and result in more interest being paid over the life of the loan compared with an equivalent principal and interest loan, depending on the loan terms and repayment arrangements.

For property investors, repayment type is one part of the lending structure to consider. Available options depend on the loan, lender requirements and the borrower's financial circumstances. 

Structuring Loans Across a Property Portfolio

Investors with several properties may have multiple loans with different lenders, repayment types, and fixed or variable rates.

Property investors may use separate loan facilities for different properties or borrowing purposes. However, having separate loans does not necessarily mean each loan is secured against only one property.

Cross-collateralisation occurs when multiple properties are used as security for one or more loans. This can affect refinancing or property sales because the lender may need to reassess the remaining debt and security before agreeing to release an individual property.

Depending on the lending arrangement, separate loan facilities secured against individual properties may also be available.

Serviceability Still Matters

Owning several properties or holding substantial assets does not automatically mean an investor can borrow more. 

Lenders assess income, existing debts, household expenses and other financial commitments. They may also consider rental income, although the way rental income is treated varies between lenders.

APRA requires authorised deposit-taking institutions, including banks, to generally assess new housing loans using a serviceability buffer of at least 3 percentage points above the applicable interest rate, subject to permitted exceptions.

APRA also applies limits to the proportion of certain new housing loans that can be issued at high debt-to-income ratios, with separate limits for owner-occupier and investor lending. 

These measures may affect investors with substantial existing debt. Non-bank lenders may apply different assessment policies. 

Complex Ownership Can Add Another Layer

Some property investors hold assets through companies or trusts. These arrangements may involve different legal owners, borrowers, income recipients or guarantors.

Lenders may apply different assessment requirements depending on the ownership and borrowing structure. Supporting documents may include trust deeds, company records, financial statements, tax returns and details of relevant guarantees.

Available lending structures depend on lender policy, ownership arrangements and the borrower's financial circumstances. Investors should seek independent legal and taxation advice when considering company or trust ownership arrangements.

Reviewing Your Investment Property Loan Structure

Reviewing an investment property loan structure involves understanding existing debts, repayment arrangements and the security supporting each loan. 

These factors may affect refinancing options, borrowing capacity and the ability to make changes to individual properties within a portfolio.

White Picket Mortgages, based in Gloucester, New South Wales, can help property investors review existing investment loans, understand their borrowing capacity and explore available lending structures. Call 0412 247 193 to discuss your investment property finance options, subject to lender assessment and eligibility criteria.

Important Information

This article provides general information only and does not take into account your personal objectives, financial situation or needs. 

It is not a recommendation to apply for a particular loan, refinance existing debt or adopt a specific ownership structure.

Lending options, borrowing capacity and approval are subject to lender policy, serviceability, credit assessment, property valuation and eligibility requirements.

Investors should seek independent legal, taxation or financial advice where appropriate before making investment or ownership decisions.