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After acquiring 17 investment properties with 19 loans, Smart Property Investment’s Phil Tarrant aims to improve his portfolio’s cash flow position by reviewing his mortgages and home loans and ensuring that they know the right information to stay ahead of the game.
According to mortgage broker Ross LeQuesne, it’s a good time to implement this strategy considering the various changes in principal interest and interest-only rates.
He said: “We've seen quite a big shift on a lot of the banks and lenders … [They] have been repricing their back books.”
“What was a competitive rate 12 months ago is not necessarily as [competitive now as we look] through these loans today,” the mortgage broker added.
Varying prices are good reasons to constantly review your portfolio as well as the rates given to you by the bank or lender. Oftentimes, banks and lenders advertise a different price to attract new clients.
“For the loans that they've written previously … [in] their back book, they have a different price, [so] you constantly need to review your portfolio to make sure that your rates are current with what's currently being advertised to new property investors,” Ross explained.
Phil said: “You need to go back to your lender and say, ‘Hang on a second, why aren't I getting the same pricing as new customers?’ ”
As the governing body of all deposit-taking institutions, the Australian Prudential Regulation Authority (APRA) moved to make changes in lending regulations to hinder lenders from “growing their loans from investors too quickly” and having too many interest-only loans on their books. Banks and other lenders are allowed to grow their investment books only by 10 per cent and no more than 30 per cent of their portfolio can be interest-only.
Moreover, the pricing on investment loans and interest-only loans have also increased over the last 12 months. These changes have made it harder for a lot of investors to get additional finance in order to continue growing their property portfolio and ultimately improve their cash flow.
One of the options for people who are eager to continue their property investment journey is to shift from interest-only loans to principal and interest (P&I) loans.
Phil explained: “If banks or lenders are capped at a particular point and they already have current investor clients, they could just push the rates up on them because it's going to potentially stop them buying other properties or moving elsewhere. Alternatively, they can bring rates down [in] other areas if they want [a] particular business there."
“As an investor, I can shift from being an interest-only to a P&I loan because there's no caps on the principal interest loans.
“They will offer better pricing to try and entice ... people into those markets. If they could shift investors from interest-only to principal-interest, it means they could go back and get new customers on interest-only,” he added.
At the end of the day, APRA only wants people to reduce their debt and consequently slow down the rampant price growth in various Australian property markets, including the big players Sydney and Melbourne.
Phil and his financial team are looking into improving the portfolio’s cash flow position by shifting from variable rates to fix rates, which could entail a lot of work but would also “shave about $25,000 a year off our repayments”.
An additional $25,000 in cash flow will be a big help considering that the cost to hold the properties reach around $62,000 annually. The property investor may also continue purchasing properties as his serviceability improves.
Ross said: “On average, [Phil’s] property's costing [him] $72 per week across the portfolio. Based on that, there's about another potentially six properties at $72 a week just by readjusting … interest rates and looking at a strategy.”
“The two options for us [are]... number one… just go to the lenders and say … ‘Can we have a cheaper rate based on where we're sitting right now?’ or, number two, we go to the lenders and say, ‘We'll move from interest-only to fixed, [so] could we ... have your fixed rate?’ ” Phil explained further.
Due to the changes made by APRA, lenders are not as aggressive in terms of repricing existing loans. Fixed rates are one of the most competitive interest ratings in the market at the moment and it could help an investor save more for his future purchases.
However, implementing this strategy also comes with several warnings.
According to Ross: “Investors … [who] are considering fixing [have] a couple of things that [they] should look at: Do you plan on refinancing or accessing equity from that property in the next three years? Are you planning to sell that property within the next three years in the case of a three-year fixed rate, or do you have some other plans?"
“It might be [doing a] renovation or [adding] a granny flat, which may change your decision … to fix ... [you may not be able] to access finance under the new lending guidelines.
“You may want to keep it variable to open up your options so you don't get hit with what they call a fixed rate break cost,” the mortgage broker added.
In order to make the best decisions for your portfolio, it’s worthwhile to sit down and have a talk with reliable property professionals. After all, there’s no one formula for success in property investment. Determining the perfect strategy for you will be based on your own financial position and borrowing capacity, among many other variables.
Phil advised his fellow property investors: “Sit down with your mortgage broker and look at those pros and cons … that need to be filtered across or in view of what your wider strategy is.”
Tune in to Phil Tarrant’s portfolio update on The Smart Property Investment Show to find out how you can stay ahead of the game when attempting to get a loan from banks and lenders for a property, how a shift from variable rates to fixed rates could impact your portfolio, and how the future plans for your investment can impact the loan you require.
Mortgages are loans that are used to buy homes and other real estate where the property itself serves as collateral for the loan.