When debt is good: How two nurses invested in property.
You’ve saved your cents, taken on extra shifts and worked hard to reduce your mortgage debt, so your balance is looking really healthy. Property values are up too – your home is now a valuable asset. So what’s next?
If you’ve gained equity in your home, it’s time to get that healthy balance working hard for you. An investment property is a step in the right direction and you’ll have someone else helping to pay your mortgage, just like Leda and Otmar.
I first met successful young nurses, Leda and Otmar seven years ago, when I helped them purchase land and build their first home in Australia, in Caroline Springs. Leda and Otmar are successful career nurses who arrived in Australia more than 10 years ago.
Highly disciplined with their money and committed to creating a great future for their three young children, the couple worked hard to pay off their mortgage. They’ve also benefited from an increase in property value in Caroline Springs, which has almost doubled the value of their home.
While paying off your mortgage debt is excellent, there’s no real benefit to have this just sitting in your bank account, as Leda and Otmar discovered after talking to me about some strategies to get ahead.
“We were proud of our efforts to get our debt down, but we wanted to find out about other ways to create a great future for our family,” said Leda. “We really like and trust Patrick as he helped us with our first home, so we got in touch to ask his opinion. Any time I have a financial question, I just give him a call,” said Leda in an interview after we’d arranged the finance.
I met up with Leda and Otmar and explained that by refinancing, increasing or drawing down on their existing mortgage, they could release funds for a deposit and get a new loan for an investment property.
Because property values have gone up recently, even if you haven’t made a large dent in your mortgage, there could be additional equity (the difference between what you owe on your mortgage and what the home is worth) in your home. With help from a mortgage broker, you can extend your mortgage on your home to get the deposit on an investment property.
By taking an 80% loan on their new investment property and borrowing the other 20% (plus costs like stamp duty) against the equity in their home, I explained to this young couple that they could finance 100% of the purchase of an investment property.
Small cost – big benefits
Leda and Otmar were surprised to discover that if you work it right, the rental income from the investment property, plus the tax deductions on the part of your mortgage used to buy the investment property, usually means the weekly cost of your investment property loan is very small.
“We were a bit concerned about whether we could afford the extra payments towards another loan. But Patrick explained that our tenants would actually help us pay the mortgage. We liked that idea!” said Leda.
“We were really happy with the idea of getting further ahead using a property as an investment too. We weren’t too keen on the share market as it seems this can change very quickly. With a property, as Patrick explained, it’s a long-term gain.”
Leda and Otmar invested in a $450,000 property, a house and land package in Craigieburn. They’ve got a property manager, great tenants and a brand new asset now working solidly for their future.
“It’s great to have Patrick help us because he makes everything really easy. We like the way he explains financial terms and he cares about our future. He always talks about the benefit for us and our kids,” Leda said.
An investment property helps you earn money on the growth in property value over time – it’s a long-term play. While you are working day-to-day and shift to shift, your home and your investment property are silently working for you, too.
With two properties growing in value, rather than one, some home owners may decide to increase the number of investment properties they own after they are feeling comfortable with their new strategy.
Top three benefits of ‘good debt’
1. Mortgage repayments on investment properties are tax deductible, so tax benefits help make repayments easier. That’s why mortgage debt on investment properties is sometimes called ‘good debt’ because it is actually earning you money. The mortgage on your home is a straight out cost, therefore sometimes called ‘bad debt’.
2. As an investment property owner and landlord, it is your tenant that helps you to build your wealth. Your personal financial investment is low, especially when you purchase a brand new home that should cost very little in maintenance.
3. By building a new home or buying an off-the-plan apartment, you can reduce the amount of stamp duty you pay.
“I’m not sure I can afford that extra debt repayment.”
The rental income on the investment property can help make the repayments. This will be taken into account by the bank when working out how much you can borrow.
“Why are the terms and conditions so different?”
There is even more variation between banks on their investment property borrowing conditions than for buying your own home. You need to choose one that suits your individual situation.
Everyone’s circumstances and preferences are different, so you need to talk these through with someone who is experienced with property investment loans, like a mortgage broker. Often bank employees have limited knowledge of property investment loans and especially the broader property investment considerations.
“I’m a bit nervous about property investment – what are the risks?”
Property investment is not for everyone. Some people like the ‘set and forget’ approach offered by the share market, or do not want to borrow more money. Generally, people who like property investment are those with a drive to get ahead – people who prefer the independence of building their own wealth rather than relying on the vagaries of the share market.
Knowing you have a property asset to cover your liability, there is normally less concern about taking on additional debt. It’s also important that you don’t mind having to spend a little extra time and money now and again on managing the property, usually through a property manager, such as choosing new tenants or dealing with maintenance.
Property investment and increased debt does come with risks. Your investment property value may go down, rather than up. A cool, calm approach is important, as is an experienced mentor and guide like a mortgage broker. Don’t get caught up in the hype that some property sales people can send your way.
Want to get started?
You can release the equity in your own home by either:
1. Using a redraw on your home loan if you have one and there are sufficient funds
2. Going to your existing lender, asking them to revalue your home and applying to increase your loan against the new (hopefully higher) value of your home
3. Talking to a new bank and refinancing your existing loan into a new, larger loan, which will hopefully have lower interest rates and fees.
My first suggestion is to work out how much your home is worth now by getting a valuation. A mortgage broker can help organise a valuation and then work out the numbers. You need to know how much can you borrow against your house, how much you can afford to borrow overall and then how much you can spend on an investment property. Then it’s time to start looking around at investments that have good value growth potential.