This article examines several strategies that, when used in combination with your client’s advice, will make their debt work more efficiently and help them achieve financial independence sooner than expected.
Access to equity
If the value of a client’s property has increased, refinancing can unlock that capital to access funds for a deposit in an investment property, for personal investments in a business or in stocks and shares as part of their strategy of wealth creation, to renovate their home, to modernize the family car or for other purposes such as helping with the education of children.
The different debt goals can be isolated in separate splits within a single set of home loans. This allows for better management of tax-deductible debts and, as with debt consolidation, allows for shorter loan terms for debts linked to shorter-term assets.
Prepare to create wealth
With the right strategy, borrowing money to make an investment can allow your clients to build wealth faster than if they were using their own capital. To be successful, investments acquired with borrowed funds must generate a total return (income and capital growth) greater than the after-tax costs of financing the investment – including interest. This is commonly used for property and stocks when borrowing against home equity or lending on margin.
Recycle debt to build wealth
With the right investment strategy, debt laundering can be used to help your clients build long-term wealth, with their home equity being used to establish an investment loan and those funds being used in the fund. part of their investment strategy. The earned investment income is then used to reduce the outstanding non-deductible home loan balance and create more equity to purchase additional investments.
Reduce inefficient debt
If your client is spending less than they earn, it may be possible to consider using this excess cash to speed up their mortgage repayment. The benefits of this are to shorten the loan term, save on interest, and potentially create equity that could be used for other purposes. Simple structural changes such as increasing the frequency of repayments, increasing repayment amounts, or depositing their salary directly into a compensation account can reduce your client’s ineffective debt faster.
A mortgage rate is potentially the lowest form of interest your customers will pay. Credit cards and personal loans can have rates up to four times higher. If a client has personal debt, you may want to consider consolidating it into their mortgage. Essentially, they increase the mortgage on their home (assuming there is equity) and use the extra funds to pay off personal or credit card debt. The overall effect being the lower mortgage rate will apply to all their debts.
Customers should aim to continue making the same overall repayment level, which will shorten the loan term and with a car loan for example, this component should not last beyond the useful life of the car. Customers must close the credit card or other facilities they refinanced.
Effectively use cash reserves
If a client has a large amount of money in savings, it can be used more efficiently by transferring it to a matching account linked to their mortgage. This will reduce the balance your client’s interest is calculated on and effectively earn them a higher after-tax return than if they were in a cash account. Plus, if they keep the repayments at the same level, they can still shorten the term of their loan by lowering monthly interest charges. If the loan is for an investment, an offsetting account will allow the client to save interest, while preserving the level of deductible debt.
Invest in real estate via an SMSF
Through a Limited Recourse Loan Agreement (LRBA), clients can purchase real estate through their SMSF. This can be a residential investment property or, for the self-employed and small business owners, a commercial investment property where SMSF is the owner of the premises and the company is the paying tenant. market rent to SMSF.
Use an inheritance
If a client receives a financial windfall, they can use it to reduce their mortgage debt and borrow an equivalent amount for investment purposes – effectively replacing inefficient debt with efficient debt and building up part of their portfolio. investment and its wealth creation strategy.
Customer situations change, interest rates change, and mortgage products become obsolete and obsolete. With a regular review of all existing loan facilities, your clients can potentially earn a better interest rate, reduce their repayments, and build up equity. The review will also allow them to take advantage of more flexible terms and features that may be more suited to their current situation or that were not available when they originally took out their loan.
Switching from a low-doc loan to a full-doc loan
If your client is currently on a low doc loan, it is likely that he will pay a higher interest rate. If their jobs and finances have become more stable, this may be an opportunity for them to switch to a full doctorate loan, where there may be a lower interest rate, lower running costs, or more flexibility.
Supporting the retirement lifestyle
A reverse mortgage allows clients over a certain age to borrow against the equity in their property. This group often finds it difficult to borrow on standard terms. Repayments are not required because interest accumulates over the life of the loan. However, deposits can be made at any time. They can be very effective, for example providing short-term liquidity to avoid having to sell a performing investment. With the right advice, a well-managed reverse mortgage can provide an opportunity to improve the lifestyle of a retired client.
While these strategies should be seen in the context of a client’s advice and overall strategy, with the right processes to identify opportunities and the right alliance of mortgage brokers to implement the opportunities, the practices can add value. Significant value to their clients by helping them achieve their financial goals and objectives.
Anthony Landahl, Managing Director, Equilibria Finance