Firstly, it’s important to point our that I’m not a financial advisor and I don’t know the details of your specific financial position. So the information provided here is a guide to some of the most common ways people pay for solar systems in Australia.
For the best finance option for you, I’d advise speaking to an accountant or financial advisor first, so you can have an expert opinion based on your unique circumstances.
When designed thoughtfully, a well financed, properly-sized solar system can earn you more money every month than it costs you to finance. Yes – even including interest. However, you need to shop around for the best finance option for you.
Below are 6 common options for property investors to finance a solar panel system:
- Roll it into a investor mortgage loan at the time of application
If you’re building a new investment property or shopping around for a new loan now is the perfect time to roll the cost of a solar system into your mortgage. This way you prevent the need for further finance paperwork and applications at the time of solar installation. You can rest easy in the knowledge that the funds are sitting there waiting to be drawn down when appropriate.
At the time of writing this blog, the average interest rate of an investment mortgage loan was around 5%. Considering the 16%+ return on investment you could be making from solar on your property, you’d certainly be better off borrowing more against your loan to invest in solar than to reduce your mortgage.
Before you decide, you should compare the total cost of increasing your investor mortgage loan vs a short term solar loan. Be careful of big application or variation fees and any impact it might have on lender’s mortgage insurance.
- Refinance your existing mortgage – increase loan or redraw from your existing mortgage
Depending on your personal circumstances and when you took out your investor loan, you may be pleasantly surprised at the saving you can make if you speak to your mortgage broker and ask them to shop around to find you a better mortgage deal. Beyond saving money by reducing your interest rate the broker can also seek to increase the loan value if the equity in the property has increased since the loan was originally established.
Again, be careful of big application or variation fees and any impact it might have on lender’s mortgage insurance.
Alternatively, if you have an offset facility or redraw as part of your existing mortgage, then you can withdraw the money required to pay for the cost of a solar power system from your current mortgage without incurring substantial fees that come with a new loan.
- Green loans
Green loans are offered by financial institutions that specialise in solar loans and often have lower interest rates than comparable unsecured personal loans. Some even come with rates more closely resembling a home loan than an unsecured personal loan.
Green loans are only available to be taken out for approved green products; which include home solar systems from a Clean Energy Council Accredited installer, and must be paid directly to the installer upon receipt of an invoice.
Setting up a new loan, whether it’s in addition to your mortgage or a green loan, usually attracts fees. Watch out for establishment fees, monthly fees and early repayment fees that can add a significant amount to the total cost of your system.
But if you look carefully, you can find a green loan with a low interest rate, long term options, low up-front fee, no on-going and no early repayments fees.
- Personal loan from bank
A finance company may be able help those who can’t borrow more on their investment mortgage. If you don’t have the discipline to repay more than your minimum repayments, then a personal loan may work out as a cheaper option in spite of the higher interest rates.
Similar to green loans, some lenders will factor the loan purpose, your home ownership status and other aspects, and may offer better than market interest rates.
A finance company will pre-approve your loan, allowing you to negotiate as a cash buyer and ensuring you can get the best system for your money. If you decide to sell your property, then the loan is unaffected as it is guaranteed by you personally and not tied to your property.
Economics 101 says, a dollar today is worth more than a dollar tomorrow. This suggests that just sitting on surplus cash, especially in today’s market where interest on savings is below inflation rates, is not a smart way to make your money work hard for you. However, depending on your personal circumstances and investment strategy using a cash surplus to pay for a solar panel system up front for your investment property may not be your best option either.
Yes paying cash will mean avoiding potential fees, interest charges and not increase your debit level but is this the best way to make your money work for you?
I’d recommend speaking to a tax accountant to see how your money can best-placed to work hard for you.
- No interest loan
In theory, ‘no-interest’ loans enable you to buy solar and pay it off ‘interest free’ over time, but establishment, monthly and other fees can add up over time to act, in effect, as a small interest rate.
Finance companies that offer interest free repayment schemes receive a fee (typically around 15-25% of the price) from the solar installer, which is where the real money is made.
If you’re paying cash, the sticker price of a system may well be the same, but the merchant will be much more negotiable on cost than if you’re financing the purchase via a no interest loan.
25% of the sticker price is more than what a typical solar installer will make on the sale. To make their margin, the installer may sell you an inferior inverter and cheaper panels, hurriedly installed in order to make a profit. The more likely scenario is they’ll have a high retail price of the system (in comparison with installers who don’t offer interest free deals) to cover the cost of offering you a solar payment plan. Buyer beware.
The finance company now owns the debt, and is responsible for collecting repayments and ensuring that the loan is repaid. If you miss repayments, or are unable to pay the loan, then this could adversely affect your credit rating and ability to get credit in the future.
For the best finance option for you, we’d advise speaking to an account or financial advisor first, so you can have an expert opinion based on your unique circumstances.
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