Where to from here – restructuring debt today
Last week we touched on Investment property and the importance of getting the strategy and structure correct. Which got us thinking. How does this apply to clients enquiring about restructuring debt.
As little as 5 years ago, things were vastly different in this space, and beginning to change rapidly. We are now starting to see a wave of investors coming off their Interest Only periods (normally 5-year terms), and having to foot the bill for Principal reductions to their investment debt.
However what we are seeing now, is an increasing number of clients who simply can not do this due to the bank’s strict new affordability guidelines.
“ In the past, you would simply approach your trusted broker, and go about restructuring debt.”
Here’s an example.
Client earns $120,000 per year ($7,200 net/month), inclusive of a company vehicle with included fuel and running costs, company phone and laptop – so their personal living expenses are quite low really.
She estimates her living expenses to be around $1350/month. She estimates the running costs for her 4 Investment properties (rates etc) to add about $3000/month to that.
They are all tax deductible expenses.
Looks pretty manageable right?
Well, here’s the thing: The bank is going to assess your interest rate as if it were 7.25%-8% somewhere – to allow for interest rate rises that may occur. That’s nice of them, but it puts a buffer of $5,175/month to this particular scenario – seemingly overkill.
But ok, they are looking out for the client.
But, then they would also like to only use 80% of the rental income that you receive, you know, just in case the property is vacant for a few weeks in the year. That seems fair too I suppose, but it shaves income by a further $1534/month.
Lastly, but definitely not least, they will never truly take into account a negative gearing benefit. Some banks will take into account the interest you pay versus the rental received, however, that isn’t the true benefit, as it does not take into account the other claimable fixed expenses such as rates, body corp, utilities, management fees etc.
So from an actual monthly income of $14,870 (before we include the tax return she will receive from the gearing benefits), loan repayments of $7987/month and fixed monthly living expenses of $4350 – it would, on paper, look like a surplus income of $2,533 – a very healthy amount.
According to the bank, we are sitting at a negative surplus of -$4176/month.
So what do we do now?
You can’t refinance or restructure – and your current loans are about to eat into that nice surplus of yours by $2435/month – with zero taxable benefits for doing so.
That someone could (should) be your trusted team: Broker, Accountant, Advisor.
The people who have a vested interest in ensuring your finances work for you.
There are also some things you can do to help the process:
1) You can approach the current lender/s and ask for the current Interest-only periods to be extended for a few years. (They may want to completely re-assess your current situation though).
2) You can re-negotiate the rent your tenants are paying.
3) Look for ways to save on running costs. Ring around and find a cheaper insurance policy etc.
4) Ask your Broker, to re-negotiate your current interest rate with your lender to reduce the overall repayment. Currently, Principal and Interest repayments are more competitively priced the interest only, so if you do switch, you may see a reduction in your rate.
5) Negotiate management fee’s, or better still self-manage. While that sounds like a nightmare, thankfully in 2018 we have access to better infrastructure.
Here’s an example: https://pleasedproperty.com.au
Investing in property can sound hard, even daunting for some. But it’s actually not.
You just need to have a team around you who understands the current landscape in the financial and property world.
It’s an ever-changing place and you need to be sure that your path is the right one for you.
“Honestly, your first move should be to contact someone who knows and understands the finance industry and can assess your position accurately.
”*The above example has been used for illustrative purposes. It does not in any way reflect your own personal circumstances.