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We have been told that our home loan is the first one we should get rid of. After all, it is the biggest debt, so it makes sense that most people want to pay it off as quickly as possible.  

But is that really the smartest way to manage your finances? Should homeowners pay off their home loan completely before considering other investments such as buying an investment property?  

For some people, this may make sense. If you want a low-risk profile, can see your income going down in the future or there are other reasons why you want to get rid of this debt, then it could be the right way to go. But when you avoid investing because you want to pay off your home loan first, you will pay a big cost.  

This is known as an opportunity cost. This is simply a way of saying – how much will it cost you to wait 10 or 20 or 30 years before you start investing? How much profit and market growth will you miss out on by waiting?  

If you bought a home in Sydney 10 years ago and waited until you paid it off before you invested in property, you would still be waiting to buy another investment. It would be at least 5 or 10 years, if not more, before owning it outright. BUT if you used some of your equity to buy an investment property 3 or 4 years ago, you would have 2 quality property assets that have both gone through a massive growth spurt. Your wealth would be greater with 2 properties than it would be with 1, even though you have more debt.  

The extra wealth of profit is the “opportunity cost” you miss out on if you wait for util your home loan is paid off.  

How Can You Safely Invest Before You Own Your Home Outright? 

How can an investor use their home equity safely, so it does not impact their lifestyle and enables them to buy a property at the same time?  

Our suggestion is that people pay off their home loans enough to be able to avoid paying Lenders Mortgage Insurance. This means you want to borrow no more than 80% of your property’s total value when you withdraw some equity to buy an investment property.  

Let us explain… say your home is worth $800,000 and your loan is $500,000. A loan worth 80% of its total value is $640,000. You owe $500,000 so you can borrow another $140,000 against your home to use as a deposit and stamp duty on an investment property.  

Here are a few tips for people who are considering this strategy: 

What Are the Traps to Know About?

Over the years we have seen a similar pattern play out in that inexperienced people don’t structure their debt correctly and end up with loan products that don’t suit them or that restrict their borrowing capacity.  

Other traps we have seen is that borrowers fall into is include using redraw, causing them to lose tax advantages, taking out principal and interest loans on an investment loan that is not tax-effective, or they don’t think about using the equity they have built on their properties to use on purchasing investment properties.  

To best leverage your loans for both your home and investment properties, it is ideal to set up the right structures and loan features from the beginning. Working with a mortgage broker and an accountant can be so powerful – it can save you from making mistakes that could cost you thousands, tens of thousands or even hundreds of thousands in lost profits, missed opportunities and unnecessary fees.  

If you are interested in property investment but don’t know where to start or whether you should pay off your home loans first, feel free to get in contact with our friendly team today and we can help look

Phone: 1300 855 022
Email: clientservices@zippyfinancial.com.au     

Zippy Financial is an award-winning mortgage brokerage specialising in home loans, property investment, commercial lending, and vehicle & asset finance. Whether you are looking to buy your first home, refinance or build your property investment portfolio, the team at Zippy Financial can help find and secure the right loan for you and your business.      

About the author:       

Louisa Sanghera is an award-winning mortgage broker and Director at Zippy Financial. Louisa founded Zippy Financial with the goal of helping clients grow their wealth through smart property and business financing. Louisa utilises her expert financial knowledge, vision for exceptional customer service and passion for property to help her clients achieve their lifestyle and financial goals. Louisa is an experienced speaker, financial commentator, mortgage broker industry representative and small business advocate.       

Connect with Louisa on Linkedin.      

Louisa Sanghera is a Credit Representative (437236) of Mortgage Specialists Pty Ltd (Australian Credit Licence No. 387025).    

Disclaimer:This article contains information that is general in nature. It does not consider the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. This article is not to be used in place of professional advice, whether business, health or financial.      

Have you been looking into the idea of becoming a landlord – but then 2020 happened, and all of your plans went out the window?

It’s true that 2020 has delivered a number of challenges to property owners, particularly those investors who had non-paying tenants who they legally weren’t allowed to evict.

The moratorium on evictions has now ended, and balance is not just returning to rental markets and in many cases, rental markets are booming.

That’s just one reason why this could be a great year for you to get a well-priced investment that helps you build long-term wealth and financial security.

But it’s not the only reason; there are plenty of other factors that mean 2021 is shaping up to be an attractive year to purchase an investment property, and it includes:

The Fact that Investment Loans have never been Cheaper.

We are getting mortgage deals for our clients that are the most competitive that we ever seen, and we have been in the finance industry for over three decades.

Landlords who were paying over 4% for their investment home loans this time last year, may now be eligible to apply for a residential mortgage as low as 1.99%. Not sure what’s available or how munch you could save? Get in touch with our friendly team for an obligation-free appraisal,

The Fact that now is the Ideal Time to Negotiate a Bargain.

Did you know that the government is estimating up to 500,000 jobs will be lost, once the JobKeeper and JobSeeker programs are rolled back in March?

When this happens, it’s possible that mortgage defaults will increase for everyday mortgage holders. It may also be the case that investors who are struggling to manage their investments or their businesses, may offload their properties.

This puts you in a prime position to negotiate a good price on the investment property you have your eye on.

The Fact that You can “Rent-vest” to Access Grants and Incentives.

First-time buyers can access a number of government incentives that are not available to investors.

But that doesn’t mean they’re totally inaccessible. If you’re a first homebuyer, then you may be able to use a reinvesting strategy that allows you to leverage these grants and schemes to buy a home.

You can live in for 12 months, to satisfy the rules of each program and incentive, then rent it out as an investment, while you live somewhere cheaper. You may be able to access tens of thousands of dollars worth of first homebuyer grants, incentives and discounts this way.

The Fact that You may be Able to Borrow more than You Thought.

With record-low interest rates in the market, which look like they’re here to stay for at least the next few years, right now it is the most affordable it’s ever been to get a loan and you may be able to borrow more money from banks than you were eligible for in the past.

This time last year, your borrowing power may have been $600,000. Now with interest rates so much lower, it could have jumped to $700,000.

You don’t know unless you find out!

So, for those of you who can see the potential financial rewards of investing in property in 2021, get in touch today. We can help you assess your borrowing power and give you an understanding of how much a bank or lender might be willing to lend to you.

If you are not sure that you’ll qualify for a loan for an investment property, we can review your situation and give you pointers about changes you could make, such as consolidating debts, or rearranging your credit cards, to improve your financial position.

This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.

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