In this issue:
> Back to Library
How a negatively geared property can be turned into cash flow positive: cash flow mortgages coming to Australia?
For many years, mortgages in Australia offered only three repayment options:
- interest only, where the repayment just covers the monthly interest charge.
- principal and interest repayments that reduce the principal of the loan as well as cover the interest.
- reverse mortgage designed for elderly people who can borrow against the equity in their property and make no repayments in their lifetime. In most cases, the loan is paid off when the encumbered property is sold.
The first option is quite popular with property investors as it minimises their repayments, increases tax benefits, and speeds up saving for the next property
purchase. With most investment properties, the interest only repayments are not covered by the rental income, making them cash flow negative. In other words, the investor
still needs to make up for the shortfall.
Imagine, you are required to pay only half of the monthly interest and the other half can be added on top of your loan. This would then significantly reduce your repayments, making them small enough to be fully covered by the rental income. This is exactly how the cash flow mortgage works.
For example, consider a $350,000 property with a mortgage of $300,000 at the ongoing interest rate of 7.49% per annum. The traditional interest only repayment for this mortgage would be $1,873. The cash flow mortgage requires you to make monthly repayments at 3.99% and the remaining 3.50% is added to the loan balance. The monthly repayment is only $996.
If the property is rented for $350 per week, or $1517 per month, then in this example, the rent is well above the cash flow mortgage repayment, but still falls short of the traditional interest only repayments.
Since the cash flow mortgage capitalises part of the interest, its balance grows over time. This cannot run forever and after the initial period of 2-5 years, the lender will
either require to start principal reductions or to pay off the mortgage completely. This can be done by refinancing the loan to another lender and perhaps opting for another cash flow period. Naturally, the rent will grow with the inflation and at some stage the property will start paying itself off. The cash flow mortgage simply helps to achieve positive cash flow from day one.
Who the cash flow mortgage would suit:
- property investors wanting to improve their cash flow
- home owners who need a break from high mortgage repayments
- investors and owner occupiers who prepare for a big financial commitment such as parenting, lengthy holiday, university study, etc
The cash flow mortgage in not suitable for:
- property buyers who cannot afford a traditional mortgage
- people in financial difficulty
- property investors with less than 15% equity in their property portfolio
Please note that the cash flow mortgages are partly to blame for the housing downturn, and subprime credit meltdown in the USA that are shaking up the worlds financial markets at this moment. A few years ago those mortgages were widely offered to people who could not afford the traditional home loans.
Since then, the American interest rates went up significantly, the initial "honeymoon periods" on the mortgages have expired and a lot of borrowers had no other option, but default on their mortgages and sell up their homes.
In Australia, borrowers taking out a cash flow mortgage must to prove that they can meet principal and interest repayments on the initial loan amount plus any capitalised interest.
For any further information relating the cash flow mortgages contact us now.
Go to the top
Are variable interest rates variable?
The vast majority of mortgage loans are wholly variable at the lender's discretion. But are they?
This publication is provided by Gadens Lawyers to their clients and correspondents for their information on a complimentary basis. It represents a brief summary of the law applicable as at March 2004 and should not be relied on as a definitive or complete statement of the relevant laws. click here for the full article.
Go to the top
Recent Testimonial
Hi Anton, Thanks for the follow up. Everything's been great and we still can't believe that it was possible to obtain a mortgage. Just really nice to have a place of your own in Sydney. Again thanks to you and Chantal for making things possible and taking us every step of the way. We will definitely be in touch if any queries arise.
Arigato gozaimasu, Anna and Pierre, Japan
Go to the top
Update on Australian mortgage interest rates
Variable Rates depending on the percentage of the property value:
- up to 80% - 7.20%
- up to 95% - 7.34%
- up t0 100% - 7.39%
Fixed rates depending on the fixed period:
- 1-year fixed - 6.99%
- 3-year fixed - 7.55%
- 5-year fixed - 7.65%
- 10-year fixed - 7.69%
Go to the top
Our selection of articles by The Age
Boom fuels explosion in manual jobs
HE building boom, security fears and years of strong growth have dramatically changed the job prospects of blue-collar and lower-skilled men, on a scale not seen for a generation...more
A town hits paydirt
Many workers earn more than $100,000 a year, have pay TV and get six days straight off work. So what is it really like in a remote Western Australian mining boom town? David Cohen reports on life in Tom Price...more
Experts divided on timing of rise: will it be August or next year?
The unexpectedly large rise in core inflation, plus an upward revision to the last quarter's rise in the weighted median (now 0.6 per cent quarter-on-quarter from 0.5 per cent previously), is likely to trigger a rate rise in early August. We expect a second tightening probably later this year, although a federal election could delay this until early 2008...more
Mortgage jitters prove contagious
When Americans buy fewer houses or default on mortgages, investors worldwide - including in Australia - worry, writes John Mangan...more
Australian dream fades as cost sends some to ghetto
WITH housing affordability now an election issue - and with house prices falling in Sydney's battler electorates and a Labor poll showing high rents are eating into people's incomes in marginal seats - experts warn the problem will get worse. They also say it might be permanent...more
Building approvals, credit surge point to rate rise. A surge in credit demand has compounded the risk of an interest rate rise, possibly as early as next month...more
In our next newsletter
- Feature about reverse mortgage.
We will be happy to discuss and research various options for your new or existing mortgage in Australia. There are plenty of deals in store for you, simply contact us by sending an enquiry.
Go to the top
|
