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Planning Ahead A Vital Task

Cash flow is king and amid the present crunch it’s crazy not to look forward, writes John Bolton.

By: John Bolton

1 November 2022

It’s not just the loss of tax deductibility hitting property investors in the pocket at the moment. The cost of everything is going up.

Spiking interest rates have been a tough enough adjustment for owner-occupiers, but if you’re on interest-only there’s a solid chance your mortgage expenses have quite literally doubled in recent months (or they’re about to).

On top of that the cost of insurance, rates, and deferred maintenance have all soared. Not to mention the cost of things like keeping up with new Healthy Homes legislation.

The resulting impact on cash flow can be dire.

Cash flow is king and amid this crunch, with bank test rates currently up around 8 per cent, we’re seeing more situations where investors just aren’t passing servicing calculations.

The situation is complicated further by falling house prices (down about 18 per cent according to latest figures) which is really eating into existing equity.

And the consequences of that can be huge.

INTEREST-ONLY

I’ve already warned of stories about investors selling a property to free up some liquidity, only to have their lender claim full proceeds to repay other debt, and be left right where they started.

And there’s also more examples of investors coming off interest-only, only to find the bank unwilling to extend (and no other bank willing to refinance) because they simply don’t pass servicing.

So, what can you do to help protect yourself, and de-risk your situation?

‘Procrastination never leads to good outcomes’

1. Get clear on your cash flow reality.

It’s crazy not to plan ahead in this environment. Step one, if you haven’t already, is to take the time to project what all these added costs will mean for
your cash flow situation over the next year or two, and (in turn) the impact on your portfolio.

That goes for everyone, but especially for investors heading towards retirement or any other sort of lifestyle transition which will have an added impact on income.

2. Front-foot any potential issues. Procrastination never leads to good outcomes.

If you’ve got a good fixed rate locked in until sometime next year, the temptation might well be to wait it out to save every dollar you can. But if you’re also due to come off interest-only next year what happens if you get to the last minute only to find the bank won’t let you extend?

Finding another solution can take time, so it’s far better to be dealing with things proactively rather than wait for it all to hit the fan.

In this environment there’s a chance finding a solution will mean having to head down the path of a more expensive non-bank option. In which case it’s far better to know that well in advance.

For those who still have all their debt with one bank, that also means taking proactive steps to split that lending, so in the event you do want to sell to access liquidity you’re not going to be faced with losing all the proceeds.

3. Be prepared to think outside the box.

Increasingly, we’re finding there’s a need to come up with quite innovative solutions for clients to navigate through the complex issues they’re dealing with.

One such option is to restructure or refinance your debt specifically to get one of your properties mortgage-free. This is a really effective option if you think you might want to tap into some liquidity at some point relatively soon, meaning you’ll be able to do that without worrying about your lender claiming proceeds.

I’ve also recently talked at length about non-banks as a relatively new tool in the arsenal to address some of the problems investors are facing. Some non-bank solutions might be more costly, but right now the safest option isn’t necessarily the cheapest – and it might pay to front up a bit more in fees in order to tap into additional flexibility.

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