This ep is crafted around two excellent listener questions that hinge around mortgage strategy.

But before the trio jump into the questions, they share their market updates.

Land tax reforms (and other ‘fruity’ ideas) are the topic of conversation for many Victorian investors, and Cate talks through the changes with Mike and Dave. She touches on some of the challenges that Victorian property owners have faced through the pandemic and she also considers some of the negative implications of the new changes. Cate wonders whether the direct impact on renters will result in segmentation due to the vulnerability of cash-flow neutral investors.

Dave ponders the impact of this tax change on the Victorian market, and holds concerns that the unintended consequences could the exacerbate the existing rental problems in the state. With supply issues at record lows and such tight vacancy rates, Dave fears that this will just make the problem worse.

Mike asks Dave and Cate a left-field question, “as land tax increases state revenue in one state, federal government tax revenue decreases. How does our Federal Government feel about this?”

Our first listener question is sent to us by Emily, who asks the Trio about converting her home loan to an interest only loan product once her offset account is working at full capacity. Dave’s rationale for recommending interest only is intriguing, but it’s important to note that this information is not designed as a ‘one size fits all’ solution. Investors need to have a plan, understand their options and remain focused on the long term goals when it comes to stepping-stone properties. Accidental investing is not necessarily a great outcome if the property is not a suitable long-term asset to hold as an investment.

Some of the key benefits of an interest only loan as outlined by Dave include;

• more interest to claim once the property becomes an investment property
• building up savings more rapidly, and in turn these savings can be used to pay more for a future home and will reduce the debt balance on the non-deductable loan.

The big unknowns, according to Dave are; “most people don’t understand the strategy, and we also can’t be certain that the home will eventually be an investment property down the track.”

Dave’s sagely explanation of this common dilemma is gold for our listeners, and many investors benefit from this approach when a stepping-stone property is no longer personally used and a future home acquisition is on the agenda.

The Trio remember the old days when lenders offered much longer interest-only periods to investors, and they compare the differences now that today’s investors face, particularly when it comes to loan amortisation.

Our second question comes to us from another fabulous listener, Marco, who asks a great question about the use of equity, as opposed to applying higher loan to value ratios, (LVRs) and paying for Lender’s Mortgage Insurance.

“Is LMI the devil, or should we consider holding onto that cash as a buffer?” asks Mike.

Dave distils some of the important details when it comes to mortgage insurance and LVRs, pointing out how tax deductions are optimised, and savings are maximised in tandem.

Cate adds some questions that are important for investors to ask themselves; understanding how much time remains to achieve the investment goals, what incomes they’ll potentially earn in the future, how long they wish to work for, what the short-term economic cost impact is, and what is in their plan.

Life throws up curveballs, but one eye-opening aspect that Dave touches on is the importance of remaining patient. Some acquisitions take many years, but the visibility that can be offered through clever modelling software can’t be underestimated. Having a clear plan and a scope of timeframes is integral to a successful journey. One of the biggest costs that Dave sees impacting property investors is selling a property that they could have otherwise kept if they’d had the right mortgage strategy.

Thank you to our listeners – we appreciate these great questions. We have more listener questions eps to come too!

And… our gold nuggets!

Mike Mortlock’s gold nugget; “don’t be the cleverest person in the room!” Mike supports reaching out for specialist advice – the financial difference when it comes to getting great advice can really add up. “It could be the best ROI you ever get.”

Cate Bakos’s gold nugget relates to the first listener question…. refinancing! Cate implores investors to stay on top of their paperwork, supporting documentation and their credit conduct so that they can ensure that refinancing isn’t a nightmare.

David Johnston’s gold nugget: If you get your mortgage strategy right and align it to your property plans, (particularly in relation to converting a current home to a future investment property), you can not only optimise your tax deductions and have more cash to put towards your next home, your extra property in your portfolio will make a significant difference to your retirement.

Resources:

If you enjoyed this episode, we suggest you tune in to these eps!

Ep. 18 – When to hold and when to fold

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

Ep. 87 – Optimising tax deductions 2020 and 2021 – Top mortgage and loan strategy tips

Ep. 128 – Upgrading and planning for the long-term home: how to keep a home as an investment, buying or selling first and more

Ep. 184 – Interest only vs Principal & Interest – Why working through the different considerations could add millions to your nest egg at retirement