Maximise your Rental Investment Property - Minimise your mortgage interest.

Maximise your Rental Investment Property - Minimise your mortgage interest.


Author: Michael Levertoff

With recent tax changes affecting depreciation claims, many property investors will find themselves paying tax for the first time in 2012.

Despite this change, interest is still the biggest cost to your residential investment property portfolio – and with a little bit of fine tuning you’ll get it paid off quicker, saving lots of interest.

Using this simple strategy will more than offset the tax benefits you’ve lost through the changes to the tax system.


 APPLY THE RIGHT STRUCTURE

By far the most important aspect, the first step of structuring your mortgage should have already taken place. However if you have not employed the below structure talk to NZ Accounting to further advise you.

Your mortgage should be set up with a 100% financed interest only portion secured against the purchase price of the property.

For example, if you paid $500,000 for your rental, the fixed interest only portion of your mortgage (in the name of the entity that holds the property) should be set at $500,000.

The balance of the mortgage should be split into two parts and secured against your personal property.

One part should be a fixed interest only portion for two years.

The second part should be a revolving credit facility set at the amount you believe you can pay off your mortgage in that two year period that amortises over that two year period.

Example:

If the balance of the debt owing after securing the first mortgage over the rental property was $200,000;

And you believe you could pay off $20,000 over a two year period;

Part one of the mortgage would be a two-year fixed interest only loan of $180,000.

Part two of the mortgage would be $20,000 revolving credit amortising over two years.

At the end of the two year period, you would set up a new revolving credit facility of $20,000 and fix the remaining balance of $160,000 for a further two years. And so on… until the debt secured against your personal property was fully repaid.


 DEPOSIT ALL INCOME TO THE REVOLVING CREDIT FACILITY

Rent from the investment property and your personal income would all be deposited in the revolving credit facility.


 PAY ALL BILLS WITH A CREDIT CARD

Bills should be paid where possible using your credit card. Your credit card needs to be fully repaid each month so that you do not incur interest.


 WHY ALL THE MUCKING AROUND?

Personal debt cannot be claimed back against your business but business debt can. So you should ensure you pay off personal debt before attacking the mortgage secured over the rental property.

Equally, the higher the debt owing on the rental property, the more you can claim back as an expense.

Revolving credit interest is calculated daily. The longer you leave money in your revolving credit facility, the more money you save on interest.

Depositing your wages and the rent from the rental property into the revolving credit facility means more funds in the facility, saving you interest.

Alongside this, paying bills by credit card uses the 55 days of free credit that credit cards provide you which again means you can keep money in your revolving credit facility for longer, which also means you’ll pay less interest.


 FURTHER THOUGHTS

* Where possible, buy big assets with interest free terms and then pay them off before the interest portion kicks in rather than paying cash for them now – keeping more money in your revolving credit facility.

* Pay for everything you can with the credit card – including groceries, telephone bills, rates, insurance – you name it, throw it on the card. Just make sure you’re paying it off though on the day you need to, to avoid that high interest.

* Consider refinancing your credit card debt when low interest offers roll around – just as long as the interest charged is less than your mortgage, it’s worthwhile.

* This concept could save you hundreds of thousands of dollars in mortgage interest. Correctly applied, some people shave up to 15 years off their mortgage.

* The trick is: don’t spend the savings. Leave them in the revolving credit facility. Aim to pay it off quicker. If you do pay it off quicker, treat yourself with a mortgage holiday. But when it comes time to reset your revolving credit facility, try making it a bit bigger and challenge yourself all over again to get that facility clear.



If you need further assistance please Ask a question.