Increased repayments vs extra savings

[adm]

Hi to all!

This question has probably been asked countless times, I’ve searched the internet & essentially found what I’m looking for, but need to understand WHY.

So the goal is to get an IP.

Max’ing out our OO mortgage repayments (to gain more equity) vs using the extra money to bump up our savings towards a IP quicker?

By far the majority of answers I’ve read on this topic have said: “Use the extra money to invest”

But what I don’t understand is wouldn’t gaining the extra cash in equity be the same as saving it? Does having higher savings appeal more to borrowers than having more equity?

Is it because you can use ‘X’ amount of savings towards rental #1 and then the rest towards #2 if your savings are looking very healthy?

I had our repayments max’d out to $1,900. I recently restructured and that dropped our minimum repayment to just $915 per month so I essentially have $1,000 on top of our monthly savings + mortgage repayment which I want to direct in a way that’s going to be most beneficial towards property investment.

Thanks to anyone who can help!

[PC]

Pay off your own debt first.
That 3.5% mortgage is paid with after tax dollars - so cost is more like 4%?
Return on saving - SFA - then taxed.
The LVR restrictions have been removed - so not such a need for a deposit.
Though you will have to give security over your own house.
Make the mortgage interest only on the rental - keep repaying your own debt first.

[Nick G]

Yip, agree 100%.

[Nick G]

What he said.

[Frezzinghot]

Does the LVR removal apply to property investment as well? Confused.

[aucklandn81]

Is there any maximum term that the Bank can offer interest only loans on rental properties? I was told that I can only go for Max 2 years even though we pay bit extra on owner occupied mortgage and hence curious if there is really a criteria or case by case for interest only mortgages.

[Keys]

Figures are for example purposes only.

Investment Property: $500k loan, repayments are $500 per week P&I
Owner Occupied Propety: $500k loan, repayments are $500 per week P&I
$1000 per week total repayments

The bank does not care where the repayments come from. Just as long as they are coming from somewhere.

Investment Property: $500k loan, repayments are $400 per week interest only
Owner Occupied Propety: $500k loan, repayments are $600 per week P&I
$1000 per week total repayments

Same return to the bank of principle, no less repayments made on the total loan of $1mil. Owner Occupied debt reduced twice as fast, Investment Property remains at full tax deductible interest.

[aucklandn81]

Figures are for example purposes only.

Investment Property: $500k loan, repayments are $500 per week P&I
Owner Occupied Propety: $500k loan, repayments are $500 per week P&I
$1000 per week total repayments

The bank does not care where the repayments come from. Just as long as they are coming from somewhere.

Investment Property: $500k loan, repayments are $400 per week interest only
Owner Occupied Propety: $500k loan, repayments are $600 per week P&I
$1000 per week total repayments

Same return to the bank of principle, no less repayments made on the total loan of $1mil. Owner Occupied debt reduced twice as fast, Investment Property remains at full tax deductible interest.

Thank you very much for quick reply. Keys. Yes, I would have thought the same and I will discuss with the bank again once my current term expires.

[adm]

Pay off your own debt first.
That 3.5% mortgage is paid with after tax dollars - so cost is more like 4%?
Return on saving - SFA - then taxed.
The LVR restrictions have been removed - so not such a need for a deposit.
Though you will have to give security over your own house.
Make the mortgage interest only on the rental - keep repaying your own debt first.

Thank you for the comment PC!

I read a thread regarding a similar question. A guy had an extra $900 per month & asked should he use it to invest in rentals or pay down his own mortgage. Almost every reply was telling him to use it to invest,which I get & don’t pay down his mortgage.
But wouldn’t paying down his own mortgage also give him more equity to leverage for investing?
So why wouldn’t someone put any extra cash into there own mortgage if they were looking to invest in real estate?
What am I missing?

Hypothetical situation.

You have $50,000 in your savings.

- Using that $50,000 to pay down your own mortgage would also give you $50,000 more equity to leverage?

- You’d pay less interest over the term.

- If you had 30% usable equity, that could be the deposit towards an IP, so you wouldn’t have to essentially use any of your savings?

- Peace of mind, lower mortgage on OO.

Thanks for any insight!

[PC]

Paying off "bad debt" that isn't tax deductible is a better return than what most of us can make investing.
For many business people that isn't true.
Be aware of the general principal and make your own choices.
Giving security over your PPOR so you can use that equity in dodgy investments might not sit well with your significant other.
i.e. the wife says "hell no!"

[Keithw]

The other thing to note is that equity is not the same as cash.
After the GFC i had so much equity it seemed it should be easy to raise finance, in my case i wanted to restructure.
But lending policies changed from being able to access equity to being very focused on servicability. equity became almost irrelevant once past a moderate level sufficient to give the bank enough security.

[Beano]

The other thing to note is that equity is not the same as cash.
After the GFC i had so much equity it seemed it should be easy to raise finance, in my case i wanted to restructure.
But lending policies changed from being able to access equity to being very focused on servicability. equity became almost irrelevant once past a moderate level sufficient to give the bank enough security.

Did you have "facilities" with the bank ?

[Keithw]

I already had loans with ASB & ANZ
ANZ wasnt interested in taking into account my overseas salary
ASB would discount the salary to 70%
both discounted rent to 70%

Broker was unable to come up with anything even from non-bank lenders

[adm]

Hi and thanks to everyone so far for their input!

So I’m with NZHL, similar to a revolving credit mortgage. I had our repayments max’d out to $1,900 per month. We recently restructured as our savings account was almost at balance, so took $20,000 off mortgage & transferred to savings so we can continue adding to our savings & hopefully pay less interest on the now smaller mortgage balance.

Our repayments have now dropped to $915 per month. I have been told I cannot up our repayments from the $915 unless I reduce the term.
Reducing the term would mean if I ever needed to drop the repayments I would have to “re-apply?” (Not sure if correct word) - explain why etc, was told not a really simple process.

The last restructure used up our 5% repayment increase and to do anymore would have to pay a break fee (not sure how much yet).

So with a $915 repayment, very little is coming off the principle, very slowly building equity. But I have an another $1,000 to add to our current savings.

We currently have $85,000 usable equity towards an IP.

From an investing point of view, would having that extra $1,000 going into our savings as a pose to dropping the mortgage be more/less beneficial or would it essentially not matter? Is it irrelevant, $1,000 is $1,000 whether it’s off the mortgage or into the savings?

Would you advise I do increase the mortgage repayments to say $1,200 so paying off extra but still gives enough room if we get an IP & having to pay both mortgages if not tenanted.

I understand paying off my own debt is important, I’ve also read that using extra cash to invest is the way to go & concentrate paying off the mortgage when have some investments under the belt.

Apologies for the long winded post, trying to ingest a lot of information & get on the right path.

Cheers all

[Beano]

I already had loans with ASB & ANZ
ANZ wasnt interested in taking into account my overseas salary
ASB would discount the salary to 70%
both discounted rent to 70%

Broker was unable to come up with anything even from non-bank lenders

But did you have a approved "drawable facility " with the bank that was cancelled during the GFC ?
Equity is only part of requirements the banks need to "create" a new loan.