Many homeowners with equity in their property don’t realise they can concurrently invest in another property and improve their cash-flow by using their equity safely and effectively.
A Sydney couple with three children who were struggling with cash-flow. They had a principal and interest home loan with 20 years of payments left, two car leases and some credit card debt. They felt stressed and financially trapped.
What they didn’t understand was the power of the $1.5M of equity they had in their $2M home, built from strong capital growth in the seven years prior. They wanted to improve their financial position but didn’t know they could use their equity to turn things around. All they could see was that after tax and bills they had very little if anything left over each month.
Step 1: Improve cash flow by restructuring and re-negotiating finances
Working with their property investment advisor and mortgage broker at inSynergy, they were able to revalue, restructure and refinance their home loan, with the following benefits:
- Reduce their home loan interest rate from 3.5 per cent to 2.5 per cent, saving $5,000 per annum;
- Extend their home loan term from 20 to 30 years, lowering minimum repayments from $3,190 per month to $2,273– a reduction of $917;
- Refinance $50,000 of car loans as separate loans secured by their home, reducing the interest rate from 4 per cent to 2.5 per cent and extending the term from 3 years to 10 years. This reduced their repayments from $1,500 to $500 per month;
- Pay out and cancel a $10,000 credit card using their home loan, reducing interest from 22 per cent to 2.5 per cent, lowering minimum repayments from $385 to $45 per month.
Step 2: Use equity, improved cash flow and interest savings to reduce risk and invest further
The next step was to use equity, cash flow and interest savings to:
- Fund income protection – an essential risk mitigation strategy for anyone;
- Qualify for two investment loans for $700,000 cash-flow positive investment properties in high growth, high yield areas;
- Create a $100,000 line of credit fund as a buffer, thereby further reducing risk of any short – medium term changes to their financial situation.
The refinance improvements not only boosted cash flow and interest savings, but substantially improved their borrowing capacity as all their loan repayments were so much lower. As they already had considerable equity, they could borrow against the equity to access enough funds for the 25 per cent deposit and costs and two lines of credit buffers of $50,000 each.
In addition, each investment property was approximately $200 cash-flow positive every week ($20,800 per annum combined total).
Step 3: Reduce bad debt and build wealth safely
The additional cash flow improvements of $27,084 from the refinance and $20,800 from the investment properties – totalling $47,884 per annum was enough to pay down the home loan in less than 10 years while building equity in a growing property investment portfolio.
They also have a $100,000 buffer, much better cash flow, investment properties in diversified high growth locations and income protection. Their finance structure is now far safer and returning far more. As the home loan is being paid down and their rental and work incomes increase – further improving cash flow and borrowing capacity – the plan is to invest in additional property as long as they can do it safely, which will substantially improve their equity over time more safely.
Don’t ever give up if your cash flow is tight or one lender or broker has said they cannot help. Strategic lending and property advice can usually significantly improve your situation and being able to help people through all sorts of situations such as that outlined above and in so many other ways can have a significant impact on lives which is a privilege we love and will never take for granted.