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If you own an investment property in New Zealand, paying down your mortgage faster might
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actually create an efficiency in your wealth creation journey.
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That sounds backwards because most of us are taught the smartest thing you can do is
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eliminate debt as quickly as possible.
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That's true for your own occupied property, car loans and personal debt, but investment
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lending can play by different rules.
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Today I'll explain how interest-only mortgages work for NZ property owners, when they
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make sense, when they don't, and why the correct loan structure can be the difference between
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enjoying a flourishing passive income or being forced to fire sell assets in a downturn.
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What is interest-only?
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With a standard principle and interest loan, every payment you make reduces your loan balance.
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With an interest-only loan, you're not reducing debt, but simply servicing it.
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Banks offer interest-only loans against your own occupied property for a max of two to
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three years, while on investment lending the maximum is typically five years with one
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or two lenders doing up to ten years.
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The first major benefit of interest-only is increasing your free cash flow.
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Lower repayments mean more liquidity each month.
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That surplus can be used to build buffers, cover interest rate increases, renovate to lift
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the rent of the property, reduce financial pressure, or allocate capital into other investments.
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Cash flow creates flexibility, and flexibility reduces risk, especially in uncertain rate
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For example, on a 750k loan, at 5% over a 25-year term, the monthly repayment would be
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If this 750k loan were interest-only, it would cost $3,125.
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That's a 1.25k monthly difference from your free cash flow of your financial position.
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The second benefit of the structure is utilizing interest deductibility to its maximum effect.
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Under current New Zealand legislation, interest on eligible investment property lending is
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a deductible expense against your rental income.
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This reduces your tax liability.
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If you aggressively reduce the principle of your loan, your deductible interest reduces
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over time, which can increase your taxable income.
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Interest only can help maintain a higher deductible interest position, provided the property
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qualifies, and the structure aligns with your accountant's advice.
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This isn't tax advice, but lending structure absolutely affects tax outcomes.
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For example, if you had 750k deductible debt, the interest associated with this loan is
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an expense on the profit and loss statement, meaning you can offset it against the rental
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income to reduce your taxable profit.
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For ease of explanation, I will not include any other deductible expenses, but the general
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principle is as follows.
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If you receive $50,000 of rental income, this amount is subject to tax.
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However, let's say your interest cost is $35,000.
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This would mean you pay tax on $15,000.
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If you aggressively reduce your mortgage and your interest cost drops to $20,000, you
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would now pay tax on $30,000.
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So by reducing your deductible interest, you increase your taxable income.
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This is why it pains me to see people with an owner occupied and investment property
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paying down both loans aggressively.
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If we use the example made earlier in the video, the extra 1.25k created per month by placing
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that investment debt on interest only can simply be redirected to reducing the debt on the
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home loan, allowing for overall debt reduction strategy to remain on the same timeline while
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creating a more tax-efficient structure.
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These investors often prefer to preserve capital, rather than tie it up and monetizing tax
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That preserved cash can help fund deposits be deployed into other investments, finance
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renovations, and significantly reduce the holding costs allowing for more aggressive
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portfolio expansion.
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This allows investors to enjoy the fruits of their portfolio income.
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I recently met with clients who had done really well and built a sizable portfolio, but
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they wanted to slow down in their working life.
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The clients they told me, Harry, were feeling asset rich but cash poor.
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We did some portfolio analysis and found they had some of their mortgages on 15 and even
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12 year terms and were really feeling the pinch.
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The clients were receiving $5,190 per week from their investment property portfolio.
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But their debt repayments were close to $3.9k per week.
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I restricted this to interest only, reducing the clients' repayments to $1,700 per week,
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meaning the clients had an extra 120k per year of free cash flow.
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This improved the clients' position drastically and allowed them to enjoy the fruits of
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their portfolio while having the flexibility to sell assets in a stronger market, not out
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of seeking liquidity from cash flow pressure, which was previously on the cards for them.
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Now that we've established how interest only on investment debt can be useful, especially
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when one has a home loan, we can touch on the benefits of interest only on owner-occupied
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If a client came to me and said that they have a little one on the way and a seeking
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temporary alleviation from higher repayments, this could be a valid option to reduce fixed
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expense obligations while the household goes on to a single income.
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So long as there is a plan to reduce the principle once the household income increases again,
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if clients are renovating their home and seeking to preserve capital for contingency
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and cost overrun, they may appreciate lower repayments for the short term.
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If a business owner's revenue is fluctuating and they see times of uncertainty ahead,
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they may want to reduce their fixed obligation during this time, as I'm sure the last thing
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they'd want is to lose the family home.
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Breathing room to get back on their feet could be of great benefit.
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Invest only is not a shortcut to wealth.
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You will pay more in interest over the life of the loan to the bank.
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When the interest only period ends, repayments increase because the principle must be repaid
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over a shorter remaining term.
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If rates rise and you haven't planned properly, that repayment jump can create real pressure.
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The strategy works when it's intentionally aligned with the long term plan.
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Some investors continually refinance to interest only in that work for their strategy and goals.
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When you're feeling sick, you go to the doctor.
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When your toilet isn't flushing, you ring a plumber.
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When your engine light comes on in your car, you drive to the mechanic, hoping you don't
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break down on the way.
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When your mortgage is up for renewal, you're looking to upgrade your home, invest in property
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or ensure your existing mortgage structure is as efficient as possible.
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You need a financial advisor.
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Here at Mortgage HQ, we specialize in enabling clients to work smart, not hard and move forward
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with wind in their sales towards their short, medium and long term goals.
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You can book a no obligation and reduction phone call with the link in their bio.
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And if the worst that comes from a quick chat is peace of mind that you're on the right
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track with the biggest liability in your life, then it doesn't sound like a terrible way
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to spend five minutes ensuring your financial future.
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We look forward to chatting soon.