Am I being sold nothing?
Housing is booming right now and there's a few development companies riding the success of it. I met with a client the morning of Good Friday (no rest for the wicked) and she mentioned that the investment company she had spoken to was amazing and that they had this incredible formula to reduce their home loan quicker as well as start to build their investment portfolio. A couple of big promises and I thought I would dissect them a little here as anyone can do this without the aid of a company making huge profits off you.
"Pay off your home loan quicker!" This was a big promise and it is actually a good one and not one that is convoluted and assists the development company in any way, this one was one that they offered solely to assist the client. For this to make sense though it is important to understand how interest is charged. Everyday your bank will calculate how much money you owe them based on the amount of money that you still owe them. If you owe $500,000 and your bank charges you 5% in interest a year (you should give me a call to have that looked at) they calculate that you owe them $68.49 in interest for that day.
The consultant said that the way "they do things" is to have an offset account (click here for a rundown on offset accounts) linked to the customer's own house that they live in and then have any money coming in go to that account. So, with an investment property you'll have rent coming in, you'll have insurance that needs to be paid, rates, utilities and management fees that all need to be paid at some point in the year. You use an offset account as the account that you save your money to pay these bills and have your mortgage repayments sit in there until they are direct debited and every day the amount sitting in that offset account reduces the interest you are charged that day for the mortgage against your personal home. Going back to our earlier scenario, assume you have $10,000 in savings in that account and then a further $8000 to cover bills and upcoming mortgage repayments this will mean you are only charged $66.03 in interest for that day. The more money in the offset account the bigger the saving.
The other promise was that the client would be able to start building her portfolio of properties. This is absolutely do-able but it is imperative that you look after you at this stage. Do you want multiple investments or is the goal to buy your first one or two properties as investments and then buy a place for yourself to live in? The development company makes money from you building/buying houses so for them they want to keep you buying and growing that portfolio. Not necessarily a bad thing but if you are buying your first property and next you think you would like to buy a property for you to live in having an investment property with a mortgage can make this harder. At the moment most banks need you to be able to prove you can afford a mortgage if interest rates hit 7.25% which is a big hit to your disposable income and reduces how much you can afford to borrow.
This particular company had suggested that once this property, that they had suggested the client purchased, had experienced good capital growth the client would refinance the loan to obtain enough cash to purchase another investment property. I did just say purchasing an owner occupied property would be harder to get as there is an existing mortgage but when you buy an investment property you can also allow for the rental income as well as any tax deductions in some cases which improves the capacity to repay.
I have just pulled apart a couple of the selling points that this company offered but I don't necessarily suggest avoiding this type of company. What I do suggest is, above all else ensuring this suits your goals and plans into the future but also I would want to see some research. You want to know what is going to drive growth in the area they're telling you to buy a house in. Job creation, infrastructure investment and the amount of available housing are good starting points.