Five investment finance strategies fraught with risk

1. Offering vendor financing

It is possible to sell to buyers with poor credit ratings by selling the property under contract to settle at a higher price at a predetermined future time. In the meantime the buyer lives and pays a sort of rent which works out to the loan repayment plus a bit more. Then when they settle the buyer purchases it at a price which is hopefully below the market value ensuring it’s easier to get a loan. Be careful with this though, people interested in buying this way have been determined by banks as being a liability for a reason, there are few reasons to ignore that assessment.

2. Running a self managed super fund

Running a self-managed super fund is a great idea if you’re absolutely ready to commit a lot of time and research into investment. A lot of people have lost their valuable nest egg through poor strategies and poorly executed ideas. Plus you can't live in a property owned by your super fund and you can't rent one from it either.

3. Taking bridging loans

It might seem like a no-brainer, taking a temporary interest-only loan on a new property before you’ve sold your old one but you risk defaulting on your loan if you can’t sell your old property.

4. Being a guarantor for a family member

Agreeing to guarantee a loan for a family member could mean the bank chasing you if they default. This might mean losing your house. It’s hard to say no, but a better option might be to pony up some cash so they can afford a bigger deposit or buying the property yourself and transferring it when the payments are more manageable.

5. Cross collateralising

Using multiple properties as collateral for one loan might be tempting but lenders can then reduce your borrowing capacity if they apply their own credit criteria to your income position to assess serviceability.  They could force you to sell your properties to reduce your debts if your property falls in value. You might be better off buying in a joint venture.

Alistair Walsh

Alistair Walsh

Deutsche Welle online reporter

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