Deal of the month: a restructure win

It’s very common for us to recommend to our clients that they review their financial position regularly, which helps them stay informed of market changes and how these may apply to their own personal situation.

Recently we worked with a couple who had an investment property with one bank, and their home with another. In most cases this is the best way to have things set-up, as I’m sure you’re all aware how fond we are here at KPM about the “Split-Banking” strategy for mortgages.

After reviewing the client’s position, we had found out that their interest only period on their Investment Property was due to expire within the next few months, and they also had some equity left in their rental property which they could use to reduce the debt on their home, the numbers looked something like this:

• Owner Occupied Property (O/O) worth $1.8m, debt with ‘Bank A’ of $781k.
• Investment Property (I/P) worth $1.3m, debt with ‘Bank B’ of $642k.

We had recommended that they look at doing two main things to ensure they were set-up appropriately for the future, with their aim to reduce debt on their O/O as fast as possible:

1. Firstly, we recommended increasing the debt on the I/P up to 60% LVR (maximum currently allowed through main-banks due to RBNZ restrictions) which would’ve meant that the client could get up to $780k of debt against their rental. They only had $642k, so this was an increase of debt by $138k. They took this top-up and used it to reduce the debt on their O/O down to $643k.
2. Secondly, we recommended extending their interest only period back out for another 5 years, because they wanted to focus their Principal payments on their O/O. This made sense for a few reasons:
   1. It’s easier to get Interest Only on I/P’s than it is on O/O properties.
   2. You can change from Interest Only to Principal & Interest during that 5-year period if you want to, and in most cases without penalty, so you’re better having as long as possible available. (It’s a lot harder to go the other way – from P&I to Interest Only).
   3. There are potentially some changes on the horizon which will make interest only a lot harder to achieve

As a result, the client ended up with less debt on their home, better cashflow overall due to the higher proportion of interest only debt (which meant they had more surplus cash to put into the principal of their home) and lastly, they saved over $1k in interest costs by moving banks (breaking and re-fixing) and also had a cash contribution of $4.5k. After deducting solicitors’ fees, the client was about $3k better off financially as well!

These re-structures can be crucial in determining your financial success in the future, and even though you may not immediately be looking at borrowing further funds for another property, or for renovations, etc., it is still worth reviewing your situation.

If you’d like to get in touch to review your own position, please feel free to get in touch at info@krispedersen.co.nz