As the true magnitude of the Covid-19 shutdown begins to become clearer for property investors, we have begun working closely with real estate agents and property investors to manage the effects this has on landlords. With Government support and changes to existing regulations regarding leases, some property investors are nervous moving forward, or feeling the pinch already. There is a very real chance that rental income could drop for property investors in the months to come, as has been the case for so many in our community already in 2020.
We are encouraging property managers and property investors to consider ways they can manage their risk by:
- Getting a cheaper interest rate
- Considering a repayment deferral for 3 or 6 months
- Changing some facilities from P & I to Interest Only
- Fixing their rate for a few years to manage budgeting
- Extending a loan term to reduce minimum repayments
We have had some real estate agents and landlords providing fantastic feedback by reviewing these options and how they can apply to them.
Here are some examples of how these reviews might be able to help you:
Example 1
Bob & Mary, aged 45 and 43, have an Investment Property worth $480,000, with an outstanding debt of $385,000. The loan started out as Interest Only but converted to Principal and Interest payments at the end of the 5 years interest Only period, with monthly repayments of $2140pm on a variable rate of 4.45% pa.
The current tenants have been in the property for 3 years, however have faced a loss of income due to COVID19 shutdowns. Working with their property manager, the parties negotiated to lower rent form $440pw to $350pw, however this has placed greater strain on Bob & Mary’s finance who have also experienced a small reduction in income during this period.
Bob & Mary also have a small personal loan from an overseas holiday several years ago, with approximately $3,000 owing. Repayments on this loan are $176 per month.
By keeping their investment property on Principal & Interest Repayments, Bob & Mary would be eligible for lower interest rates at most lenders, with further rate reductions and budget certainty on offer through some Fixed Rate offers.
If Bob & Mary refinanced their investment property loan over 30 years with Principal & Interest repayments, they could reduce their monthly payments to $1,530 per month, and also qualify for lender cashback & rebate offers of up to $4,000.
If they used a cashback or rebate offer to pay out & close their personal loan, they would have the following cash flow changes:
| Home Loan Repayment Saving | +$610 per month |
| Pay Out Personal Loan | +$176 per month |
| Reduction in Rental Income | -$390 per month |
| NET CASH FLOW BENEFIT | +$396 per month |
With a review of existing finances and some small adjustments to current lending, Bob & Mary could still be in a far stronger position despite the reduction in rental income as a result of the Coronavirus.
Example 2
Sam & Sally, aged 51 and 48, are experienced property investors with 3 investment properties. While they are relatively comfortable for the time being, if the shutdown relating to Covid-19 continues for some months, they will start to feel the strain on their monthly finances, particularly if there are any sudden costs such as repairs on any of their properties.
Sam & Sally have not reviewed their lending portfolio for more than 5 years, as they have been on “autopilot” in this time.
A summary of their investment portfolio looks like this:
| Property Type | Property Value | Loan Amount | Interest Rate | Repayment Type | Monthly Repayment |
| Unit | $400,000 | $320,000 | 4.20% pa | Interest Only | $1,120 |
| House | $550,000 | $400,000 | 3.90% pa | Principal & Interest | $2,099 |
| House | $900,000 | $285,000 | 4.45% pa | Principal & Interest | $1,586 |
| TOTAL | $1,850,000 | $1,005,000 | $4,805 |
Facing uncertainty & possible rental income reductions on all three properties, a review or refinance strategy to improve cash flow and consider Interest Only lending for all 3 investment properties, while searching for a lower interest rate, could make a significant difference to Sam & Sally’s monthly budget.
With Variable, Interest Only rates from 3.23% pa, total repayments across their three loans could be reduced to below $2,800 monthly, over $2,000 less each month then they are currently paying.
By remaining on a variable rate, they also have no additional repayment restrictions, and can increase repayments to start reducing the debt once their rental income become a little less uncertain in the future.
If you want to learn more about how we may be able to assist you with a review of your current lending please contact us using the Contact Form below.
Contributors: Alex Jacques & Gary Carter – Finance Specialists, Jacques Financial Group
