With high inflation, higher interest rates and the gradual removal of interest deductibility on rentals it is good time to consider minimising the impact on cash flow to ensure you can retain your property portfolio.
For the past few years very low interest rates have meant that many investors haven’t had to optimise their mortgage lending due to the considerable advantages of a cash flow positive environment. With high inflation now reducing household surpluses, much higher interest rates, and the gradual removal of interest deductibility on rentals, many previously profitable portfolios are now requiring significant top ups when loans roll off the fixed rate. We detail some strategies to minimize the impact on cash flow for property investors.
1. Shop the Banks
With a lot less new lending many banks are now focused on the refinancing of each other’s clients. It has become quite normal for banks to offer one percent of the loan amount (i.e. $10,000 on a $1,000,000 loan) to encourage clients to move their lending from a competitor’s bank to their own. Potential clients will also often be offered a better interest rate than they’re receiving at their current bank. We suggest getting a good mortgage advisor to shop the banks for you or at the least use the threat of moving banks to negotiate a cash or rate discount with your existing lender.
2. Restructure your loan
There are often substantial cash flow savings available from restructuring your loans (often easiest achieved with a re-finance). For example if you had a rental loan of $1,000,000 at the new rate of 6.5% with 17 years left on the term, on principle and interest the payments would be $1864 a week. By dropping this to interest only you would pay $1246/week. This might be the difference between retaining a rental property with the higher rates/ interest deductibility dropping off, or having to sell in a down market.
3. Keep a revolving credit buffer
All investors should have a good revolving credit buffer (in our opinion at least $100k) of available funds for times like this where interest rates are high/cash flow is constrained. This means that you can fund higher interest rates causing a cash shortfall on the rentals or urgent maintenance that has come up. The loan servicing criteria is often easier for a small top up then an interest only extension. If you don’t have this in place again it is something that you should look to put in place as soon as you can.
4. Retaining funds when selling rental property
Another important point to note is that if you are selling a rental property the bank will normally take full net proceeds if you have other lending with them in order to reduce debt if you are unable to service the remaining lending that you have with them. Be aware that the default position is full net proceeds and a loan application will be required to consider you retaining funds. You will also have to pass the current income servicing criteria to retain these funds. We strongly suggest you use a good mortgage advisor to help you in this area as their connections and knowledge will often be key to getting this approved.
For a no-obligation review of your situation please contact
Richard Harwood | Financial Adviser
threefold insurance mortgages advice
Office: 09 418 0773
Mobile: 021 389 734
Website: www.threefold.co.nz
