Why Paying Down Your Investment Mortgage is a MISTAKE (NZ) | Mortgage Strategies Series Ep 2

If you own an investment property in New Zealand, paying down your mortgage faster might

actually create an efficiency in your wealth creation journey.

That sounds backwards because most of us are taught the smartest thing you can do is

eliminate debt as quickly as possible.

That's true for your own occupied property, car loans and personal debt, but investment

lending can play by different rules.

Today I'll explain how interest-only mortgages work for NZ property owners, when they

make sense, when they don't, and why the correct loan structure can be the difference between

enjoying a flourishing passive income or being forced to fire sell assets in a downturn.

What is interest-only?

With a standard principle and interest loan, every payment you make reduces your loan balance.

With an interest-only loan, you're not reducing debt, but simply servicing it.

Banks offer interest-only loans against your own occupied property for a max of two to

three years, while on investment lending the maximum is typically five years with one

or two lenders doing up to ten years.

The first major benefit of interest-only is increasing your free cash flow.

Lower repayments mean more liquidity each month.

That surplus can be used to build buffers, cover interest rate increases, renovate to lift

the rent of the property, reduce financial pressure, or allocate capital into other investments.

Cash flow creates flexibility, and flexibility reduces risk, especially in uncertain rate

environment.

For example, on a 750k loan, at 5% over a 25-year term, the monthly repayment would be

$4,384.

If this 750k loan were interest-only, it would cost $3,125.

That's a 1.25k monthly difference from your free cash flow of your financial position.

The second benefit of the structure is utilizing interest deductibility to its maximum effect.

Under current New Zealand legislation, interest on eligible investment property lending is

a deductible expense against your rental income.

This reduces your tax liability.

If you aggressively reduce the principle of your loan, your deductible interest reduces

over time, which can increase your taxable income.

Interest only can help maintain a higher deductible interest position, provided the property

qualifies, and the structure aligns with your accountant's advice.

This isn't tax advice, but lending structure absolutely affects tax outcomes.

For example, if you had 750k deductible debt, the interest associated with this loan is

an expense on the profit and loss statement, meaning you can offset it against the rental

income to reduce your taxable profit.

For ease of explanation, I will not include any other deductible expenses, but the general

principle is as follows.

If you receive $50,000 of rental income, this amount is subject to tax.

However, let's say your interest cost is $35,000.

This would mean you pay tax on $15,000.

If you aggressively reduce your mortgage and your interest cost drops to $20,000, you

would now pay tax on $30,000.

So by reducing your deductible interest, you increase your taxable income.

This is why it pains me to see people with an owner occupied and investment property

paying down both loans aggressively.

If we use the example made earlier in the video, the extra 1.25k created per month by placing

that investment debt on interest only can simply be redirected to reducing the debt on the

home loan, allowing for overall debt reduction strategy to remain on the same timeline while

creating a more tax-efficient structure.

These investors often prefer to preserve capital, rather than tie it up and monetizing tax

deductible debt.

That preserved cash can help fund deposits be deployed into other investments, finance

renovations, and significantly reduce the holding costs allowing for more aggressive

portfolio expansion.

This allows investors to enjoy the fruits of their portfolio income.

I recently met with clients who had done really well and built a sizable portfolio, but

they wanted to slow down in their working life.

The clients they told me, Harry, were feeling asset rich but cash poor.

We did some portfolio analysis and found they had some of their mortgages on 15 and even

12 year terms and were really feeling the pinch.

The clients were receiving $5,190 per week from their investment property portfolio.

But their debt repayments were close to $3.9k per week.

I restricted this to interest only, reducing the clients' repayments to $1,700 per week,

meaning the clients had an extra 120k per year of free cash flow.

This improved the clients' position drastically and allowed them to enjoy the fruits of

their portfolio while having the flexibility to sell assets in a stronger market, not out

of seeking liquidity from cash flow pressure, which was previously on the cards for them.

Now that we've established how interest only on investment debt can be useful, especially

when one has a home loan, we can touch on the benefits of interest only on owner-occupied

properties.

If a client came to me and said that they have a little one on the way and a seeking

temporary alleviation from higher repayments, this could be a valid option to reduce fixed

expense obligations while the household goes on to a single income.

So long as there is a plan to reduce the principle once the household income increases again,

if clients are renovating their home and seeking to preserve capital for contingency

and cost overrun, they may appreciate lower repayments for the short term.

If a business owner's revenue is fluctuating and they see times of uncertainty ahead,

they may want to reduce their fixed obligation during this time, as I'm sure the last thing

they'd want is to lose the family home.

Breathing room to get back on their feet could be of great benefit.

Invest only is not a shortcut to wealth.

You will pay more in interest over the life of the loan to the bank.

When the interest only period ends, repayments increase because the principle must be repaid

over a shorter remaining term.

If rates rise and you haven't planned properly, that repayment jump can create real pressure.

The strategy works when it's intentionally aligned with the long term plan.

Some investors continually refinance to interest only in that work for their strategy and goals.

When you're feeling sick, you go to the doctor.

When your toilet isn't flushing, you ring a plumber.

When your engine light comes on in your car, you drive to the mechanic, hoping you don't

break down on the way.

When your mortgage is up for renewal, you're looking to upgrade your home, invest in property

or ensure your existing mortgage structure is as efficient as possible.

You need a financial advisor.

Here at Mortgage HQ, we specialize in enabling clients to work smart, not hard and move forward

with wind in their sales towards their short, medium and long term goals.

You can book a no obligation and reduction phone call with the link in their bio.

And if the worst that comes from a quick chat is peace of mind that you're on the right

track with the biggest liability in your life, then it doesn't sound like a terrible way

to spend five minutes ensuring your financial future.

We look forward to chatting soon.