The type of loan that an investor takes out is a personal decision and should relate to their needs for cash flow and their capacity to manage their own funds.
If we accept that the outcome all investors want is both cash flow and growth from an investment and that a property can provide both, but not usually at the same time, then it becomes clear that a thorough knowledge of an investor’s personal circumstances is crucial when a choosing loan type.
An investor who chooses a property which is in its rental yield growth phase will have good cash flow immediately but not as much value growth. They will need a flexible loan option where they can divert this cash flow into loan repayment and gain property equity through debt reduction even when the property is not growing itself.
An investor who buys property in its value growth phase is likely to find the yields lower and so they will need a loan with the option to minimise repayments so that their personal cash flows are not overly affected. They will be receiving equity in the property through market growth and so they may not need to focus on debt reduction as much.
You need to pay attention to your client’s additional needs, such as capital expenses, education expenses and other life expenses As an advisor, your sound knowledge of how loans work will help you to be of greater assistance to your client when they are deciding what type of loan to acquire.