Private property issue #12 - 2 mortgage plays (you need to use)

Private Property – our weekly newsletter that gives you insights into what's happening in the NZ property market. Written by managing director Andrew Nicol. Sign up to receive this in your inbox every Thursday.

If the bank won’t lend you the money to invest …

There are 6 strategies you can use to get a ‘yes’ from the bank.

In today’s Private Property, you’ll learn the two most popular – The Mortgage Buster and Split Banking.

Also, there is a short quiz at the end, so pay attention. 😉

First thing’s first. To get the bank to say yes, you need a. deposit (equity) and b. income (servicing).

Together, these two strategies improve both (servicing & income).

Play #1 the mortgage buster

The Mortgage Buster is one of the most powerful strategies.

It helps you pay down your home loan quickly and improves both equity and servicing.

How does it work?

At its core, you’ll pay down your mortgage more quickly ... but, there is a bit more to it than that.

Because you’ll set up your accounts in a way you probably haven’t thought of before.

You’ll break your mortgage up into two parts –

Part #1 - A standard home loan (the home loan you’ll already have), which has a fixed interest rate.

Part #2 - A revolving credit or offset account, which has a floating interest rate.

A revolving credit is a special type of account that lets you pay down your debt (and reduce your interest costs) … but you can take that money out again if you need to.

You can’t do that with a standard mortgage.

So, if your mortgage is $500k, you might break $10k off and set it up as a revolving credit.

You then make minimum repayments against the standard home loan.

Then you put the maximum amount of money you can in the revolving credit.

This means you’ll pay your debt down quickly.

But, if you put away too much money and need to take some out (like if your car needs repairs), the money is available for you.

At the end of a year, you can use the money in the revolving credit to pay down your primary mortgage.

Then you start again.

Play #2 split banking

The Split Banking strategy improves equity, especially for investors who have purchased new builds.

How does it work?

When you buy a new build investment property, you need a 20% deposit.

But, the day that property settles, it becomes “existing” in the banks' eyes … and so requires 40% equity.

If you set all your properties up with one bank ...

This sucks useable equity out of your own home that could be used to purchase your further investments.

That doesn’t happen if you use multiple banks.

So you can often borrow more if you use multiple banks rather than just one.

How do I set it up?

You can use this strategy even if you already have all your properties with one bank.

You do this by applying for new mortgages at other banks and using those mortgages to pay off your existing ones.

This effectively moves your debt from one bank to another.

This is way more easily said than done.

So it’s best to work with a mortgage adviser to set this up.

Have you been paying attention?

Now let’s go through two case studies to see which strategy investors could use.

Case Study #1

Jess owns 3 properties: a house in Auckland (her own home) and 2x townhouses in Christchurch (investments), which she bought as new builds. All her lending is with the same bank.

Jess runs her own business and has a sizeable income. She wants to buy another townhouse but doesn’t have enough equity.

Question: Of the two strategies, which should Jess think through first? (answers below).

Case Study #2

John and Mark own their own home in Christchurch. They have about $500k left to pay on their mortgage. They reckon they could probably pay it off a bit quicker.

But, they want another investment property, so don’t know if that’s their best option. Their mortgage adviser says they’re held back by equity and servicing problems.

Question: Of the two strategies, which should John and Mark think through first? (answer below)

How do I learn more?

These are just two of the most commonly used mortgage plays. But there 4 more (including the Debt Destroyer and Earn, Baby Earn)

If you want to learn all the strategies … and dig into more detail.

We’ve just released our new Mortgage Playbook, an 18-page guide that shows you how to turn the bank’s ‘no’ into a ‘yes’.

Download the Mortgage Playbook here.

And the answers to the case studies are: Jess should check out the Split banking strategy first. And John and Mark should investigate the Mortgage Buster first.

Sign up here 👇