How To Use Split Loans For Investment Property Finance

Copyright (c) 2010 Kaye Dennan

Financing investment properties is an important part of building a property investment portfolio, whether it is for buying a home or investing property. Managing property investment finance needs to be an ongoing process when a person owns investment properties and the success of a property investor will often relate back to their finance skill.

Finance is so important at any time, but at the moment with the financial world the way it has been for some time and with property investments in general, having a good knowledge of the various loans is helpful in making a decision which will benefit you both in the short term and the long term.

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. When they are going to change is anybody’s guess although we do expect sooner rather than later, but at what speed they go up is the most critical factor.

Here are two considerations to make when setting up your loans on your investment properties:

1. What interest rate you have been quoted and what you will be paying as time goes on; and

2. whether you want to pay monies off your loan as you make your repayments.

With consideration to both these factors here are some split loan suggestions for your consideration regarding investment property financing:

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 loan as well. The interest only loan does allow for a slightly less repayment value than if the whole loan was on fixed interest plus capital. With this arrangement the owner has a set sum to find for each payment and this can be a very good arrangement for those starting property investing or for those on fixed incomes with little room for movement in repayments.

Adjustable rate – 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 is a fixed interest loan. The owner takes the chance that interest will not go up much before they sell the property. A loan arrangement such as this is a good one to have if it seems likely that interest rates will go down, but that seems unlikely at the moment.

Fixed interest and adjustable rate – fixed interest/interest only and adjustable rate plus capital repayments. This loan could suit 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.

Adjustable rate and fixed interest – adjustable interest/interest only and fixed interest plus capital repayments. The reverse here is that an owner may take out a adjustable/interest only loan and a 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 at the same time wants to pay down some of the loan and build equity in the property. Most probably the fixed interest and capital repayment loan would be a larger one with the intention of building equity.

Interest only – fixed interest and adjustable rate. This is where the owner opts to have interest only loans, but where one loan is fixed and the other variable. This loan set up gives the advantage of a fixed rate if interest rates go high, but benefits if the interest rates go down.

Interest and principal – fixed interest plus capital repayment and adjustable rate plus capital repayments. This is not such a popular split 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.

My suggestion is to consider your options, look at your long term plans for property investing and work out which type of split loan would suit your current and long term property investing. It is quite possible that split loans could be the way to go even if you are not purchasing but refinancing your investment property finance.

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