Keep an eye on the cash flow

After the RBA’s recent rate cuts we have seen more investors approaching their banks to request interest reductions, and in some cases, lenders are agreeing to reduce interest rates, but only if monthly repayments remain the same.

This kind of deal might seem appealing — but if you’re seeking to refinance with the goal of increasing cash-flow, it isn’t an attractive option.

Unaware of their own negotiating power, borrowers sometimes accept the terms set by banks, not realising they’re in a good position to sternly insist on the best possible deal. Lenders will go to great lengths to keep clients on their mortgage books — so speaking to another broker or financier about better deals is also worthwhile.

These rate cuts certainly aren’t dampening the enthusiasm in the market. Lately we’ve observed more investors paying owner-occupier prices for properties. With an emotional investment in their homes, owner-occupiers tend to be willing to pay around 10 per cent more than harder-nosed investors. But some investors are buying at owner-occupier prices with the belief that property values will continue to rise unabated – they are effectively paying an upfront premium on that future growth. This isn’t a good move because, amongst other issues, over payment drives down the property’s yield, leading to possible cash-flow problems and a reduced ability to demonstrate serviceability to a lender.

To build wealth from property, we have to strike a balance between long-term value and current income potential. This involves choosing the right property at the right price, buying at a useful rental yield value, and negotiating a loan structure that meets our needs.

 

Until next week,

Jock Bing