Property investors can fund purchases through savings or by unlocking equity in existing properties. The video explains the difference between lender pre-approval, which is often unverified, and formal approval, which requires a full application and property valuation. It covers how to structure equity withdrawals for purchases planned over the next 3-5 years and practical steps like using finance clauses to protect yourself.
Questions this video answers
5% to 20% deposit (plus legal fees, disbursements and stamp duty).
Three to five years.
Anywhere between two hours and two weeks (depending on the lender).
Usually within two days from the time of initial contact.
Conditional approval.
Chapters
In chapters eight and nine, we look at ways of funding your purchase and getting your loan approved. Now, as you may or may not know, I'm a mortgage broker specializing in property investment. So every year I meet and talk to thousands of investors. And you know, for many people, the finance side of things is not that sexy. And I understand this, but it's a very important part. And while many would rather be designing a kitchen or choosing a bath, knowing how you can fund your next purchase and the one after that is a fundamental part of successful property investing. So in this video, we look at the critical things you need to know about funding your next project and how to make sure you get your loan approved. Now, you need to think about where the money is going to come from to fund finance your investment, property purchase and renovation. Essentially, it will come from either your savings or from unlocking the wealth that has been building up in your home in the form of equity. If you are lucky, you might even have a family member who may be prepared to help you by using their own property as a guarantee. But realistically, that option is not very common. The funds you will need to contribute to a property purchase will be funded 5 to 20% deposit, plus additional funds for your legal fees, disbursements and stamp duty. Let's have a look at the equity model. I love this. If you've already got a home commonly referred to as your principal place of residence, and have been paying the loan off quickly, thereby reducing the total amount of interest you'll pay over the life of the loan, then assuming your property has increased in value, you'll probably have some equity available. Unlocking this money or equity tied up in your principal place of residence or even another investment property is the easiest way to buy your first investment property. So how much equity do you really need? You need to decide how much equity you want to take out from your property. It's important to consider the amount you'll need for this purchase and also for the purchases that you intend to make over the next three to five years, plus a buffer and your renovation costs. That is all the figures that we calculated above. If you're accessing equity to buy another property, and if your goal is to purchase a further property in the next three to five years, then you should factor into your finance application now. Not just the purchase of the property now, but the one in the future as well. So why is the equity model beneficial? Releasing equity from your home in a structured way allows you to keep your savings in the bank. Most investors want to combine the Benefits of utilising none of their own savings with tax minimisation advantages. When buying an investment property. Accessing equity in your home or current investment property allows you to leverage your current situation and to use the lender's funds to assist you with than buying a property, hence buying you time in a growing market. The more exposure you have to a growing market, the more opportunity to grow equity and in the long term, the more equity you have to help you fulfil your goals. Bear in mind that geographic markets do not all grow at the same time or at the same rate. So spreading your exposure and therefore your risk across different states, towns or suburbs is one investment strategy. To reduce risk. Obviously you also need to be able to service any new loans and maintain an acceptable standard of living. Accessing equity is a clever technique. It allows you to use the money you have put into paying off your loan and also the capital growth you have gained rather than your savings to assist you in achieving your financial goals. So let's just leave your savings there as a buffer. So where do you get the money you need a loan? Let's start at the beginning of the process. The pre approval. Now, getting pre approved for a loan prior to putting in any offers is obviously extremely important. But what most people don't know is the different stages of actually going through and getting that loan approved. So I want to have a look at that for you. Essentially, many people believe that if their lender says that they have pre approval, which is sometimes called conditional approval, then the lender has done all the checks and balances and you can go with confidence and purchase a property. Now the reality is that many lenders will do a cursory evaluation and approve the loan. And in actual fact, all they've really done is they've registered your interest, they've typed in the information you've given them into a simple calculation and said yes, you can borrow that amount. This is not a full evaluation and in actual fact, when it comes to getting a formal approval, you, you might be really, really upset to find that you can't get your loan. Now other lenders will do a full evaluation, even contacting your employer to verify your employment. Obviously their pre approval is worth more than the previous case. So you need to know what lenders are saying and what you need to ask of them. If a lender tells you you have pre approval, then ask if it has been filled, fully verified, or is it based on information that you've just given them. You need to know what you can afford so you can Go with confidence and buy your property. A formal approval or being formally approved is when you have had not only your situation evaluated but the property you're buying or refinancing has been validated as well. Now that is the valuation has been done and you'll be receiving the contract from the lender to sign so that the funds will be available at sale settlement. Thus, when you're told you have a pre approval, make sure if you go ahead with a purchase that your pre approval is really worth the paper it's written on. In addition, protect yourself by having a finance clause in your letter of offer. We'll go into that in the next module. This allows you to get the property off the market, but you have the seller agreed that the lender needs to give some time for you to get the final approval, ie get the valuation done before you formally exchange the contracts. Now once you've found a property, it's time to get your skates on. If you have a loan pre approved, you need to get the contract of sale to the lender or the mortgage broker asap, especially if you're under a five day cooling off period. You may also provide your most up to date payslips and if you don't have a confirmed pre approval then a full assessment of your loan application will be required. Depending on the lender, this can take anywhere between two hours and two weeks. Now your valuation is also required. On most purchases the lender has to order a valuation. The valuer has to accept the order. Then they contact the seller's agent who may have to contact a tenant or owner to organise a time to visit the property, usually within two days from the time of the initial contact. After visiting the property, the valuer then researches comparable sales and compiles a report. The report needs to be approved by the valuation company internally. It is then sent to the lender who looks for adverse factors and if there are none, accepts the valuation. The valuer works for the bank but is not part of the bank. These are usually independent contractors. You do not get to choose who your valuer is and often you don't get a copy of your valuation. Only then if all the boxes are ticked, do you get a formal approval. What's more, often the valuation for an actual purchase is not ordered until all your details are substantiated. Depending on the lender, this could take a day or a week. If a lender happens to be offering a short term promotion for a super duper fixed interest rate for instance, they will be overwhelmed with business which means their processing times could blow out and and you may miss your finance clause deadline or even have to delay settlement, which could incur penalties to you. You might be thinking, nah, that won't happen to me, but believe me, it can and it does happen. It's happened to me even. These are real examples of my experience with lenders and buyers and they should serve as a reminder to get all your ducks in a row and to allow time for things to take longer than imagined. So when we go into putting clauses into your contract a little bit later, putting in extra time to get everything done is so very important. Let's look at formal approval. This is what you really, really want and you don't get to sleep until you get it. This means the lender has verified your loan application and that the property is worth what you've agreed to pay for it. It also means the property has been exceeding accepted by the lender as a security that fits their policies and those of the mortgage insurer if needed. If you have a finance clause in your letter of offer, then you are finally ready to exchange and formally agree to buy the property or move from the cooling off period. If you bought at auction, you can now just relax.
