Up to 70-80 per cent of the property investors we speak to are breaking their fixed-term mortgages and changing early. The most common reason for this is poor advice and structuring.
With that in mind, let’s take a closer look at why strategic mortgage structuring is so essential for property investors, and what you can do to improve yours.
Aligning your mortgage with your goals and circumstances
What do you want to achieve as a property investor? This should be the first question you ask and answer as your mortgage should be tailored to fit your circumstances and help you to reach your goals.
As an example of how this works, let’s say you’ve bought a property in an area where values aren’t increasing quickly, but where rental returns are high. You’ve also got limited cash flow at the moment and want to build up equity over time. Renovating is an option in the future if you can afford it.
In this situation you may want to structure your mortgage like this:
- Make principal and interest repayments to slowly but steadily build up equity.
- Include a redraw facility that allows you to draw down on your mortgage to pay for renovations or cover unexpected costs in the future.
- Fixed interest rate portion that gives you certainty around repayments and some protection if interest rates rise in the future.
- Floating interest rate portion that allows you to make extra repayments and pay your mortgage off sooner.
Your goals and circumstances are unique so your mortgage should be too. Look past interest rates and instead focus on how your finance can help you succeed as a property investor.
Putting a plan and a budget in place before you start
Before you lock in a mortgage, you need to fully understand your circumstances, set goals for your property investments and work through a detailed budget. All this information will help you tailor your mortgage.
Look closely at:
- Your property’s cash flow: Is it negative, neutral or positive?
- If it’s positive or neutral, it’s might be best to make principal and interest repayments.
- If it’s negative, in some cases you may be better off with an interest-only mortgage, provided you’re expecting the property’s value to increase.
- Your income: Do you have enough money left over to top up your mortgage repayments or cover extra expenses as necessary?
- If you don’t, a redraw facility could be handy. This essentially allows your mortgage to function as a massive credit card.
- Before you lock in a mortgage, you need to know that you have enough to top up repayments and cover whatever extra costs come up. A detailed budget is the best place to start.
- Your goals: What do you want to achieve?
- If you’re looking to cash in on capital gains, your mortgage’s structure should reflect that.
- On the other hand, if you’re looking to build up equity over time for retirement with a positive cash flow property, you’ll need a different structure again.
If this all sounds a bit complicated, don’t stress. Money Empire aims to make mortgages and finance simple so that you get the results you want without the worry and confusion. We take the time to understand your circumstances and your goals to help you create a budget and a detailed plan.
After we’ve run through those details with you we’ll set up a mortgage structure that helps you get the job done. Give us a call today and let’s talk money!