Should you have multiple lenders?

“As you can see … certain lenders have different interest rates. So, yes, it gives you a good diversity across the portfolio,” he added.

Phil’s portfolio is now worth around $7.2 million with a total debt of $4.9 million, which puts his loan-to-value ratio (LVR) at about 60 per cent. Every month, he has to pay $20,000 to decrease the debt on his portfolio.

The average interest rate across the portfolio—across all the lenders and 19 loans—is 5.08 per cent, which Ross deem as “a little bit high”.

The mortgage broker explained: “Some of the lenders had put a premium on for the trust borrowing … By converting to a fixed rate, we could bring that down significantly.”

“The other thing is … some of the rates had crept up because of the interest-only loadings and the investment loadings, which just needed to be repriced.

“I think, that [the] average of about 5.08 per cent, [by] just looking at what we're going to do, should come down to around about an average of ... 4.7 per cent ... after we do the negotiations,” Ross explained further.

By bringing down the average interest rate, Phil can save around $24,000 a year.

Varying rates

Some property investors often find interest rates a little too complicated to deal with, especially considering the different rates you can get, even from the same lender. Phil, for instance, has five loans with one lender, and the lowest rate he pays is 4.89 per cent while the highest is 5.19 per cent.

Simply speaking, the interest rate depends on the initial loan-to-value ratio of a particular investment property, Ross explained. An LVR at 80 per cent or below can get better interest rates compared to higher LVRs.

Phil said: “Anything under 80 per cent, you don't pay lenders' mortgage insurance. Anything over 80 per cent, you pay lenders mortgage insurance on the percentage over 80 per cent.”

“Lenders' mortgage insurance doesn't insure you as an investor. It insures the bank that, should you default on your loan, they [can] flog your property [and] if there's any shortfall, they'll pretty much make their money back,” he added.

Moreover, interest-only loans are also more expensive than principal and interest (P&I) loans following the revised lending regulations implemented by the Australian Prudential Regulation Authority (APRA).

Negotiation

The interest rates can be negotiated once the equity of your property has increased.

“That's a great time to say, ‘Well, [the] value is no longer sitting at a 90 per cent. It's sitting at a 70 per cent loan-to-value ratio so [I’ve] got the argument to get the pricing at the 80 per cent mark,’ ” Ross advised property investors.

There’s always room for negotiation, but you have to be sensitive to the lender’s desire to keep you as a client. You’ve got to work out whether to stay and negotiate or just move to replace your lender.

Phil said: “ It's an inexact science and there's a whole bunch of different reasons why you may or may not do this … If you're a serious investor you've always got to be chasing cash flow efficiency.”

At the end of the day, as a property investor, you’ve got to work out the leverage and make sure it’s in your favor.

Options for improving cash flow

For Phil’s portfolio, Ross suggests shifting variable rates to fixed rates in order to improve its cash position. Phil, Ross, and the rest of the financial team are now looking into shifting three loans from a single lender into a fixed position at 4.4 per cent, which can potentially save them $7,500 annually over a three-year period or $22,000 in total.

Ross said: “We've highlighted what potential savings we can do with fixing the loans … Obviously, [this] lender … is a no-brainer [and] that is something that will get in place straight away because the savings that we're going to have there [by staying with this lender and] by switching to fixed [interest] is [massive].”

Aside from that, Phil can also consider drawing equity out from his existing properties or refinancing his mortgage.

“It [will be] just be a wait and see … what [the lender] come back to with a variable rate and then we decide what we're [going] to do,” the mortgage broker shared.

Diversification and timing

While there are many options available to property investors when it comes to improving their portfolio’s cash position, it’s important to discuss their strategy with property professionals in order to make the best decisions. After all, almost every investment strategy has its pros and cons.

According to Phil: “If we shifted ... most of these loans to a fixed position and [we can get] the current three-year fixed rates … with these five different lenders we use, we'd take about $25,000. Are we going to do that all in one hit? No, we're not.”

“It's very dangerous to shift everything [to fixed] at one point in time … If everything changes and reprices, then you can find yourself in a lot of trouble.

“Diversification and timing of when your mortgages go from fixed to variable [interest] or when they renew [are important] ... Have a whole bunch of different lenders so you're not reliant on any particular actions or behaviours,” he concluded.

Tune in to Phil Tarrant’s portfolio update on The Smart Property Investment Show to find out how you can stay ahead of the game when attempting to get a loan from banks and lenders for a property, how a shift from variable rates to fixed rates could impact your portfolio, and how the future plans for your investment can impact the loan you require. 

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