Refinancing: A negative gearing quick fix

Although many high income earners are encouraged to purchase negatively geared properties for tax benefits, some investors are struggling to keep up with the weekly holding costs and this could be putting a great strain on their financial situation and lifestyle.

If you're experiencing such hardship this article is definitely for you.

Property is a long term investment and selling is one of the big no-no's. But when you're in financial hardship, sometimes selling seems like the only option.

However, it is best to know all your options first and one option to look at first is whether refinancing your loan will improve your cashflow.
Review your current loan structure: is it a Principal & Interest or an Interest Only facility? Depending on how you've acquired your investment property, your loan could be either. In a negatively geared scenario, I recommend that it’s best to have an Interest Only loan and I'll explain why shortly.

You need to also research the benefits of switching lenders, unless your current lender is offering the best interest rate on the market. And right now fixed rates are as ‘hot’ as I’ve ever seen with some 3yr rates at 4.84% and one 5yr rate at 5.29% - so every negatively geared investor should be doing their math on this right now!

Currently in Australia, we are experiencing record low interest rates across both variable and fixed rate options, with more cuts predicted to come over the next 10-12 months!

Don’t think for one minute though that this is happening because our economy is doing well or that the banks are ‘sharing the love’. Neither could be further from the truth!

If you’re able to, feel free to take advantage of the situation … and remember that in the world of banking, loyalty is a one way street. They expect it but have none in return for you. So don’t be ‘lame’.

Earlier I recommended that you have an Interest Only loan. The only reason for this is that you can offset your interest with the balance in a linked account known as an offset account. An Offset Account is a separate account which is linked to the loan & it offsets the interest charged to that loan.

Offset Accounts work well with variable rate loans as they lower the interest charged on the loan, but still delivers you leverage. If you aren’t interested in a fixed rate (not sure why that would be though) I highly recommend that negatively geared properties have an Interest Only loan with a linked Offset Account and that you accumulate all your spare cash in it.

This is how Offset Accounts work with Interest Only loans:

(The loan balance - Offset Account balance) × current % ÷ 12 = monthly repayments)

As you can see from the simple equation above, the offset account lowers the monthly repayments.

You should also know that there is a massive difference between putting funds directly onto the loan rather than into the Offset Account. Funds you put onto your loan directly cannot be redrawn for non-investment purposes without affecting the tax deductibility of the loan's interest. But, funds placed into the Offset Account can be redrawn for whatever purpose and do not affect the tax deductibility of the loan's interest.

So if you don't already have an Offset Account in place, I'd recommend that you secure one as soon as possible. If you have savings in other accounts, I'd recommend that you transfer those funds into the Offset Account NOW to reduce your interest bill as much as possible, however minimal the funds may be. And keep adding to it monthly.

As I mentioned above, refinancing is one solution. It may not work for you and you may need to sell, depending on how draining your negatively geared investment property is. An experienced professional mortgage adviser like myself (with years of real world property investment expertise) can look at your situation & calculate the benefits of refinancing for you without you having to actually take the risk.

For example, I had a client who was suffering from the holding costs of a negatively geared property. She had around $700k in high interest debt. Based on her current income, the debt was too high to refinance or offset and the only way out was to sell her negatively geared property.

I restructured the remaining debt & negotiated with her current lender to significantly reduce the interest rate they were charging. With my help this client freed herself of the negatively geared property and saved approx $5000 a year in interest on her owner occupied loan.

As you can see, there’s no ‘one size fits all’ solution so I don’t recommend that you go ahead and implement this solution without first consulting a professional. You have a greater chance of creating a worse financial state than you currently have if you run with what can be complex refinancing solutions by yourself.