Cut Your Investment Loan Costs

How to Reduce Your Mortgage Repayments on an Investment Property

Investment properties can be a powerful way to build wealth, but high mortgage repayments can limit cash flow and reduce returns. For property investors, maintaining a positive cash flow is essential for covering expenses and ensuring the investment remains profitable over time. Fortunately, there are several strategies to lower monthly mortgage repayments on an investment property, enabling investors to maximise cash flow and improve the property’s financial performance. This article explores practical tips and strategies to help you reduce your mortgage repayments and make the most of your investment.

1. Refinance to a Lower Interest Rate

One of the most effective ways to reduce mortgage repayments is to refinance to a loan with a lower interest rate. Even a small decrease in the interest rate can lead to significant savings over the life of the loan and reduce monthly repayments. If you haven’t reviewed your loan rate in a few years, it’s worth checking if there are better options available, as lenders regularly adjust rates and offer promotions.

Steps to Refinance Successfully

• Research current rates: Compare interest rates across various lenders, including both fixed and variable options, to find competitive deals.
• Consider fees and costs: Refinancing may involve fees, such as application fees or exit fees from your existing loan. Ensure the savings outweigh these costs.
• Negotiate with your current lender: Sometimes, your existing lender may offer a lower rate to retain you as a customer, saving you the hassle of refinancing with a new lender.

When to Refinance

Refinancing is most beneficial when there’s a significant rate difference between your current loan and available market rates. Ideally, check rates at least once a year or whenever there’s a notable shift in the economic environment.

2. Extend the Loan Term

Another way to reduce monthly repayments is to extend the loan term. By spreading the mortgage over a longer period, the monthly payments decrease, which can improve cash flow. For instance, extending a 15-year loan to a 30-year term can substantially reduce monthly repayments, though it will result in higher interest payments over the life of the loan.

Points to Consider

• Increased interest costs: While extending the term lowers monthly payments, it also means paying more interest over the long term.
• Flexibility for future repayments: You can still make extra repayments if cash flow improves, helping you reduce the principal faster without locking you into high monthly payments.

3. Switch to Interest-Only Payments

For investors, one option to reduce repayments is to switch to an interest-only loan, which temporarily requires payments only on the interest, not the principal. This significantly lowers monthly repayments and can provide valuable cash flow relief, especially in the initial years of the investment. However, interest-only loans come with certain considerations:

Advantages

• Enhanced cash flow: Lower monthly repayments free up funds that can be reinvested, used for property improvements, or allocated to other expenses.
• Flexibility for short-term strategies: Interest-only loans can be particularly beneficial for investors planning to sell or refinance within a few years.

Disadvantages

• Principal remains unchanged: Because you’re not paying down the loan balance, the debt remains the same, and you won’t build equity in the property.
• Limited term: Interest-only periods are generally limited (e.g., five years), after which the loan reverts to a principal-and-interest structure, potentially increasing repayments.

4. Use an Offset Account

An offset account is a savings or transaction account linked to your home loan. The balance in this account is offset against your loan balance, reducing the interest charged on the loan. For example, if you have a $500,000 mortgage and $50,000 in an offset account, you only pay interest on $450,000. This reduces your interest payments and, in turn, can lower your monthly repayments.

How to Maximise an Offset Account

• Deposit rental income and savings: By depositing all available funds, including rental income, into the offset account, you can maximise interest savings.
• Keep funds accessible: An offset account allows you to reduce interest costs while keeping funds available for emergencies or further investments.

5. Consider Split Loan Structures

• A split loan allows you to divide your mortgage into two portions – one with a fixed interest rate and the other with a variable rate. This structure provides flexibility and potential cost savings, as you can benefit from the stability of a fixed rate on part of the loan while taking advantage of lower variable rates or features like offset accounts on the remaining portion.

Benefits for Investors

• Risk management: A split loan provides a balance between stability and flexibility, allowing you to manage rate fluctuations more effectively.
• Offset and redraw facilities: By keeping part of the loan variable, you may be able to access offset or redraw facilities to further reduce interest costs.

6. Make Use of Extra Repayments When Possible

Many variable-rate loans and some fixed-rate loans allow for additional repayments without penalties. If you have surplus cash flow, making extra payments can reduce the principal balance faster, lowering interest costs and, over time, reducing your monthly repayments. This strategy is particularly beneficial during periods of strong rental income or when interest rates are low.

Tips for Making Extra Repayments

• Regular small contributions: Even small additional payments can reduce the principal and lead to significant interest savings over time.
• Lump-sum payments: If you receive a tax refund, bonus, or other windfall, consider applying it toward your mortgage to reduce the balance and future repayments.

7. Review Loan Features and Remove Unnecessary Add-Ons

Some loans come with features or add-ons, such as insurance, credit cards, or packaged products, that can add extra costs to your monthly repayments. It’s worth reviewing these features periodically to ensure they still add value to your loan structure. Removing unnecessary features can reduce costs and lower your overall repayments.

8. Negotiate with Your Lender

Many borrowers are unaware that they can negotiate with their lender for a better rate or loan terms, especially if they have a good repayment history and a strong credit profile. Contacting your lender and requesting a review of your loan terms can lead to a reduction in interest rates or fees, potentially lowering your repayments without needing to refinance.

How to Approach a Rate Negotiation

• Research competitors: If you find competitive rates from other lenders, use them as leverage in your negotiations.
• Highlight your track record: A strong repayment history can be advantageous when requesting better terms, as it demonstrates reliability to the lender.

9. Consolidate Debt to Improve Cash Flow

If you have multiple high-interest debts, consolidating them into your mortgage can help reduce overall monthly repayments. Mortgage rates are typically lower than credit card or personal loan rates, so consolidating debts into your home loan can save on interest and simplify repayments. However, be cautious as this approach extends the term of short-term debts, which may increase the total interest paid.

10. Maximise Rental Income

To cover mortgage repayments more effectively, focus on maximising rental income from your investment property. Strategies to increase rental income can include:

• Upgrading the property: Simple improvements such as new appliances, modern fixtures, or fresh paint can make the property more appealing and allow for a higher rent.
• Reassessing rent periodically: Review rental rates in your area annually to ensure your property is aligned with market rates.
• Considering short-term rentals: In high-demand locations, short-term rentals through platforms like Airbnb may yield higher income than traditional rentals, though this depends on occupancy and management costs.

11. Focus on Positive Cash Flow Properties

When selecting investment properties, consider those likely to generate positive cash flow from day one. Positive cash flow properties are those where rental income exceeds mortgage repayments and other expenses. This ensures that the property contributes to your income rather than being a drain on cash flow. While these properties may be harder to find in certain areas, focusing on cash flow from the outset can make it easier to manage mortgage repayments over time.

12. Leverage Tax Benefits

Investment properties come with potential tax benefits, such as deductions for interest expenses, depreciation, and maintenance costs. Maximising these deductions can reduce your tax liability and improve your net cash flow, indirectly helping with mortgage repayments. Consulting a tax professional can help you take advantage of available deductions and ensure your investment property is structured tax-efficiently.

13. Consider a Mortgage Offset Strategy

A mortgage offset strategy involves using cash reserves to offset the mortgage balance while maintaining the funds’ accessibility. Unlike traditional extra repayments, an offset account allows investors to withdraw funds as needed, providing a level of liquidity. This is particularly advantageous if you plan to reinvest funds or need to keep cash accessible for other financial opportunities.

14. Reassess Property Portfolio Periodically

If you own multiple investment properties, review the performance and cash flow of each property periodically. Selling underperforming properties and using the proceeds to pay down high-interest loans or reinvest in cash-flow-positive assets can help optimise your portfolio and improve overall cash flow.

Reducing mortgage repayments on an investment property can significantly enhance cash flow and improve the property’s financial performance. From refinancing to negotiating with lenders, there are numerous strategies to lower repayments and make your investment more sustainable in the long term. By carefully considering the options outlined in this article, investors can select the approaches that best align with their financial goals and create a more resilient and profitable property portfolio. Whether you’re a new or experienced investor, optimising mortgage repayments can pave the way to achieving greater financial flexibility and success in property investment.

Learn effective tips and strategies to reduce monthly mortgage repayments on your investment property and maximise cash flow. This comprehensive guide covers refinancing, using offset accounts, negotiating with lenders, and other practical methods to lower costs and improve the profitability of your property investments. Perfect for property investors looking to boost cash flow and enhance long-term returns.