How to get a loan during the credit crisis

By Sarah Mills

Plunging interest rates, falling petrol prices and a still-healthy economy are prompting some investors to return to the property market — either in search of a bargain or a safe haven in the wake of the global credit crisis.

But with credit tightening and risk rising globally, it is more important than ever for investors to be well-armed with a plan to present to financiers.

Such a plan should include cash-flow calculations and a schedule of returns over a five-year term to give lenders a clear view of your financial position and the investment's prospects.

There are eight main things you need to consider when developing a financial plan:

• Property price
• Property rental
• Purchasing costs
• Ongoing costs
• Loan type
• Gearing level
• Depreciation schedules and other tax issues

The lender also will want to know your income, assets and liabilities to get a sense of your broader financial position. This will enable them to assess your capacity to repay the loan under a broad range of scenarios, such as recession, job loss or asset depreciation.

Loan expenses and repayment schedules for the plan will be affected by the following:

• The loan type: Investors can choose from fixed-rate loans, floating/variable rate loans, split loans (a combination of fixed and floating) or line-of-credit facilities.
• Repayment choice: Interest-only repayments or principal and interest.
• Mortgage insurance: Borrowings of more than 80 percent of the value of the property may require mortgage insurance.
• Level of equity: Borrowing levels not only affect the need for mortgage insurance but may flag unacceptable risk to the financier at this stage of the cycle. This will have to be managed in the plan.
• Gearing choice: Investors can either negative gear, wherein they are prepared to trade off a short-term loss against an anticipated gain, or adopt a more conservative positive gearing strategy, wherein borrowings are sufficiently conservative to allow a weekly profit/income.

Purchasing costs
When incorporating the purchasing costs into your loan plan, you will need to consider:

• Loan establishment fees — legal fees, mortgage registration fees and valuation fees.
• Real estate agent's commission.
• Conveyancing fees and other legal costs
• Stamp duty
• Inspections
• Surveys
• Title registration
• Strata title investigations
• Insurance

Ongoing costs
These are expenses that are incurred after you purchase the property. They include:

• Interest repayments
• Property management fees
• Pest control
• Security costs
• Stationery and postage
• Lease fees and advertising
• Body corporate fees
• Depending on the property, ongoing costs can also include lawns and gardens, cleaning, linen and laundry
• Council and water rates
• Maintenance and repairs
• Bank account keeping fees
• Insurance — building and contents, public liability and landlord insurance
• Land tax
• Travel and car expenses — investors are usually entitled to one trip each year to visit a property.

Tax
A few things to consider here include: identifying all tax deductions — all capital costs and all revenue costs; and setting depreciation schedules.

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