With 17 properties and 19 loans, The Smart Property Investment team have become experts on mortgages and home loans. This episode, they reveal how knowing the right information has kept them ahead of the game.
Join The Smart Property Investment Show host Phil Tarrant and Aussie Parramatta mortgage broker Ross Le Quesne as they delve into all things mortgages, mortgage rates and banks.
They reveal the ins and outs of 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.
You will also hear about APRA’s guidelines and how to understand them, how the mortgage industry impacts the property industry and changes in the investment and interest-only lending space.
If you liked this episode, show your support by rating us or leaving a review on iTunes (The Smart Property Investment Show) and by following Smart Property Investment on social media: Facebook, Twitter and LinkedIn. If you have any questions about what you heard today, any topics of interest you have in mind, or if you’d like to lend your voice to the show, email [email protected] for more insights!
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Announcer: Welcome to the Smart Property Investment Show with your host Phil Tarrant.
Phil Tarrant: G'day everyone. It is Phil Tarrant here, host of the Smart Property Investment Show. Thanks for joining us today. We have Portfolio Update. This is once a month, I look to share our portfolio with all of our listeners. If you're familiar with Smart Property Investment we've been at this for quite a number of years now, and one of the original reasons why we decided to set up Smart Property Investment was just to get to the real world scenarios of investing a property and being a journalist for many, many years and also as a property investor always felt that what you saw in the media wasn't real life when people spoke about their property portfolio. One of the many objectives we're trying to achieve through Smart Property Investment was to actually share a real-life portfolio. We've now been sharing for about five or six years now our growth as property investors with Smart Property Investment.
Today a portfolio update. If you tuned in last time we were on air for our portfolio update, 22nd of January this year, so just around a month or so ago, that was with Steve Waters. Steve Waters is from the Wright Property Group. He is my buyer's agent and has been from day dot, when we started investing in property. Amongst many of the themes we spoke about during that podcast, and go and do listen to it. Even now if you want to stop go and listen to it and check back in. 22nd of June, you'll see it on the feed. Talking about some of the objectives moving ahead for 2018 with our portfolio. Obviously we are on the acquisition path or accumulation path. We want to keep growing our portfolio but we need to do that with an eye towards cash flow management and cash flow management is critical to all investors.
That allows you to stay in the game. Have you got enough money to pay the bills, first and foremost? And then how you can improve your cash flow position to allow you to either accelerate your investing journey which means buy more properties or if you're at the other side of the coin if you're looking to pay down debt or looking to retire your debt you want to look at cash flow in terms of what you get so it's more money in your pocket. For us it's about improving the cash position of our portfolio. It's a good portfolio. I ran through all the numbers in that podcast on the 22nd of January. Cash flow however was negative north of 55 plus K every year before tax so it costs a little bit to hold this portfolio but it's a growing portfolio. Obviously post-tax the numbers look a lot better.
But I'm a pretext man so I look at the cash flow it costs us or how much it costs us to hold this property portfolio. If I can minimise that as much as possible I'm happy. As I mentioned in that last portfolio one of the key things I needed to do was speak to my mortgage broker who I have in the studio today. Ross Le Quesne, he's from Aussie Parramatta. You might be familiar with Ross, he's been on the podcast many times both on the portfolio update side but I also turn to him to share his insights and knowledge for our listeners around all things mortgages and mortgage rates. Ross, how are you going?
Ross Le Quesne: I'm going great. Thanks for having me here. It's good to be here.
Phil Tarrant: It's good to have you back mate. We've just spent a good couple of hours looking through our portfolio of 17 properties with 19 loans. Interesting scenario, it's interesting, good fun to throw around a whole bunch of what-ifs. What if we did this, what if we did this and whatnot. But to my point about improving our cash position of our portfolio one of the key ways we can do that is by reviewing our mortgages. Is that correct?
Ross Le Quesne: Yeah definitely. The timing is great at this point because the last 12 months we've seen a lot of changes in regards to changes between principle interest and interest-only rates and also the changes between owner-occupied and investment rates. We've seen quite a big shift on a lot of the banks and lenders with their back books have been repricing their back books. What was a competitive rate 12 months ago is not necessarily as we saw looking through these loans today.
Phil Tarrant: Let's touch on that quickly. For a lot of our listeners who might be U2 property investing you're talking about some repricing, you're talking about back books. What are you talking about?
Ross Le Quesne: Quite often the banks will, to get new customers they will have one price and then for the loans that they've written previously which is what we call their back book they have a different price. 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.
Phil Tarrant: I'm going to simplify that for our listeners. If you have a loan with lender X they can push their rates up whenever they want. They can always push your rates down whenever they want but they often like to push rates up because that helps their shareholders and bottom line. The loan you have today with the lender might be a different rate in three months, six months, 12 months' time and you're an existing customer. So 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?" Is that fair? Sort of?
Ross Le Quesne: Pretty close.
Phil Tarrant: Pretty close?
Ross Le Quesne: Yeah.
Phil Tarrant: I like to keep things basic and simple.
Ross Le Quesne: Definitely.
Phil Tarrant: If you're currently a customer for a bank you should always be asking your bank whether they've got the right rate for you.
Ross Le Quesne: Exactly.
Phil Tarrant: That's cool. And the repricing of black books, so the slow increase for primarily investors on their interest rates, just for our listeners, let's just really ... Let's quickly do a wrap on that and it's something that's been happening for a number of years now. But a couple of things moving in unison listeners, and that is number one, lenders can't grow their loans from investors too quickly. And number two, they can only have so many interest-only loans on their books pretty much. Is that pretty much it?
Ross Le Quesne: Exactly.
Phil Tarrant: Can you just quickly explain that for everyone?
Ross Le Quesne: Exactly. APRA is governing body of all the deposit-taking institutions being banks, building societies, credit unions, put in a rule that basically they cant' grow their investment books by more than 10% and they can't have more than 30% of their portfolio on interest-only. They've made some changes in regards to rates and policies to put these caps into effect. That's why a lot of investors are struggling to get additional finance and we're seeing the pricing. We're specifically talking about cash flow and one of the biggest effects on cash flow is interest rates. So also with interest rates you've seen over the last 12 months the banks have increased their pricing for investors on investment loans and interest-only loans as well.
Phil Tarrant: So 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 for other areas if they want particular business there. As an investor I can shift from being an interest-only to a PNI loan because there's no caps on the principal interest loans right?
Ross Le Quesne: Exactly, yeah.
Phil Tarrant: So therefore they will offer better pricing to try and entice, cajole, whatever else people into those markets. If they could shift investors from interest-only to principle interest it means they could go back and get new customers on interest-only.
Ross Le Quesne: Exactly. The philosophy behind that and APRA is they want people reducing the debt on these. They don't want them to have interest only forever in a day. They want them to reduce the debt so they're offering more attractive pricing to allow them to do that to fall in with the guidelines.
Phil Tarrant: The rationale for these recommendations and guidelines put in by APRA was to try and slow down rampant price growth in the market and obviously Sydney and Melbourne have seen significant growth. Other parts of Australia haven't and there's an argument around that but outside the remit of this podcast, we've spoken about it in the past. But the market has changed a little bit in terms of investor appetite for property. There has been effects depending on the market of slowing down of rice growth in some markets, a little bit negative. Again outside the remit of this podcast. But for us, Smart Property Investment and our portfolio, where we sit right now, we want to improve our cash flow position. So we've run some numbers and done some science around our portfolio and we've worked out that should we look to shift from variable rates to fixed rates it would be a bit of work. Shave about $25,000 a year off our repayments.
Ross Le Quesne: Yeah exactly. I mean that's a big number, $25,000 in cash flow I think you mentioned in your January 22nd podcast you were about $62,000 in the negative so $25,000 helps a lot to bring that up. You mentioned about 30,000 of that was land tax. That really improves your cash flow position quite a bit by-
Phil Tarrant: And we can do lots of stuff with that right? That's more properties we can buy, that's more serviceability.
Ross Le Quesne: Yeah. I just crunched some quick numbers before we went on-air and I think you said on average your property's costing you $72 per week across the portfolio. Based on that there's about another potentially six properties at $72 a week just by readjusting your interest rates and looking at a strategy. As we said this is looking ... We can do a two-pronged approach, we can look at pricing, repricing, going to the lenders and asking for a discount on the variable rate. What we've looked at today is particularly what they're offering on a three year fixed rate and keeping the loans at interest-only. It's considerable savings.
Phil Tarrant: It is. A couple of things we just spoke about there for our listeners. What we can do, we're obviously paying this money out now so we can obviously cover the cost of holding this portfolio irrespective of any interest rates. If we do have that cash flow discrepancy there you're saying that we can actually use that to go and buy more property, that's cool. We'll probably chat about that later on. But the two options for us to improve our interest rate position, number one as you mentioned was just go to the lenders and say, "Hey, 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 and could we therefore have your fixed rate?"
Ross Le Quesne: Exactly. Because of these changes that we just spoke about in the investment lending and interest only space lenders haven't been as aggressive as they have in the past in repricing your existing loans. What we found is quite often and the reason we particularly look it through your fixed rates it's one of the most competitive fixed rate on the market at the moment. The potential to save more is probably greater by looking at that. Obviously that comes with some caveats in terms of that we spoke about it depends on what are your plans for this particular property? And the investors out there should think about if they are considering fixing there's a couple of things that you 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 to do a renovation or to add a granny flat which may change your decision whether you want to fix that particular property because if you can't access finance under the new lending guidelines with that particular lender 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.
Phil Tarrant: As with anything, any decision there's pros and cons. So there is pros in terms of fixing your rates because you get a perceived better interest rate. One of the cons of that, you have a lot less flexibility.
Ross Le Quesne: Exactly.
Phil Tarrant: We'll go through this process and it might be your whole portfolio, it might just be one or two assets within a portfolio but it's probably worthwhile sitting down. If you don't have a mortgage broker get one, they help you out with this sort of stuff. Sit down with your mortgage broker and look at those pros and cons and that needs to be filtered across or in view of what your wider strategy is. If you're looking to draw down an equity, do renos, et cetera you need to be viewing those pros and cons within the filter of those decisions. If you're not going to do anything it's okay to fix because you're not going to need access to the cash. But if you choose to be proactive in portfolio development and you need to drill down equity in terms of buying new property or building granny flats it might not be the right solution or scenario for you.
Ross Le Quesne: Yeah. It's individual, obviously based on your own financial position, your own borrowing capacity. There's several things that we can look at but that's a great summary of what I was-
Phil Tarrant: Just in terms of break costs that's when you say, "Mr Lender, thanks for three year fixed rate. I'm two years in, I need some money now, I need a different home loan." They go, "Sure, no problem. For you to break this mortgage is going to cost you X thousands of dollars," I imagine. On a $300,000 loan, I mean that was sort of a what if but what sort of break costs would you be doing if you broke that within a two-year period?
Ross Le Quesne: It's a hard decision and it's something that you need to go to your lender to request a break, what the break cost would be. Because it depends on what the cost to the lender is going to be. If they could lend the same money that they've lent out to somebody else and get a higher interest rate from it then the break cost is not going to be very much. But if it's in reverse where rates are considerably lower than the rate that you have locked in at at the time when you're looking to break then the fixed rate break cost will be higher because there's no way they can lend out to somebody else that money. So they've banked that return so as the ... That's the risk that you've taken in terms of choosing to fix so you're the one that's liable for that cost and that's where the break cost comes into it.
Phil Tarrant: So you just throw caution to the wind. You're just going, you don't know if interest rates drop and you're paying at a high rate your break costs might not be that much. But if it's the reverse you might end up way out of pocket. It's actually tens of thousands of dollars.
Ross Le Quesne: Yeah. It just depends. I know back in the day when there was the hype around the election and the rates were up at eight or 9%, there was hype around if the Labour government got in rates might go to 15% or whatever. It was never going to happen but there was a big campaign around it. A lot of people locked in and then GFC happened and rates came down to 5%. So these people are three or 4% with massive break costs because they've locked in. I don't see rates falling by 3% any time soon but who knows.
Phil Tarrant: It's actually quite complicated, this whole scenario in terms of whether to fix or stay variable because you don't know what you don't know. You don't know what the market's going to do, you can't control the market. You might be able to control what you choose to do with your property or property portfolio in two, three years' time but you can be restricted if you do fix.
Ross Le Quesne: Yeah. It's like insurance and for you what you do know is the cash flow of your portfolio. You know the rent's in, you know the rent's out, you know the cost. For you that's refinanced a number of times if we take out that land tax cost which is about 30,000 after you do these negotiations you're looking at about $7,000 cost to hold a portfolio which divide that by a weekly basis to hold 17 properties, it's 150 bucks a week. Not a bad thing. They're the things you do know and if you fix that that cash flow position isn't going to change, right?
Phil Tarrant: Isn't going to change.
Ross Le Quesne: I think if you focus on that then that's what you need to focus on as Vesta. For an investor let's say for example some of your purchases, you're getting a six to 7% yield. If you just purchased that property to lock that in at four and a half percent you're locking in the cash flow of that property. You've given yourself certainty for a three year period knowing exactly what your cash flow is going to be.
Phil Tarrant: What happens after three years on a fixed rate? Do you just renegotiate whatever the rates are at that point in time?
Ross Le Quesne: Yeah. At that point in time it will roll, you'll have a choice. It'll either roll over onto a variable or you have the option to re-fix it at that point in time.
Phil Tarrant: So again it's a little bit of risk in there because if you're stowing variable you can get the benefits of a variable rate which you hope is down but often it's up again. If you fix it 4.5 and in three years' time variable rates are at 6% you can potentially have a 1.5% jump in your interest rates at the end. You need to buffer that.
Ross Le Quesne: Exactly.
Phil Tarrant: But you just don't know. You just don't know right?
Ross Le Quesne: Exactly.
Phil Tarrant: This is one of the-
Ross Le Quesne: We're not looking at fixing all of your loans because if all of your loans are expiring at the one time if you say, if rates have jumped to 6% that would be a big cash flow hit on the portfolio all in one time.
Phil Tarrant: That's a good point. You want diversity between fixed and variable and also you want diversity for when your interest rates renew because if you get slugged in one hit, if you get hammered hard you're in a lot of trouble. But if it's a slow increase over time at least it's a little bit more variable.
Ross Le Quesne: Yeah. That's why we also have a look at when your interest only periods are expiring on all of your loans so that's another factor to consider and something that we looked into and then we decided whether to fix or not to fix is when are those periods coming off? Because you don't want all of your interest-only periods expiring at the one time because again the difference between interest-only and principle interest is a big jump from a cash flow point of view.
Phil Tarrant: Just for listeners I'll run through these and we've got a big spreadsheet in front of us here. We've got 18 loans for this particular portfolio, the Smart Property Investment Portfolio. By the way you go to Smartpropertyinvestment.com.au, check it out. We've got a section all about our portfolio online. You go and have a look at all the stories we've done in the past on it. A blend of lenders, AMP, CBA, MacQuarie and NAB, Pepper and Suncorp. What's that, one, two, three, four, five, six different lenders Ross on 19 different loans? Is that a reasonable amount of diversification?
Ross Le Quesne: Yeah. It's good diversification there. It gives us options, it spreads your risk, it's in terms of interest rates gives you flexibility and as you can see there's certain lenders have different interest rates. So yeah it gives you a good diversity across the portfolio.
Phil Tarrant: And then look at the total debt is 4.9 million and if you go and tune into the podcast for the 22nd of Jan evaluation is portfolio now is sort of seven, I think 7.2 million. It's a fair bit of equity in there, high 60% LBR. That's the debt to the valuation ratio. Total interest a year annually, 249 grand so per month $20,000. So $20,000 we've got to pony up every month to pay the debt on this portfolio. Obviously we receive rent on this so it helps. The average interest rate that we pay, well our average interest rate across the portfolio, across all the lenders and 19 loans is 5.08%. Ross, how does that sort of stack up compared to other investors you see as an average?
Ross Le Quesne: The interest rate as we discussed today is a little bit high and there's a couple of reasons. Because of that some of the lenders had put a premium on for the trust borrowing which by converting to a fixed rate we could bring that down significantly which is good. The other thing is that we saw with some of the rates had crept up because of the interest-only loadings and the investment loadings which just needed to be repriced. By looking at the options that we did it'll bring that down considerably. I think that average of about 5.08, just looking at what we're going to do should come down to around about an average of around about 4.7 I would say after we do the negotiations.
Phil Tarrant: And it equates to $24,000 a year.
Ross Le Quesne: Yeah. It's a big chunk of money.
Phil Tarrant: Yeah, it's a big chunk of money. You get occasionally a phone call from me when I get a bit irritable with the world, which often happens when I put my head inside my property portfolio on an interest rate perspective. I have a particular degree of annoyance sometimes like all investors. But one of those reasons that I look at lender A here and work out yet whether I'm going to call out names because I know a lot of these lenders are listening to this show. Any of these lenders, you're happy to give me a call if you want to chat. Lender A, I have one, two, three, four, five loans with them. The lowest interest rate I pay with lender A is 4.89% and the highest interest rate I pay the same lender A is 5.19%. Why is it different Ross? Why? I'm talking about lender A that starts with an M.
Ross Le Quesne: Yes. It's interesting in terms of depending on how ... At what loan-to-value ratio the loan was initially borrowed at because under 80% you tend to get a better interest rate. Above 80% the price and definitely now for interest-only loans if you try to get an interest-only loan above 80% today you're looking at in the mid fives compared to under 80% where you can look at almost a percent less in terms of interest rates. It depends on when the loan was initially done which raises a point. Once you get to the point where the equity in that property has increased and it's now under the tier that's a great time to say, "Well, value is no longer sitting at a 90%. It's sitting at a 70% loan-to-value ratio so you've got the argument to get the pricing at the 80% mark."
Phil Tarrant: That's a really important point for our listeners. A couple of things you're talking about and I know a lot of our listeners are very sophisticated investors, been doing this for a long time. But for those of you who are new we're talking about LVRs here of 80%. 80% is a benchmark number for property investors so pretty much by-and-large these are the rules. Anything under 80% you don't pay lenders' mortgage insurance. Anything over 80% you pay lenders mortgage insurance on the percentage over 80%. Lenders' mortgage insurance doesn't insure you as an investor, it insures the bank that should you default on your loan they need to flog your property. If there's any shortfall they'll pretty much make their money back in the most simplest term.
Ross Le Quesne: Exactly. And the benefit to the borrower is it allows you to borrow more money with less deposit.
Phil Tarrant: That's right. What you're saying though is that over 80% it's deemed to be more risky and therefore there is a pricing disparity on the interest rate as a result of that.
Ross Le Quesne: Yeah. Again, interest-only is more expensive than principle and interest. Principle and interest at 90% you can still get some competitive pricing around the low fours. But it's the interest-only pricing at 90% is the one that's really been effective.
Phil Tarrant: That goes back to what we're saying before about the restrictions on lenders to not grow their investment-only book too much. If they're going to give one of these loans they'll make sure they make some good money out of it?
Ross Le Quesne: Exactly, and APRA specifically mentioned interest-only loans above 80% in its guidance to the banks as well. So that's a reason why those loans are priced higher than under 80%.
Phil Tarrant: Do I have good cause then to get annoyed about not getting parity on my interest rates with a particular lender? Is that just the reality of being an investor, it's never going to be perfect?
Ross Le Quesne: No. There's always room for negotiation. So there's always room for negotiation and it's about looking at your business case to do that. Because if the lenders are so competitive now that if you've got the ability to, which a lot of lenders with big portfolios are just stuck at the moment because they don't have the borrowing capacity. Even if they want to change lenders they can't at the moment due to the changes in the lending criteria. But someone like yourself, you can vote with your feet. If you're not happy with paying that we can look to switch to a different lender where you'll have a more competitive interest rate. They're aware of that and they want to remain competitive so there's always negotiation.
Phil Tarrant: Again an interesting point. If I'm annoyed enough I can walk and that's a particular pain in the arse, doing that. Which the lender knows, the incumbent lender knows. However they know there's going to be a pressure point or a trigger point where the hassle and time and effort to refinance with another lender, we'll get to a point where it's commercially viable and therefore you do it. There's a middle world where you operate where you've got to work out is it easier to stay, negotiate and see ... Test the appetite of the lender to keep you as a customer or move on. It's an inexact science and there's a whole bunch of different reasons why you may or may not do this but that's what you need to do. If you're a serious investor you've always got to be chasing cash flow efficiency.
Ross Le Quesne: You look at your portfolio with around about $4.9 million in debt, $25,000 savings is big savings. If over a number of properties. But if we look at a couple of the different loans and we're looking at lender E we'll call them at this point in time there was about $800,000 worth of loans and the savings on this were seven and a half thousand dollars per annum. Or over the three year fixed period about $22,000 saving. Is that enough annoyance factor to get you to-
Phil Tarrant: It's a huge annoyance factor. Going back to my original point, before I do that, what you said around your clout in negotiation if you're down under on LVR, way down under 80% it's going to give you a lot more clout to actually say, "Give me a better rate," right?
Ross Le Quesne: Exactly. Because they know if you're above 80% that you're going to have to pay mortgage insurance wherever you go. Mortgage insurance is quite a big upfront cost and so I don't recommend people very often to look at switching unless there's an extreme circumstance that they need to do that if they've previously paid mortgage insurance and would have to pay mortgage insurance again. Even if you're saving you've got to weigh up that cost of paying that mortgage insurance again to get the savings.
Phil Tarrant: So you work out where the leverage is and make sure it's in your favour, okay. Let's go to this scenario, just pointing out. We have three loans with this lender, E. I'm going to call them lender S. They have green and yellow in their logo and based in Queensland. The lowest interest rate I have with this lender is 4.9%, the highest is 5.74%. That's a disparity of like 80 basis points which is huge. These are all hypothetical what-if's. For us to shift those three loans into a fixed position at 4 point ... What are they offering?
Ross Le Quesne: Four four.
Phil Tarrant: 4.4. We can save seven and a half thousand dollars a year. That's just on three loans. Over a three year fixed period that's $22,000. That's massive. It's huge.
Ross Le Quesne: Yeah, it's huge. Just looking at your options of those property, what are your plans to do. On an $800,000 saving seven and a half thousand dollars per annum is ... And that's seven and a half thousand dollars in net income so for most people to save seven and a half that's over $10,000 worth of gross income. So yeah, massive savings compared to people's ... The average salary of $60,000 or whatever. That's massive.
Phil Tarrant: That is big. Action points Ross and I'd like to get stuff done. We spoke about this $25,000. So that $25,000 for our listeners, that's a what if scenario. If we shifted everything or most of these loans to a fixed position and the current three year fixed rates we can get with these five different lenders we use, we'd take about $25,000. Are we going to do that all in one hit? No we're not. We've spoken about the reasons why. It's very dangerous to shift everything at one point in time to fixed so that at three years' period of time if everything changes and reprices then you can find yourself in a lot of trouble. Diversification and timing of when your mortgages go from fixed to variable or when they renew, point number one. Point number two, have different ... Have a whole bunch of different lenders so you're not reliant on any particular actions or behaviours of a lender.
Lenders can sometimes, not all the time but they can sometimes be unreasonable. Lenders have obligations to their shareholders. Lenders love to lend, let's dispel that theory at the moment. Lenders, if they reject you for a mortgage there's probably good reason why right? Lenders want to lend you money.
Ross Le Quesne: Exactly. At the most their profitability comes from lending money so they're keen to lend money and they're keen to lend as much as they possibly can as close to the caps as they possibly can.
Phil Tarrant: Lenders like property as in asset classes well don't they? I think just before we come on air we're watching some reports. I think the DOW has tanked 5% and the sky's about to fall in. What's going to happen to the ASX and all that sort of stuff right? As an asset class lenders like property and if it's under 80% they really like property. They say, "Oh yeah, okay." Lenders want to lend, all right. For us action points, we're not going to refinance all this immediately or shift to…
Ross Le Quesne: Yeah. There's some key ones. What we'll first look at doing is requesting pricing across lenders on a variable rate to see where we can get to from a variable rate. Then we've highlighted what potential savings we can do with fixing the loans. We've looked at three periods. Obviously the lender S you mentioned is a no-brainer. That is something that will get in place straight away because the savings that we're going to have there by switching to fixed is something. That one which will save 22,000 over three years. That one's straight away, then we also just looked at drawing some equity to ... And looking at refinancing one of your properties in Park Street. So that's something that we'll get underway straight away and the others, it'll just be a wait and see. See what they come back to with a variable rate and then we decide what we're looking to do.
Phil Tarrant: So it's about prioritisation right? We look at where you're going to get the biggest impact quickly with the least amount of work right? That's how I see the world. This one with lender S is the obvious one to do, and then you've got-
Ross Le Quesne: And then probably the other one was ... Which was just as significant was the $9,900 per annum and then $29,000 in savings. Those two I would consider ... Yeah, those two are the biggest-
Phil Tarrant: They're the biggest ones.
Ross Le Quesne: The biggest.
Phil Tarrant: That's what we should be concentrating on. Some of the stuff here would be nice to do but there's not really that much. There's another lender here, it's Macquarie. We have five loans with those guys. We have some reasonable pricing with them, we've worked out if we do the same rating we're going to save ourselves 800 bucks. You know what, it's not ... Right now there is other priorities ahead of it and same with our mortgage with CBA. There's some savings there but it's not as considerable as these other two. That's what we'll get sorted. As my mortgage broker this is one of the key benefits I believe, there's many, of using a mortgage broker. Is this just bloody hard work for you guys?
Ross Le Quesne: No, this is what we get paid for. This is the value adding stuff that we like to do. It's great being able to show someone that, "Look, you could potentially save over $25,000 a year by just making some simple tweaks." These aren't full applications. In a lot of cases it's just a one or two page document or sometimes even a phone call just to fix a loan from variable to fixed is not a difficult process. It's something that is quite easy for us to do and for the lenders to do. But it's just a matter of, and it just shows the importance of regularly reviewing your portfolio. As a broker we can ... You just need to make one phone call and we can look at all of them rather than having to do it yourself and call around your six different lenders and then work out the best option in terms of-
Phil Tarrant: You know who to talk to right?
Ross Le Quesne: Exactly.
Phil Tarrant: You can pick up the phone and speak to the person that makes decisions, not a call centre. I don't have the appetite for it. That's cool. A lot of our listeners, if you don't use a broker that's cool. Deal directly with your bank or your lender. A lot of people like to manage their finances that way and that's really good. By the way 54% of all new loans now are done by a broker so more home owners or investors use a broker than don't use a broker, which is good. And it's grown from 36% ten years ago so obviously what brokers are doing is beneficial for borrowers and as you can tell I'm pro-broker. I wouldn't be doing this if I didn't have a broker so I wouldn't have the time, effort and bandwidth. But when you see mortgage brokers in the marketplace you often ... They're a call to action, taught marketing speak, we say, "Come and get a home loan health check," right. That's all we're talking about here right, is a home loan health check.
Ross Le Quesne: Exactly.
Phil Tarrant: Everyone with a home loan should be checking to see whether or not it's still the most appropriate home loan for them at any given time. My language there is quite deliberate, the most appropriate and that means that every single person's got different circumstances and blah, blah, blah. But you've got to stress test your mortgages right?
Ross Le Quesne: Exactly.
Phil Tarrant: And take responsibility for your mortgages. Your lender's not going to call up and say, "Hi Mr. Phillip. Look, I just looked at your loan and yeah I think we're charging you too much. We're going to take a percentage point off." That just doesn't happen right?
Ross Le Quesne: Yeah, and most of your clients would have owner-occupied loans. So if your owner-occupied loan doesn't have a three in front of it at the moment you should be seriously thinking about refinancing.
Phil Tarrant: Really? Owner-occupied. So your principle place residence.
Ross Le Quesne: Your principle place of residence has never been a better time to look at refinancing your owner-occupied property because rates are starting from around about 3.59% on them. So yeah, it's low. Anyone over four is a long way out of the market.
Phil Tarrant: As an investor I'm paying a premium, was it 2% on my interest rate investing in property.
Ross Le Quesne: In some cases-
Phil Tarrant: In some cases?
Ross Le Quesne: In the commercial, yeah. On the commercial side of things.
Phil Tarrant: Just on that basis also then if your principle place of residence, and I know a lot of people, a lot of listeners have a PPR as well as an investment property. To your point if rates are so attractive on owner-occupied loans it might be a good chance to have a look at potentially drawing down some equity on that and using it to either leverage into more property or start investing in property as well.
Ross Le Quesne: Yeah, I guess when we see people refinance it's normally not just to save money. It's because they want to buy another property or they want to do some renovations or they want to do something else is more the trigger. And then they go, "The rate discount is a bonus." But as we've seen today on an $800,000 mortgage, you can potentially save between seven and a half and $10,000 on a big, big interest rate differential. Yeah, there is that reason but yeah. It's a great time while you're at it to access some equity or to build a buffer from your cash flow point of view and just sit it in an offset account. In your case your shortfall's about $60,000 a year and as you mentioned last time cash is king. I know for myself I'm a property investor, I've got a buffer that I just sit in an offset account because should anything happen, repairs, maintenance, vacancies, I don't have to sell those properties.
Phil Tarrant: Good point. How long is this going to take us Ross to get to a point where I'm satisfied that this scenario or this exercise that we're running through right now, as in a health check on our portfolio, on our home loans and taking actions?
Ross Le Quesne: I say it's a pretty seamless process. To get pricing from the existing lenders and to sign the forms to switch to a fixed rate is pretty seamless. Within a week a lot of this should be affected.
Phil Tarrant: But our priority would be to keep some of these on variable and just get a repricing which would be more competitive would be-
Ross Le Quesne: As I say that's the first step and then we make the decision from-
Phil Tarrant: Whether we fix it.
Ross Le Quesne: Whether we fix based on your plans for the property or whether we keep it variable, look at the differentials again and then make the final decision.
Phil Tarrant: Just on that basis then, this decision doesn't happen in isolation between me and you. We also need to bring in other people who are part of this team that we've put together to help us invest in property. So our accountant, our buyer's agent would probably have a view of this as well, accountant would be from obviously a taxation growth strategy perspective and buyer's agents around our appetite for continue borrowing capacity to invest in properties.
Ross Le Quesne: Yeah, because from your last podcast in January Steve spoke about improving cash flow through various acquisitions right? That may include, he might target a few properties to put a granny flat on for example to increase the ... That may be a consideration. Well let's not fix that one because we may need to do-
Phil Tarrant: Get the cash.
Ross Le Quesne: A granny flat loan against that property. So yeah, definitely in consultation with your team is the way to go.
Phil Tarrant: That's good counsel. What we're talking about here is obviously the wider strategy for our portfolio at the moment is to improve the cash position. One of those ways to do it is revision of our interest rates to make sure that we're getting the most competitive rates that we possibly can and that's been the focus of today's podcast. What you've just alluded to, there's other ways to fix or improve cash flow. One is to generate more income and that might be by renovation or a granny flat or a knock down, rebuild or whatever. You also mentioned that another way to improve cash flow is to buy another asset that is better cash-yielding as well. So a couple of things moving around and we'll keep covering those things off over the months ahead on our portfolio update.
But Ross, I think we've done a pretty reasonable job. Thanks for coming in, I do enjoy ... A lot of people don't like the finance stuff. Mortgage is a necessary evil for property investors but I think what you've highlighted today really clearly to our listeners is that it makes a bloody big difference if your financing is firing on all cylinders.
Ross Le Quesne: Exactly. There's a 40% benefit in terms of the cash flow out of your pocket and as we said last time cash is king and you're making it a whole lot easier on yourself by reducing that $72 a week per property by 40%. So you're now looking at what, $40 a week per property.
Phil Tarrant: Yeah. That's a couple of coffees. That's good, thanks Ross. Appreciate it mate and go back and listen to if you haven't yet the podcast on the 22nd of January when I spoke to Steve Waters from Rock Property Group. My buyer's agent and I put a bit of heat on Ross saying I need to chat with him and I'm happy to report that he was extremely responsive as he always is and doing what all good mortgage brokers do, and that is look after their customers. A good broker, yes, will get you into the right mortgage and help you through that process. But a great broker will also just not forget about you as well. They'll be continually working for you in your favour to make sure that the loans that you have are right for you. And take a vested interest in what you're trying to achieve as well, rather than just giving you home loans, your wider strategy around property investment.
As should your accountant and buyer's agent or your financial planner or anyone else that you use as part of your team for investing properties. So thanks again mate, do appreciate it.
Ross Le Quesne: Thank you. Thanks for having me.
Phil Tarrant: Remember to check out Smartpropertyinvestment.com.au. If you're not yet subscribing like tens of thousands of other Australians to our morning market intelligence newsletter you can do so. Smartpropertyinvestment.com.au/subscribe. If you're a social media person you can find us, Smart Property HQ. Search us, like us, follow us and you'll get all the information that we're putting out every single day, morning as well. If you like what we chat about on the Smart Property Investment Show you'll like to come on. We like investor stories. You can contact the team, they'll be really responsive. [email protected] and thank you everyone for those reviews coming on iTunes. Just anecdotally and I know this person listens to the podcast, I've never met them but they're actually carpooling with a colleague of mine at work at the moment.
I found it quite satisfying or interesting that he mentioned that this person just turned on the podcast to listen to. I know it's getting listened to. So I do enjoy it and it's good to myself and also I guess having a show like Ross and Steve and Munzurul, we all have a vested interest to make sure that Australians are making more informed property investment decisions. We'll keep at it. But let us know what we can do to improve. If you want to come on the show as I mentioned get in touch and any questions let us know. [email protected] and we'll answer them live on air. Until next time we'll see you then. Bye bye.
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