Developing and investment loans are often assessed differently by lenders than owner occupied loans. Many banks will tell you that these loans aren’t that different from each other, which may be true on paper, but in fact the lender is also assessing the profitability on an investment loan, as the outcomes do vary.
Getting your pre-approval
When developers and investors approach their local lender for a pre-approval, sometimes they receive misguided or inappropriate advice. Some lenders may not specialise in a certain type of loan or investment loan scenario whilst another may be proactively trying to attract this type of client for their portfolio. If you approach a lender who doesn’t specialise in these loans, you can be told poor advice from a bank manager who is not qualified to give an opinion on the project, and may not want this kind of customer. In these cases, developments can be put on hold and time is wasted when another look at the viability of the project is needed.
The most common example of wasting time on this is when you approach your lender to see if you qualify for a loan amount and they give you the pre-approval. After you have spent time and money on getting the working drawings completed for your project, the bank takes the assessment to the next stage. At this point someone more senior in the lending organisation will assesses the loan and you are told the loan is conditional upon items that were never discussed upfront, or worse outright declined with no reasoning.
These items may be a greater deposit, higher interest or that you are required to raise the titles prior to starting construction on the development, or even have a certain number of pre-sales. Any condition may have a time and cost impact on your development that you were not expecting, and it is imperative that these things are discussed at the outset. If your bank manager isn’t willing to go over these details, it’s likely that they are not well versed in investment loans and that you should shop around.
Not all banks have the same policies and it pays to get a broader idea of what is on offer by speaking with several before taking the plunge and getting that pre-approval. Remember that you are the client and have choice on who you want to have as your lender.
If you are certain as to the knowledgability of the lender and feel safe to continue, it’s best that you know what type of loan will suit you and your investment. Typically, there are two types of loans available to investors: Interest only, and a line of credit.
With an interest only loan, the principal borrowed amount remains the same for the duration and you pay the interest on that amount monthly. This is attractive to investors who will be selling their development on completion, as they can pay back the entire amount, and hopefully have made a profit in the meantime. Interest repayments can be tax-deductible and monthly payments are less than that of a normal loan, making it easier to enter the property game.
A line of credit loan is one where you can borrow against any equity that you have built in an existing piece of property that you own. This can be risky, but talking it over with your bank manager should answer any questions you might have about this type of loan.
Once your finance is all sorted out, you can start getting approvals and choosing your designs.
Erin Warbrook loves poring over house plans and dreaming big when it comes to property. She trusts the advice of Ventura ID Development Experts when it comes to investment properties.