Risk management and the things that can go wrong when mortgage strategy is ineffective (Ep. 191)

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In this week’s episode, Dave, Cate and Pete cover some of their best tips for managing risk.  Tune in to hear why mortgage strategy underpins this, and what can go wrong when mortgage strategy is ineffective …

Pete’s market update highlights the extra pressure that could be placed on our available rental stock as a direct result of the Chinese government’s new requirement for international students to be domiciled in the nation of which they are sourcing their higher education from.

Cate reminds listeners about the root causes for our dire rental situation in our nation and she discusses the misconception in the media about the root cause of the issue.

Dave discusses an interesting consideration that our Labour government is driving in relation to pensioners and retirees selling their family home. Greater incentives in relation to tax and superannuation treatment of windfalls. The age of eligibility has dropped now to 55 and vendors are permitted to make a one-off, post-tax contribution into their superannuation. These changes will support more down-sizers to sell and will hence free up more well-located property in the established areas.

1. Seeking the help of a strategic mortgage broker. Dave takes our listeners through some of the key things that can go wrong when a mortgage strategy is ineffective and he differentiates a strategic mortgage broker from a transactional mortgage broker. Dave’s ‘six areas’ of strategic mortgage broker are fascinating – tune in to hear them all.
2. Tax deductions. From negative gearing to depreciation, offset account facilitation to tailored advice, tax concepts are crucial to a successful portfolio.
3.  Being forced to sell is a sad outcome that can stem from ineffective mortgage strategy. But there are clever ways to mitigate this risk. Buffers are integral for any property investor to implement, but interest only and cashflow optimisation should be considerations too … it’s all about clever mortgage strategy.
4. LVR and equity management – Loan to value ratio can be varied to suit an investor’s risk profile, and this aspect of risk management is particularly important for those with properties in more volatile growth locations.
5. Buffers – what is the difference between a cash savings buffer and a cashflow buffer? Cash on hand, cash that can result from liquidation of shares and offset savings are all considered cash savings. Cashflow buffer simply relates to the amount of money that is left at the end of the month after living expenses and other commitments. Cate asks Pete to share some of the effective ways he’s been able to manage tight situations in the past. Listen in to hear more about Pete’s celebration budget!
6. To fix or to leave variable – which is best? Dave explains that there is no right or wrong answer. This decision is entirely contingent on the individual’s own timeframe and risk profile.  He reminds listeners to allocate ample variable rate for early repayments and/or offsetting though, as most fixed rates don’t enable either of these.
7. One lender or multiple lenders? – Cate raises the question to both Dave and Pete. It is interesting to hear how each of the trio approach this so differently. Dave discusses the pros and cons of each outcome and he also discusses cross-securitisation…. an often misunderstood borrowing option, and not always the ogre it’s made out to be.
8. And ….. our gold nuggets!

Gold Nuggets

Pete Koulizos, the ‘Property Professor’s Gold Nugget: “When you’re looking at risk, consider the possibility of something happening, and consider the consequences if this something happens.” Pete’s matrix model allows us to consider risk in perspective.
David Johnson, the ‘Property Planner’s Gold Nugget: Dave encourages borrowers not to do themselves a disservice by overlooking the importance of mortgage strategy. Selecting a strategic mortgage broker is an important step when it comes to setting up the right foundations early on in the investment journey.

Resources

  • Ep. 9: Why mortgage strategy is more important than your interest rate
  • Ep. 34: No mortgage strategy (4 of the top 7 critical mistakes)
  • Ep. 48: Offset accounts; God’s gift to mortgage strategy
  • Ep. 99: Cross collateralisation
  • Ep. 184: Interest only vs principle and interest

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