Interest only to increase retirement cash-flow

[Vision]

Hi.

I'm sure there are many older investors out there in a similar situation to ourselves. My wife and I have been steady investors for 28 years and presently have 3 Wellington rentals with 80% equity plus and our brand new freehold home.

For health reasons we wish to retire 3 years early so hopefully we are still entitled to the pension in 3 years! All 3 rentals have P & I mortgages with the same bank and at 65 (3 years) we intend selling the smaller home allowing the remaining 2 larger homes to be freehold plus cash.

We are looking to approach our bank now and request all 3 mortgages or failing that 2 of 3 mortgages move to interest only. This will enable us more cash flow for living over the next three years and the potential of 3 years gain rather than selling one now.

Although we do have some saving to live on for 3 years with the large amount of capital tied up in the houses chances are we personally won't get to spend it even if we make 80+! We would like some of the wealth effect now having lived lean for years to upkeep and attained the houses. We don't wish to be paying down debt and in doing so increasing equity which in the long picture our estate would benefit, not us personally.

Have other forum members approached their bank requesting similar?
In our opinion the risk to our bank is very low with the high equity level, they get to keep mortgage business and the debt stands still and we personally have the better cash-flow for enjoyable living.

Thanks for your comments

[Don't believe the Hype]

Have you reviewed your rents? The Wellington market is moving up quickly so my first action would be to ensure you’re revenue stream is maximized.

then I would at my costs:
cost of borrowing - talk to the bank tAre you getting the best possible interest rate - could you negotiate with the banks/banks to get a better rate? Consider different loan terms.
insurance - do you have the right cover? Is there a better price for your current situation?

you might find this assessment is a better way to achieve a better retirement cash flow than simply moving to IO payments on your mortgage.

[DaveW]

I would be very surprised if they don't give you IO with that low an LVR.

[Rosco]

Hi Vision,

Why not sell one of the rentals now? Why wait 3 years? If you are going to sell, why wait?

From a historical perspective the market will go flat for 5-7 years, so holding for 3 years wouldn't achieve much!

NOTE this is just based on history and no one has a crystal ball. Market boomed late 2007, then when flat for most of NZ (excluding Auckland) to 2014 approx. Different areas boomed at different times, Auckland first, Hamilton Tauranga stopped around late 2016. Other areas started to go up a lot later, and have therefore been booming later, but are going to stop at some point, the guessing game is exactly when!

Overall I would be looking at a plan that works well for you in the long term, and trying to rely on banks the least amoutn possible.

My guess is that banks won't like interest only for you, but if you have a plan they might be keener.

Ross

[anne123]

Another option may be to negotiate a revolving credit facility to cover the principal payments until you want to sell. Banks don't like to do this though so you may have to think creatively about what the banks will give you a revolving credit for.

As someone mentioned above, in 3 years time it may not be a good time to sell and it may be a good idea to take your profits now while prices are good.

[DaveW]

I think reverse mortgages will be a thing of the future. Instead of paying any principal the mortgage just keeps growing bigger providing funds to live on over the years till death. The bank can then sell the properties to recoup principal and interest.

[ownblock]

I think reverse mortgages will be a thing of the future. Instead of paying any principal the mortgage just keeps growing bigger providing funds to live on over the years till death. The bank can then sell the properties to recoup principal and interest.

I can see this option happening more and more. I can then run top fuel

[Beano]

I would say the bank would be pretty happy with 20pc LVR
I asked the bank the same question
What LVR they would not require principal
The answer was 40pc to 45pc
What is your current interest cover ?
On 20pc LVR would interest cover be 6 times (net rental to interest ) cover (I estimated this as I am on 2.8 and at 20pc it would be 6)

[Beano]

I think reverse mortgages will be a thing of the past while interest rate are low .
When interest rate are high then they could be more popular