How to immediately cut your mortgage payments by 45%
This loan is worth considering if higher interest rates are stretching your budget and you need some breathing space
It can reduce your repayments by up to 45% in the first year with reductions continuing for the next two years.
Called the Cash Flow Manager, it allows you to add a portion of your monthly interest repayments to the loan amount - in other words interest is capitalized. So, you substantially reduce the cash needed to hold an investment property and may even obtain a positive cash flow.
The loan is best suited for properties with high growth potential and reasonable rental yields which are being held for the long term. It is probably not appropriate for marginal investments in poor growth areas.
The loan must be taken over 5 years and the headline interest rate is higher than most at 9.30% p.a. for the full doc - but in the first year 4.25% is capitalized, so your repayments are based on just 5.05%. Compare that with 8.27% for a package loan from a mainstream lender.
Here’s an idea of how it works: let’s say you borrow $400,000 on a property worth $500,000. The property grows at 7% a year and the rental yield is 4%. (For this example we’ve estimated your tax rate is 30% and we’ve capitalized loan setup costs of $7000).
Loan
$407,000 |
Interest
Rate
Paid |
Monthly
Interest
Payment |
Interest
Capitalised |
Mortgage
Balance |
Yearly
Valuation |
LVR
(7%
Growth) |
Monthly
Cash
Flow |
| At Start |
|
|
N/A |
$407,000 |
$500,000 |
81.40% |
$ - |
| End Yr 1 |
5.05% |
$1747 |
4.25% |
$423,500 |
$525,000 |
79.16% |
$446 |
| End Yr 2 |
6.30% |
$2257 |
3.00% |
$436,500 |
$551,250 |
76.25% |
$78 |
| End Yr 3 |
7.30% |
$2681 |
2.00% |
$445,000 |
$578,813 |
72.65% |
- $227 |
| End Yr 4 |
8.30% |
$3093 |
1.00% |
$449,500 |
$607,753 |
68.58% |
- $524 |
| End Yr 5 |
8.80%
(inc 0.05%
discount) |
$3296 |
0.00% |
$449,500 |
$638,141 |
64.10% |
- $615 |
In the first three years, you paid approximately $80,000 dollars in interest. If you had taken a traditional lender’s pro pack loan at 8.27% p.a. your interest payments would have been approximately $99,000. In other words you have kept $19,000 in your pocket!
The pendulum swings the other way in the fourth and fifth years of the loan. By year five your saving is $8000. However, you can extend the period of lower repayments and higher cash flow by restarting the loan at the end of the second year.
Obviously, higher rent will increase the possibility of positive cash flow, so cosmetic improvements which allow you to charge more rent could put you in a better position.
It is an innovative product and a challenging concept for some borrowers, so you should ensure you have a thorough understanding of the fine print before signing up including the tax implications which the lender believes are benign because the borrower is simply deferring cash outlays rather than creating tax deductions.
The lender points to Taxation Ruling TR 94/26 which says that “the interest which is paid and the interest which is capitalized is tax deductible” However, you should talk to your accountant about whether this loan suits you.
The loan’s set up costs are relatively high – in the order of $7000 which you can add to the loan amount. The break costs are also high in the first four years. But if you plan to hold for the long term this will have less impact.
With all that said, this loan can give a cash strapped investor breathing space to ride out the interest rate increases.
Our consultants at Finding Finance can explain the detail and demonstrate the likely outcome of various scenarios.
For more information call us on 1300 729 075
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