By
The scenario
When we were introduced to this Sydney couple with three children, they were grappling with cash flow. They had a principal and interest home loan with 20 years of loan term left; two car leases and some credit card debt. They felt stressed and financially trapped.
What they did not recognise was the power of the $1.5m of equity they had in their $2m home, built from that property’s strong capital growth over the past seven years.
Our clients were seeking to improve their financial position but did not 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.
These clients were friends of existing clients and had been referred to us to see if we could help. We started by ordering three upfront valuations from three different lenders, which differed by 7% ($140,000). We chose the lender with the best valuation and the best terms to suit the clients’ needs. The next step was to address their cash flow issues.
The solution
The first step was to improve their cash flow by restructuring their finances. By revaluing, restructuring and refinancing their home loan, we reduced its interest rate from 4.7% to 3.7% (it has since fallen further to the high 2’s); at the time this saved them around $5,000 per annum.
We also extended their home loan term from 20 to 30 years, lowering minimum repayments from $3,190 per month to $2,273 – a reduction of $917 per month.
Next, we refinanced their $50,000 in car loans as separate loans secured by their home, reducing the interest rate from 5% to 3.6% and extending the term from three to 10 years. This reduced their repayments from $1,500 to $500 per month.
Finally, we paid out and cancelled their $10,000 credit card using their home loan, reducing the interest rate from 22% to 3.6% – and lowering minimum repayments from $385 to $45 per month.
The total cash flow improvement after the restructure and refinance was $2,257 per month, or $27,084 per annum. The annual interest savings came to $7,540.
Now that the clients’ cash flow restructure was sorted out, the next step was to use their equity, cash flow and interest savings to fund income protection via referral to one of our regular business partners. We also qualified them for two investment loans worth $700,000 each, which could be deployed into cash flow positive investment properties in high-growth areas. This forms the other arm of our business.
We also created a $100,000 line of credit fund as a buffer. The refinance not only improved cash flow and interest savings but substantially increased their borrowing capacity as all of their loan repayments were so much lower. As they already had considerable equity, they could now borrow against it to access enough funds for the 20% deposit plus 5% costs and two line of credit buffers valued at $50,000 each.
The 25% deposit and costs (including stamp duty, legal and other costs) for each $700,000 property totalled $175,000 each, amounting to $350,000. As there was still plenty of equity in their existing home, the clients used this to borrow the two $50,000 lines of credit – one as a personal buffer and another as an investment buffer to help with any unforeseen cash flow issues. The deposit and cost funds then allowed them to borrow the other 80% required to settle on the investment properties they wanted.
We used the niche lending policy of a lender that used “actual repayments” over a buffered amount, which almost doubles your borrowing capacity and ability to invest. To use this lender, Liberty, effectively, we had to restructure as much debt as possible against the clients’ home with the other lender in a staged lending strategy, while using cash buffers to derisk their investment portfolio as much as possible.
Each property generates circa $200 in positive cash flow every week, or $20,800 per annum combined in total.
The takeaways
A well-executed finance structure combined with an investment-specific strategy is always more powerful than a marginally better spot rate that could change tomorrow.
The additional cash flow improvements we achieved for this client include $27,084 from the refinance and $20,800 from the investment properties, totalling $47,884 per annum. This was not only enough to fund income protection – a must-have for any investor – but it will also be enough to pay down their home loan in less than 10 years!
Our clients have told us what a weight off their minds it is to be actively doing something for their family’s financial future and to be in such a great position now.
Raj Sarin
Head of investment finance at
inSynergy Property Wealth Advisory
