Expert Advice with Philippe Brach 23/08/2017
Over the last year the lending landscape has changed drastically for investors. Interest only loans have become increasingly difficult to secure – but they are worth fighting for in order to maximise the return on your money.
Over the last 24 months, the banks have implemented a number of policies to put the handbrake on investors’ seemingly insatiable appetite for real estate.
Most recently, they began limiting investors’ access to interest only loans, with requirements ranging from a larger (mostly) 20% deposit - up from 5% - to more expensive interest rates for interest only products.
These restrictions have all been introduced to cool down investor demand, particularly for properties in Sydney and Melbourne.
Of course it’s impacting investors across the country, who are now finding it difficult to refinance or obtain a loan with a competitive interest only rate.
Though it may be hard in this climate to get an interest only loan, they are worth fighting for, as they can save you a fortune in the long run – and ensure your money is working in your best interests.
Home loans vs investment loans
Broadly, there are two categories of people: people who have a mortgage on their home, and people who don't (as their own home is paid off, or they are renting).
If you have a mortgage on your home then, from a financial point of view, there is no way that you want to repay your investment loans in any way, shape or form, until you’ve fully repaid your home loan.
The reason for this is simple: it’s because every dollar of interest you pay to the bank on your own home costs you $1. However, every dollar you repay on an investment loan only costs between 53c to 65.5c for most investors - depending on your income tax bracket.
To put it another way: when you make a payment on the principal of your investment loan, you are reducing your tax-deductible debt. From a financial perspective, it makes so much more sense to prioritise the payment of your non-deductible debts, because it costs you more to hold these debts.
We suggest to our clients that their repayment priority should be:
1. Credit cards (highest interest non-deductible debt, 20%-plus)
2. Personal loans and car loans (high interest, 10-17%)
3. Home loan (non-deductible loan, 3.5-4.5% interest)
4. Investment loans last (tax deductible debts 4.3%–5.2% interest + tax refund)
Maximising your money
To get your money to work in your best interests, you need to have interest only loans on your investment properties for as long as possible. The above repayment priority suggestion allows investors to maximise every dollar, making it the ideal strategy for most investors, until their own home loan is fully repaid.
Planning ahead and factoring in various scenarios is all part of risk mitigation, which forms a big part of our service. When we sit down with a new client, we look at their financial situation so we can create a plan that allows them to maximise their money, and structure their cashflow in the smartest way. Interest only loans can be crucial to this process.
The banks and regulators are making it difficult for borrowers looking to secure 80%+ LVR interest only loans. In the current mortgage marketplace, having an experienced investment-focused mortgage broker in your corner is essential when making your next move. It’s all about cleverly blending together what the banks have on offer (and it changes daily!), your personal situation and your investment strategy.
Of course, for those with no non-tax deductible home loans - either because they have paid off their home mortgage or they are renting - there are a lot more options, but this is another story all together!
Philippe Brach is CEO of Multifocus Properties and Finance
. Philippe has over 10 years experience in property investment, he has helped many first time and experienced investors achieve their goals.
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property