Structuring your mortgages correctly is an important step property investors need to make if they want to achieve the best tax deductions and have the best chance of positive gearing their property.
In this article I am going to discuss some ways that refinancing you mortgage can help you to achieve a positive cash flow faster.
Disclaimer: This article is for general educational purposes only and should not be seen as mortgage, financial or taxation advice. Always seek the help of a professional.
Here are three ways refinancing can help you achieve a positively geared portfolio.
1. Minimise Your Payments
There are two ways to move from negative cash flow to positive cash flow and that is to either increase your income or reduce your expenses, and refinancing may be a great way to reduce your expenses. Here are some ways it can help you achieve that.
Interest Only Loans
If you are paying principal and interest on your loan then your repayments will be much higher than if you are just paying interest only on the loan.
A $400,000 loan at 7% interest on a 25 year term will cost you approximately $2,827/month whereas on interest only it would only cost you approximately $2,333/month.
This is an extra $494/month or $114/week in cash flow that you are saving. This extra money can be put into an offset account, can be used to reinvest, or can pay down some of your bad (non-tax deductible debt)
Offset accounts are bank accounts that (believe it or not) offset your mortgage. This means if you have $1,000 in your offset account then you are avoiding your interest charges on $1,000 of your loan.
If you have $10,000 in there then that can save you about $700/year (on a 7% interest rate) or about $13.46/week.
If you do not currently have an offset account attached to your property loan then you may be able to refinance to a loan that does have an offset account.
Lower Interest Rates
Many different lenders offer different interest rates. By shopping around you could secure yourself a cheaper interest rate and save yourself a fair amount of money.
If you could save just 0.5% interest per annum on a $400,000 loan that works out to a saving of $2,000/year or $38.46/week.
This is a significant saving which could put your investment property into the positive cash flow.
Interest rates aren’t the be all and end of of a mortgage. A low interest rate with high fees may be worse than a higher interest rate with low or no fees. It is important to do your calculations.
If you could refinance and save yourself on annual fees then this could save you a good chunk of money each year.
How Much Could You Reduce Your Expenses By?
For our example $400,000 property, if we lower our interest rate by 0.5%, use an offset account and move to interest only instead of principal and interest:
We could potentially reduce our cash flow expenses by an estimated $8,578/year or $164.96/week (illustration only)
That sort of refinancing could make a lot of negatively geared properties positively geared overnight.
2. Maximise Your Tax Deductions
If you are earning a full time income then the chances are that you are paying some sort of tax. By clawing back some of your tax through the effective use of tax deductions you could create enough savings to make your property positively geared.
Interest Only Loans
I mention this again only because a lot of investors don’t realise that by paying off their mortgage on their investment property they are almost always reducing their tax deductions for that investment.
By maintaining an interest only loan on your investment property and use the excess cash flow to pay down other non-deductible debt you could save yourself a lot in tax deductions.
By claiming other bank expenses correctly, such a fees,an help you further claim more deductions when tax time comes around.
Claim Deductions Throughout The Year
Rather than waiting until tax time it is possible to claim your deductions up front and receive your tax refund in portions throughout the year. This can help your month to month income.
3. Reinvest For Positive Cash Flow
If you have equity in your property it may be possible to refinance and use your equity to reinvest in a positive geared property.
This will grow your real estate portfolio but will also give you more cash, potentially making your entire portfolio positively cash flowed.
Imagine if you were $50/week negatively geared and you refinanced so you could get equity to purchase a new positively geared property. If that property paid off the new loan, all expenses and generated you an extra $60/week then your portfolio would be cash flow positive by $10/week.
As you can see refinancing can be a great way to reduce the monthly expenses of your mortgage and create a positively geared property. Speak to a qualified mortgage broker for more information and advice.