Sometimes not paying back your home loan is a smart move

OPINION: In the current environment of historically low interest rates, it’s possible to borrow a million dollars and yet only be repaying around $570 per week back.

As insane as this is, you need to ask is that healthy to your investing and to your portfolio?

The only way to get repayments that low is if you choose to only pay the interest on the loan rather than the traditional “principal and interest”.

This means that after two or three years of paying your mortgage you are still going to owe the full principal amount of $1,000,000 and you haven’t at all chipped away at the lending.

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In essence all you have done is kick the can down the road.

Most people will tell you, and quite rightly, that this is a dangerous way to leverage.

You’re paying the absolute minimum amount the banks will allow and making zero headway into getting freehold which is the aim of many Kiwis, so why would you do it?

Consider it this way, If you want to set up your retirement nicely, most Kiwis would like to have a freehold family home in a nice location and a couple of bulletproof rentals that tick over with low maintenance and are rented out all the time with a very low mortgage.

Steve Goodey: “You’re paying the absolute minimum amount the banks will allow and making zero headway into getting freehold which is the aim of many Kiwis, so why would you do it?”
But to get to that situation many Kiwi families need to scrimp and save not only to get the home and keep it but to get on that rental ladder and keep up with rates, maintenance and upgrades so that their rentals stay full.

So every dollar of cash flow during this “growth” period of investing is incredibly important.

If you’re paying principal and interest on your lending, you might end up after 25 years of investing owning, say, five properties.

But if you go interest-only on the rentals and only pay principal on the family home over that same 25 years you may end up with six or seven properties.

The risks are, of course, that you will have better cash flow and you might even feel rich but in actual fact you will need to have some great personal financial self discipline to use that cash flow as a resource for your future and not to spend it as disposable income.

Some people will support interest-only lending because property values are going up, but as we all know capital gains are not guaranteed.

Banks will often have an issue with you keeping a mortgage on interest-only for a number of years but if you show them valuations with capital gains you shouldn’t have too much of a problem.

Most main street banks will tell you that two or three years is the limit of how long they will allow you to be on interest only but at the moment I have one loan coming up on 10 years without any principal payments.

Everyone’s investing journey is different and I wouldn’t recommend this for everyone without knowing a lot about their ability to be financially strict and their goals in investing but if you’re trying to grow your portfolio and are cash flow starved as most new investors are it’s an option.

It’s also well worth considering having a redraw facility that your additional cash flow and your salary goes into, which will lower your liability but allow you access to all your cash any time you need it for deposits on future purchases and renovations.

In a tight housing market like we have now it is often the buyers with access to their funds quickly that get the great deals.

Also keep in mind that once you have four or five properties and some equity in your portfolio, it’s worth re-evaluating your strategy.

If you have a well paid job and a couple of cash flow rentals and you don’t either plan to invest further or don’t need the cash, I would probably recommend the opposite advice and say that you should not only pay principal and interest but also consider “over-paying” your mortgage during these times of low rates.

Either way, you should take a close look at your lending at least every six months to make sure it’s working for you.

Steve Goodey is a property investor and coach.

*This article is featured on Stuff.co.nz

Steve Goodey – Steve is a property investor & coach with over 14 years of hands on experience in the New Zealand investment. He shares his wisdom on this blog and his facebook page as well as through his private coaching program.