reFINaNCING OPTIONS

WHaT CaN yOu DO WHeN THe baNK SayS NO TO REFINANCING

BY CHRIS GRAY,

CEO, YOUR EMPIRE

I’ve been investing in property for almost 30 years and I’m still learning. I get to know more from friends, colleagues, books, other investors and generally just by asking questions and being inquisitive.

A lot of my strategy has been about buying blue chip properties in blue chip locations and then refinancing every year or two in order to build my cash buffer or to buy more property.

In the good old days, you could tick a box to say you could afford it and you would get a 80% loan. These days you’ve got to watch how much Uber Eats you order and how often you take your pet to the vet.

Serviceability is a major issue with refinancing these days and that’s what property investing has turned into - 90% of a game of getting money from the bank and 10% of what property to buy and how to manage it.

One alternative strategy to consider is to try and get banks to release properties debt free. Let’s say a number of years ago you bought 2 x $500k properties with 2 x 80% loans of $400k each. Over time ideally those properties would grow to $1m each and so you would only be 40% geared on both.

You might then like to access some of the equity to take a holiday, do some renovations or retire early.

In an ideal world you refinance to 80% again and have $800k in your redraw account $2m x 80% = $1.6m less $800k already owed = $800k

However, if you don’t have the ability to service $1.6m they won’t lend it to you.

If you sell one of those properties for $1m then the bank may require you to pay off that original related mortgage of $400k which means you only get $600k net proceeds from the sale, less tax of $125k ($500k capital gain less 50% CGT discount x up to 50% tax). So you only end up with $475k.

There’s an argument to say that the bank only needs $1m of security for your $800k original loan, not the $2m current value and so there’s a chance they will release $1m of property debt free and give you back the title deeds. They probably won’t do it if you say you’re going to sell a property as that would reduce the income you’re using to service the $800k debt, but if you say you’re doing it for asset protection / diversification reasons that may give you a better chance.

So then you have your original $1m of property with the bank and your 80% $800k loan.

At a later date you may then choose to refinance or sell.

With that $1m of debt free property you might be able to go to a 3rd or 4th tier lender and get a 10%, 20% or 30% no doc loan at very reasonable rates as the risk is very low for the new lender.

If that’s still not possible due to serviceability constraints then you could sell one.

But this time you get the full $1m proceeds as those properties are debt free. You still pay the $125k capital gains tax but now you end up with $875k cash rather than $475k.

One of my friends has done this a couple of times and I’m currently going through this process now.

I still have no intention of selling one unless I really have to, but at least it will give me flexibility in the future.

As always check your strategy with your mortgage broker, accountant and/or financial planner before taking any action.

I hope this gives you some more options and as you can see, not all buyers agents or mortgage brokers are the same and so I suggest using ones that have got the results that you yourself want.

A b OUT THE CONTRI b UTOR

Chris Gray is CEO of Your Empire, a buyers’ agency that buys homes and investments for time-poor professionals – searching, negotiating, renovating, and managing property on their behalf. Chris has spent over 10 years as the host of ‘Your Property Empire’ on Sky News Business channel, where he’s interviewed various heads of property research companies and major industry figures. Chris is a qualified accountant, buyers’ agent and mortgage broker. For more information, visit www.yourempire.com.au and follow Chris on Facebook: @YourEmpire

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