How mortgage strategy shapes your ability to hold property, and grow your wealth for decades into the future! (Ep.24)

Resources:

• Five mortgage strategies that can grow your wealth 
• How our mortgage strategy helps us to hold properties 
• Four critical mortgage offset strategies 
• Mortgage Strategy 101 – YouTube video series. 
• Mortgage Strategy 101 – Ep 1. The top 5 mortgage strategies 
• Mortgage Strategy 101 – Ep 2. Money management system 
• Mortgage Strategy 101 – Ep 3. Holding Property 
• Mortgage Strategy 101 – Ep 4. Optimise investment deductions 
• Mortgage Strategy 101 – Ep 5. Risk management 
• Mortgage Strategy 101 – Ep 6. Offset optimisation 
• Mortgage Strategy 101 – Ep 7. Getting the buckets set up in your money management system 
• Mortgage Strategy 101 – Ep 8. How to keep a stepping stone home when you upgrade 
• Mortgage Strategy 101 – Ep 9. Maximising your tax deductions by using a redraw facility 
• Mortgage Strategy 101 – Ep 10. How to manage risk through your net monthly surplus
• Mortgage Strategy 101 – Ep 11. How to set money goals so that budgets are a thing of the past 
• Why your Mortgage Strategy is more important than your interest rate! (Podcast Ep. 9 ) 
• Making the first move – why the first property you buy is the most important of all 
• The critical mistakes of property investment – starting without a plan 
• Why you need to plan for your future home when buying an investment property 
• Why short-term investing has long-term consequences 
• Why your approach and assessment of risk is paramount to property success! (Ep.10) 
• Why the land-to-asset ratio of a property can determine its future price growth 
• How data can help property investors identify gentrification before it happens 
• Property Cycle Management – why now is always the best time to buy if it suits your personal economy and you have a long-term property plan (Ep. 12) 
• Choosing whether to hold or sell investment property 
• Questions to ask when buying an investment property 
• How to succeed with Property and Create your Ideal Lifestyle 

Show notes

• It’s widely known that getting a low interest rate can save you hundreds and thousands of dollars over your life time. What most people don’t get is how an effective mortgage strategy can make you hundreds of thousands, or even millions over your lifetime through being able to hold one or more properties that you would have otherwise sold.  
• The devil is in the detail – how mortgage strategy can create wealth is quite complex and is not understood by most lending professionals. We have broken it down to 5 key areas you should focus on before taking out a loan:  
  • Offset optimisation 
  • Money management 
  • Optimsing investment deductions 
  • Risk management 
  • Holding property as you accumulate property over the journey  
• Where do you begin? Start by matching your mortgage strategy to your property plan for future accumulation.  
• Lending products are the same across almost all lenders – so the last thing you need to determine is the product, lender and rate after your mortgage strategy is clear as this can have a long-term impact on your wealth. Who your loan is with will come and go!  
• Attention all investors! (Current and future) – By using the offset account, you are preserving your capability to claim interest on the property as a tax deduction. This is relevant if you plan to purchase future properties or your existing home may change purpose to investment.  
• We love a good scenario – you want to purchase for $600,000 and earn $100,000 p/a and have $100,000 in savings.  
  • The first question – is it home or investment? Investment! 
  • To have a loan to value ratio of 80%, the loan you take would be $480,000. (80% of $600,000). What does that mean? You need savings of $150,000 to complete the purchase ($120,000 deposit + stamp duty and costs) – which you don’t have 
  • You are in Lender’s Mortgage Insurance territory because you need to borrow more than 80% of the property value.  
  • Q: So how close do you want to get to 80%? A: it’s all about the buffer. What amount of savings do you want to have available after the purchase?  
  • You want to be comfortable in case there are renovations or the oven breaks, your available funds buffer is up your sleeve for a rainy day. $20,000 is a common number for first time buyers scraping together a deposit.  
  • So $80,000 of your $100,000 savings will be used towards the property. Assuming that the costs to purchase that property are $15,000 but this is being conservative and depends on the state you are based in + $600,000 property value – the total cost will be $615,000. Minus your $80,000 in savings = a loan of $535,000 best case scenario, but probably higher.  
  • With $20,000 left in your savings offset account, you will be paying interest on $515,000. 
  • Do your future plans include buying a home? If the answer to this is ‘yes’ (as is with most Australian’s), the plan to hold the property when you go to make that purchase is to pay interest only on your investment loan and put every spare $ of savings into your offset account. Let’s say you save up $300,000. 
  • This can be used to purchase your future home – the debt on which is not tax deductible. And you have preserved the loan balance of your investment property – meaning that you claim all the interest on the $535,000 loan balance as a deduction at tax time.  
  • On top of this, you have used your $300,000 to purchase your home and reduced that loan balance by $300,000 – minimising your non-deductible debt. 
• So, why are you reluctant to use an offset account instead of pay down the loan? 
  • What our parents told us – debt is bad! Pay it down as fast as you can! 
  • The cost of the offset account – to have an offset, you normally need to be on a lender professional package – which is often around $400 a year. Yes, $400 is a lot, but it is nothing compared to what you would be saving.   
• Repayment strategy – principle and interest v interest only. Principle and interest comes with a lower rate and you may be more comfortable because you are forced to make repayments. You can still make the minimum repayment and put extra repayments into your grow account.  
  • Interest only and tax deductions – so you have an extra $5,000-$10,000 p/a in tax deductions each year. Multiply this by holding the property for 20 years and you have an additional $200,000!  
  • Not only that, you are paying less interest on your home, so you are saving money on non-deductible debt which could add up into the hundreds of thousands as well. 
  • The third factor, the icing on the cake, is you now have a property that you have held onto that you would have otherwise sold. This could mean an extra $1million in retirement simply through the capital growth along with the increased rental income. This is a great example of how the benefits of great Mortgage Strategy often pay off into the future, and can be unascertainable today. 
• Money management system – interacts with your mortgage strategy 
• Set up your buckets – trap your surplus cash flow 
  • Grow – your fixed expenses and savings.  
  • Life – your variable necessities.  
  • Fun – the ‘nice to haves’. 
  • Investment – incoming and outgoing expenditure.  
  • Or what ever you like! It’s up to you.  
• Risk management – people sell property because they feel stress at a certain period of their life. Risk management is about prevention, not cure! There are plenty of risk management strategies you can put in place to future proof your investments.  
• Keep savings in a Grow Offset that you do not touch rather than losing access to them by paying into a loan. The length of your cash buffer runway, is your best risk mitigation. 
• Access to redraw – will allow you to set up a bigger buffer of available funds, should you be in a challenging circumstance, you can prepare yourself so you don’t need to sell property to get by.  
• Fearing debt – your risk management strategy should be married up to your risk profile.  Remember that debt on a mortgage is debt that assists you create wealth. However purchasing jet skis on a credit card will do the opposite.  
• Fix interest rates – have certainty on your repayments, which is normally a variable expense. 
• Optimise tax deductions: borrow the full amount of the purchase price on an investment, plus costs. It seems counter-intuitive, but you save money by borrowing more!   
• You only have one opportunity to borrow to purchase an asset and that’s when you pay for it. Learn why borrowing the full asset price can enhance your ability to keep a property in the future, all without costing you any more interest, and how this approach, although counter intuitive, will empower you to borrow less on a future home.   
• You can’t redraw on an investment loan to pay for your home and claim it as a deduction, this will fall foul of the ATO ‘Purpose Test’ – which determines deductibility based on the purpose of the funds.  

LMI the ‘enabler’ – should you bite the bullet? Lender’s mortgage insurance is a deterrent for many people, who prefer to save up a larger deposit. So should you buy now or wait? Property values normally grow faster than you can save – property growth at 10% would see that $600,000 property go to $660,000. If you’re on $100,000, can you save $60,000 a year to keep up? 

David Johnston- The Property Planner’s Golden nugget: make sure you talk to a genuine mortgage strategist prior to taking out a loan and ensure they are providing expertise on: offset optimisation, your money management system, how you can manage risk, optimising your tax deductions and how you can hold property. And enjoy the fun bucket! 

Peter Koulizos – The Property Professor’s Golden nugget: we’ll keep it short and sweet, if there’s only one thing you remember from this episode, it’s the offset account. Get yourself an offset account!