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Reproduced with permission.
Most mortgage brokers and bank staff have a single aim – to provide you with mortgage finance. They typically do not analyse or comprehend cash flow, tax implications in conjunction with maximising your future property purchasing opportunities. This reduces your choices and flexibility when it comes to buying and holding property.
Instead they are predominantly focused on ‘winning’ your business in the volume based, sales driven, world of lending, rather than optimising your investment potential. Nor do they invest the time to educate you on the property decision-making process itself. All of these vitally important considerations can be achieved by undertaking a strategic approach to your finances.
Unfortunately for most borrowers this goes unnoticed because the focus when borrowing is not on effective structuring and strategic financing. A major reason for this, is that almost everyone gets distracted by the following three issues:
1. focusing on what the finance is paying for
2. focusing on the interest rate
3. getting the loan approved.
Let’s break these points down. Number one is within your control. Number three does involve some skill, however, most people borrow within their means and therefore predominantly this is not a differentiator for selecting who you use to obtain finance.
Let’s face it, point number two is where many people dedicate the majority of their attention. But ask yourself why? My view is that we are educated to focus on this by the media and through advertising. This line of thinking can be perpetuated by well-meaning friends and family.
However, should the interest rate be your main focus?
If borrowing at the lowest rate of interest is the main concern regarding your financing, you would need to refinance weekly, if not daily. New offers spring up every other day. Most lenders have almost identical products and very similar rates. In our extensive experience, prices fluctuate with lenders over time. Yes, we want a great rate, but let’s not lose sight of the big picture. The interest rate, or let’s call it what is – the price of the product we are purchasing (with the ‘product’ being loan and banking options) – can distract our focus from what is most important: the sustainable ongoing benefits of the finance structure through effective use of the products that we have at our disposal.
I will let you in on a little secret, all mortgage brokers and lender sales people can access the same rates. This informs us that we should select our adviser based on the ‘other stuff’, their ability to take a strategic approach to your banking and financing arrangement. As opposed to selecting your adviser based on the prevailing rate of the day or any emotional attachments you may have, e.g. to a brand of bank you may have a long term relationship with.
Some examples of strategic financing (or the ‘other stuff’) includes –
- buffer strategy
- offset strategy
- risk management approach, there are many ways you can manage risk via your loan and banking structure
- maximising current and future deductibility
- understanding the ‘purpose test’
- enhancing flexibility and property choices; buying, holding
- planning for possible property purpose changes, i.e. home to investment or vice versa
- cash flow management and savings
- ensuring loan balances are drawn down accurately at settlement (most lenders take no note of this at all)
- how your banking interacts with your loan structure.
And the list goes on…
Why has strategic financing become so vital? Because loan products have evolved significantly since deregulation of the banking industry in the 1980’s. This creates opportunity if we know where to find it. The majority are still caught up in the game of selling interest rates.
Almost everyone we meet has at least one, if not multiple flaws within their loan structure. This means restructuring or refinancing is often necessary to remedy the situation. Regularly, the current set up would cause the unsuspecting borrower to fall foul of the ATO if they were audited.
Confidence in your finance strategy and banking set-up is vital when making property investment decisions. Appropriate loan structuring involves various moving parts. This is one reason most mortgage salespersons steer clear, as it saves them time by only focusing on the product and price. Occasionally, they discuss limited aspects of loan structuring, then often don’t follow through.
Understanding your loan structure and how it interacts with your day-to-day banking is crucial, and frankly, underestimated by the lion share of mortgage professionals. Your lending and banking is where most, if not all of your accessible cash and debt is located. Savings, offset and loan accounts (cash and debt) are the aspect of our personal financial world that houses our money on a daily basis. Often these accounts cause us great worry. Have you ever had any of these thoughts?
- I have too much debt;
- I do not have enough savings if something goes wrong;
- We are not reducing debt fast enough.
We have met many people who have had these worries and showed them how they can reduce these concerns.
Our banking nowadays is highly visible with the click of a button due to the advent of internet banking. For all these reasons and more it sits at the forefront of our minds throughout our lives.
Management of our cash flow can be improved when we have a specific focus on risk management within our lending and banking structure. Some of the strategies can seem counter-intuitive, but once we educate ourselves on the benefits and advantages, effective strategies can provide opportunity and peace of mind; poorly or ill-considered execution can mean sleepless nights or selling assets we would preferably have held onto. I think we all would like to feel more comfortable day in and day out with the confidence in our banking and lending set up.
How your loans are set up and how your payments are structured, can also make a profound impact on the long term costs and investment opportunities available to you. If done well it can allow us to acquire assets without selling and buy time to stabilise our financial situation. Further, strategic financing can enhance the deductions on existing property when undertaking your next purchase.
If you pay scant regard to strategic financing and get it wrong, the true cost of financing and property investing will increase dramatically, especially if you have to pay interest out of your after tax income, instead of being able to claim a tax deduction (if only you had structured your finances correctly from the outset). Beware the traps and pitfalls that are often overlooked as our gaze is drawn elsewhere!
Click here to make a time to discuss your personalised strategic financing needs or call the office – 03 9819 4088 (Melbourne), 02 9387 1344 (Sydney).
David Johnston, Managing Director