If your main goal is to make money, then using mortgage debt to leverage into a property is a great idea. As long as you do not overpay for the property and buy in a good area, the long-term benefit of owning the property as a family home or rental should prove to be a financial windfall. Capital gains, rental yield, inflation, and the ‘forced savings’ of having a mortgage should help you on your path to building wealth. Good debt is money you borrow that allows you to make more money. Bad debt is borrowing money that does not improve your chances to make money. Borrowing to buy a TV or holiday, whilst fun and a good fix from retail therapy, if you are still paying for the TV or holiday years later then you probably made a mistake.
Where we see people make the biggest mistakes is when they get multiple credit cards from different banks, use GEM Visa, Q Card and other financial products to fuel a lifestyle that is beyond their affordability. Do not kid yourself. Debt is borrowing from your future self.
Imagine you are out for lunch and go to buy a pie, just before you order you get a tap on the shoulder with your past self from 3yr ago holding out their hand for some money, for a TV you no longer use and a car that you’re already tired of… you go to pick up dinner, takeaways, and past-self taps you on the shoulder to pay for your trip to Aussie in 2015… you go to put petrol in your car the next morning and past-self taps you on the shoulder again to pay for all the meals out in 2017… the cycle continues as your past-self asks you for money and you think ‘if only I can borrow from my future self…’
Don’t fall into debt traps. Reset things with a debt consolidation into your mortgage if you have to, or consolidate into a personal loan on a better rate. Look at your decisions with a critical eye and start budgeting better if you want to build wealth the debt you use should be helping you accumulate assets that produce cash flow and capital gains, not fill your belly and make you look good on the road.
Seek advice from books and financial advisers.
Should I invest in Property or Shares?
Many books have been written on the topic on whether you should invest in property or shares. You have to decide on balance that works for you. Do you understand shares? Do you understand property?
The biggest difference between buying shares and property is usually that you can leverage to buy property and get capital gains on the full purchase price whereas buying shares only gets you a return on your cash investment at the start. This means you can buy a $1mn house with your $100k of cash (10% deposit). If you buy well, you might get a $1,050,000 house for $1mn which helps you lock in $50,000 of return on your investment immediately. With 5% annual capital gain, the house again will bring you another $50,000 return in the first year (without tax). If you put $100k into shares and get a 10% return, this is only $10,000 and is taxed. You can see why many investors are choosing property.
The benefits are numerous; property is easier to understand, you can live in it, you can touch it. If you understand share investing (buying a part of a listed business like Apple or The Warehouse Group) then you will know that you have to ride waves of uncertainty and volatility that has higher highs and lower lows than the property market. Which means, depending on when you buy shares, you risk losing a lot more of your original investment in a shorter amount of time. If you buy $100,000 of share and the market drops 10%, you lose $10,000 and it might take years to recoup this amount. If you buy property and it drops 10%, if you have only put 10% into the house you have lost all of your money… so you will have to wait for a recovery and ride out the property crash otherwise you are back to zero. Both shares and property carry risk and you need to buy well and understand your strengths, weaknesses, opportunities and threats (classic SWOT analysis).
Be wary of anyone trying to push you into shares and not property and vice versa, understand how they are paid, if it is commission just be careful.
The best investment for most people is their family home. Get this paid off well before retiring and you will be much happier. It sounds simple but a lot of people get distracted by shiny new things and miss the mark.
You are competing against the smartest financial minds in the world when you are buying shares, companies like Goldman Sachs, Berkshire Hathaway, Bridgewater etc are professionals at buying and selling stocks – they usually identify what is good before anyone else.
Debt Consolidation into your Mortgage
If you are starting to fall behind on your mortgage or debts, this is called ‘arrears’ and can seriously damage your ability to borrow money and have low-interest rates. Missing payments on your cards or insurances or your mortgage will lead to debt collection services knocking on your door. Most of the time, this is an honest mistake and your missed payments and other debts can be consolidated into your mortgage at a main bank or at a non-bank lender if the main banks will decline you. We can help you with second mortgages, caveat loans, and setting up all your loans into a single repayment. One easy payment with a debt-free date.
Our service is often paid by the lender and is a small fee for our time. It is only charged if you are successful. There are no credit checks or obligations.
Debt consolidation is when you take your high-interest debts such as credit card debt, personal loans or any debts with high-interest rates and get a mortgage top-up to pay off these debts and ‘consolidate’ them into your Mortgage. If you have debts on interest rates that are much higher than your mortgage interest rates, and/or on shorter terms, this will mean your repayments are much higher than they need to be. If you consolidate your debts into your mortgage you can simplify your repayments taking advantage of the equity in your home and begin to feel that you are back on top of your debts and having a surplus of money each week rather than a stream of money exiting your bank account. How does it sound to take your credit card debts which are 20% interest rates and put them onto something closer to 4% which is what Mortgage rates are currently?
Are you finding it difficult to manage all of your debt accounts? After a few years of having a mortgage, and the distractions of modern life coming into play, we see many client’s personal budgets fly out the window and their bank accounts get messy and hard to manage. There may have been an extra top up on the mortgage for building a pool, or one or two credit cards from Christmas the year before last. Often, once the debt is out of control, things can become very difficult to manage. Refinancing is a great way to consolidate all of your accounts and debts into one account, in a much more manageable format. When applying for lending, clients are often assessed based on their spending habits. If your bank is telling you you’re unable to re-assess your lending position (borrow more, or consolidate debt), there may other options they’re not telling you about. At mortgagehq, we often help clients consolidate debt, and manage their personal budgets more effectively. Here are three side-benefits to refinancing you might not have considered:
- Refinancing is a great time to consolidate other debt and tidy up your account conduct
- Refinancing gives you the opportunity to re-assess the ownership and borrowing structure of your properties.
- Refinancing gives you a chance to properly reassess your mortgage structure with a professional mortgage adviser
Using your home as security, you can go up to 80% of your home’s value on your mortgage to consolidate your debts and higher if you use non-bank second mortgage options. These are called caveat loans. We have a number of lenders willing to use these options if required. Maybe you were a first home buyer and the debt on top of your mortgage has got away on you a little, this is quite common.
There are some things to keep in mind –
Debt consolidation is a short-term fix if you keep racking up debt on credit cards and personal loans and try to use your home equity as a bank. It’s a great strategy to give you a clean start but not if you will continue to repeat the habits of higher-interest rate debt.
Some people will criticize debt consolidation for lengthening your loan terms and in effect paying more interest over a longer term means the debt will cost you more, but you need to consider that debts are not created equal and you still need to have money for food and life. Try to ignore advice from people who are not at least Registered Financial Advisers and fully understand your debt position. If you have a buffer of extra cash instead of having a shortage it means you can, if you want, start paying down the debt faster.
A common scenario is to refinance your existing mortgage and loans into a new mortgage, totalling all the debt together, sometimes at a new bank that will provide a lower rate and cashback when you do this. This is refinancing. You might hear it called rebalancing or extending your mortgage because you will often reset the term to 25/30 year mortgages (depends on equity and your goals). We can help at all banks in NZ including Kiwibank, ASB, ANZ, Westpac, BNZ, SBS, TSB and more – we will often help you top up your mortgage or present options with better rates and cashback at another bank. You will need to pay attention to your LVR level, but that is something we can help you understand and there are options even if you will end up with a high LVR.
If you have any of the following and want to minimise the repayments and reset things by consolidating debts into your mortgage, give us a call or email.
- Mortgage Arrears
- Personal Loans
- Credit Cards
- Q Card
- Gem Visa
- Car Loans
- Asset Finance
- Tax payments
Take care when shopping around for options that there are no hidden fees or charges that burden you with even more costs. There are tonnes of loan options out there, check the facebook and google reviews and do not trust the testimonials slapped onto the website. Work with registered financial advisers and have a plan in place to avoid getting into the same position in a year or two.