Wouldn’t it be wonderful if you could pay off your family home sooner? To think that you could say goodbye to mortgage payments much sooner than expected probably causes you to dream a little. You could do so much with your mortgage payment…if it wasn’t going to your mortgage.
Australia’s property investment experts have unveiled some insider strategies on how to use investment property to pay off your mortgage within 10 years.
While owning a home is a dream we all aspire to, many of us will carry our mortgages for 25 years or longer.
Let’s look at a case study to show you how you can structure your finances, what property to buy, and when a good time to buy is.
In this study, Alan and Jan are paying $3,000 per month towards their mortgage and they desperately want to pay it off in 10 years from now.
Alan & Jan Profile
- Household gross income: $130,000
- Current home value: $750,000
- Purchase price: $650,000
- Home mortgage: $500,000
- Monthly repayments @ 4.5% pa after refinancing: $3,000
- Savings: $2,000
- Credit cards: nil
If we look at this simplistically (assuming a 4.5% interest rate), they’ll need to increase their monthly payments by approximately $2,000 per month—to $5,000 total— in order to pay off their property in 10 more years. This isn’t possible given the couple’s current financial situation.
Borrowing to Fund Investment Property and Borrowing Capacity
In their minds, before they can invest in property, they think they’ll have to pay off their current mortgage. However, given their current financial information, they can borrow up to $540,000 to invest in property.
Buying Investment Property with Equity
In this instance, Alan and Jan have $100,000 that they can use and still keep their loan-to-value ratio below 80%, which banks are comfortable with.
The most advisable way to access this equity is by setting up a home equity line of credit. This line of credit would be secured by their home.
Home equity lines of credit are similar to credit cards, however, the interest rates are home loan rates as opposed to the much higher rates charged by credit card companies.
Alan and Jan will use this line of credit to cover the deposit, stamp duty, legal costs, etc.
Finding the Right Property
We would suggest the couple invest in a property in an up-and-coming suburb with strong population growth, substantial infrastructure spending, and a multi-industry approach.
For this example, we’ve chosen a trendy 2 bedroom, 1 bathroom apartment in the heart of the Melbourne CBD. The property purchase price is $525,000 and the anticipated rent is $560 per week.
Financing the Property
|Stamp Duty (approx):||$26,500|
|Mortgage fee (approx):||$114|
|Mortgage @ 90 %||($472,000)|
|Home Equity Line of Credit||($81,000)|
We suggest this couple accesses the equity using a home equity line of credit. We’re going to borrow $81,000 from the home equity line of credit and leave the rest available as a buffer for unexpected circumstances and peace of mind.
Since the couple had to take a 90% mortgage, lenders mortgage insurance is applicable and varies depending on the lender. At roughly $9,300, this will increase the mortgage payment by about $35 per month.
When we structure the loan the way we’ve done, we avoid cross-collateralisation, which is unadvisable as it becomes difficult when trying to sell or refinance one property.
Capital Growth Expectations
According to Domain Group data, house price growth is predicted to grow at 5%-7% in Melbourne for the foreseeable future as interest rates are expected to remain low. Many suburbs in Melbourne have seen capital growth well above 10% and are expected to continue to grow. While we can’t predict beyond the short-term, at a growth of 7% this property will almost double in value in 10 years.
We have also assumed the tax rate will be 22.5%, the highest rate for individuals who hold properties for over one year.
Speeding Up Payments
All rents collected and expenses will be paid into and out of the LOC. Since this investment is cash flow positive, the balance of the LOC will decrease over time. If interest rates increase to 6%, then the LOC will remain approximately the same.
At their current interest rate, at the end of year 10, the balance of their home loan will be $330,000.
Due to all of the above, their loan balance will be $228,400 at the end of year 10. This means our couple could repay their home loan at the end of year 10 provided the property grows by approximately 5% per annum on average.
It’s easy to see how—given the right interest rate environment and the right suburb with the right market values—it’s easy to pay off your property in 10 years or sooner than originally anticipated.
Although you can see it is possible to structure your investment property in such a way that you can pay off your family home sooner and save, investment properties aren’t designed for that purpose specifically. In this instance, the family had to increase their mortgage repayments in order to meet their goals.
When growing your wealth by using investment property, it’s all about leverage, planning, and time.
If you have questions about purchasing an investment property or would like to speak to a qualified real estate professional, contact us.
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