Hi, it’s Connie from Prosperity Finance. Hope you have a great weekend. What I want to share with you today is very important. It seems simple but if you don’t do it correctly, it can cause big issues down the track. Do you know that your loan structure (i.e. loan amount, loan product, repayment arrangement, ownership entity and borrower etc) will directly or indirectly affect many other aspects, such as your taxation, asset protection, flexibility and even future borrowing capacity? Are you still making your loan decision mainly based on the interest rates on different banks? In many cases, a seemingly simple loan application, our mortgage advisers need to make a comprehensive analysis based on your personal circumstances and goals, as well as lenders policies before providing advice. 

If you have been following our channel for a long time, you will know that I am building my new home now.. Despite I have a good network of the construction industry such as architects,  developers, builders, and other main contractors, I can tell you that there has been a steep learning curve for me. During the process, the biggest lesson I have learned is when you are not working in a particular field, you don’t know what you don’t know and you have to proactively ask and learn.. Without professional advice, a simple wrong decision can cause problems in many other aspects in a long run. Sometimes the mistake is very costly or  is most likely irreparable.  

Finance is very similar. Even it’s a very straightforward application or request, I hope everyone seek professional advice in advance and avoid unnecessary mistakes. Sometimes it can be challenging to reverse the processes on a loan application if it is not done well. Next, I will share with you a classical real example.

Things You Do Not Even Realize Behind A Simple Loan Maintenance Request 

Recently, an existing client came back to us with a simple loan maintenance request. For the purpose the privacy , let’s call her “Mary” in this case. Recently, Mary has sold one of the existing investment properties, at the same time, she had a construction loan approved and halfway through the construction processes on building another new investment property. Mary is planning to use the sale proceeds to cover some of the construction cost herself to save interest costs. We all know that the interest of construction loans is relatively high floating interest, and it is reasonable for Mary want to repay the construction loan first. However, our Financial Adviser analysed Mary’s current loan structure aligns with her short-term needs and long-term goals. In a short term, Mary is planning to use the money to reduce her total construction lending so that she can save some interest, however, Mary has plan to pay for her children’s first home deposit in the near future so she wants to make sure the money can be reused when needed.

After reviewing all the situation mentioned above, our Finance Adviser suggest Mary do not use the money to repay the construction loan that currently under construction. There are two disadvantages to it.

1. Under the current situation, the construction loan has been approved, if Mary uses her own money to pay the construction loan, then the bank will assume she does not need this much construction loan, the construction loan drawdown will be reduced. Which leads to a later problem If Mary wants to get the same amount of money back to pay for her children’s first home deposit.  Because the purpose of the current construction loan has changed, therefore, Mary needs to re-apply a new loan subject to the lending policy and her financial situation at that time. Under the current unpredictable environment with strict loan policy, apply a new loan facing many uncertainties. There is no guarantee that Mary will get the same amount of loan as she expected.                                                               
2. As we all know, Labour’s nonsensical interest deductibility policy for investment property implemented last year. But this policy has an exception on new build investment properties. The current under construction property Mary is building is for investment purpose. In this case, if certain amount of loan is repaid, there will be less interest can be offset against the rental income. Therefore, she will be end up paying more tax.. It is not ideal to reduce the new property loan. Our financial adviser suggested Mary should use the money to reduce her existing investment properties loan instead of the new built investment property. (Mary has her own home without a mortgage, otherwise we will advise her to consider repaying the loan on her own home first).

Based on the above analysis with suggestion of not repaying the new construction loan, we need to give our client further instruction on how to manage her current funds in a more efficient way to achieve the purpose of reduce interest.

Now, let’s review Mary overall loan structure in detail. Mary has one single investment rental property mortgaged to BNZ with a loan amount of $600k. She has another two-investment property loans at ANZ with balance of $1.8m. They all investment properties. The recommendation is using Mary’s current available funds to break the existing BNZ property loan and then convert it into an Offset loan product. The two ANZ loans remain unchanged. There are four main benefits to this: asset protection, flexibility, efficient tax reduction, and interest savings.   

• Asset protection: The $600k BNZ property loan can be fully repaid via the sale proceeds . If her money is no longer needed to buy a house for the child, she can easily pay off BNZ loan and discharge the property so it’s become a mortgage free property at any time, which plays a role in property protection.

• Tax efficiency: Through the offset loan product, the client only puts the funds in BNZ to save interest cost, but she does not pay off the BNZ loan. Just because the amount is equal, the BNZ loan will temporarily no longer need to pay interest. When she needs the money, the loan will no longer offset with the funds, and interest will continue to be paid, the purpose of the original BNZ mortgage loan will not change, nor will the nature of taxation. Conversely, if the client pays off the ANZ loan, ANZ has no offset product, and the closest product is Revolving (called ‘Flexi’). Although Revolving and Offset are not much different in terms of interest saving benefit, considering Mary may need to withdraw the money to help with her children purchasing their first home, then the purpose of the loan will change therefore she can’t claim interest costs against the rental income and will have to pay more tax.

• Interest Saving: ANZ Revolving is capped at $300,000, while BNZ's offset has no cap. Therefore, the more interest that can be offset. To offset all the $600k at BNZ, Mary can minimise the interest paid.

• Flexibility: As BNZ has only one mortgaged property, Mary can fully release the mortgage on that property. Since ANZ has two investment properties, the loan amount is relatively large. Even if Mary’s current funds can pay off one of the properties’ loans, it cannot release the property easily because the two properties are cross secured. at ANZ. In contrast, after offset all the loans at BNZ, it gives Mary a total flexibility to decide how she want to do. Secondly, Mary can use BNZ offset money to help her children purchase a house at any time without reapply a new loan.

Today's content is just one of many clients that our Financial Advisers have helped. Each customer has different situations and needs. Our mortgage advisers will always make tailored solutions. The best part of our job is to see we make impact on our clients’ life and it’s an honor to gain our customers completely trust along the way.

I recommend everyone seek professional advice in advance to avoid any unnecessary mistakes.  which is why I want to share Mary’s case with you today. I hope today's content is helpful. Welcome give us a call or email if you have any questions. See you next time.

Disclaimer: The content in this article are provided for general situation purpose only. To the extent that any such information, opinions, views and recommendations constitute advice, they do not take into account any person’s particular financial situation or goals and, accordingly, do not constitute personalised financial advice. We therefore recommend that you seek advice from your adviser before taking any action.