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Is the Cash Flow Mortgage still Good for Investors?
By Tim Riley.

There has been a lot of discussion in the market recently about the Cash Flow Mortgage™ and its effectiveness for property investors.

If you don’t know what the Cash Flow Mortgage™ is about, you can simply think of it as a mortgage product which allows property investors to pay lower interest repayments over a number of years initially so that rental and tax benefits you receive can cover most, if not all of the repayment.

The amount of interest you are required to pay increases over time, the idea being that it mirrors the rise in your rental return over time. Hopefully the two become aligned so for the borrower, the difference is covered. The purpose of the product is not to save you interest, but to allow you much better cash flow for high growth investment properties. (For more info )

Recent comments about the product have centred around whether the product is good or bad for investors. When a new product is introduced to the market, people often only focus on whether the product is good or bad, they forget other more important aspects.

Let me explain.

Think of any new invention, the more useful it is, the more it is used…and the more it can be mis-used. Like a sharp kitchen knife, if it is in the hands of the wrong person, an accident is not far away. But if it is used properly by the right person (such as a skilled chef), it can deliver amazing results.

Can you see it can be almost pointless if you only talk about whether a sharp knife is good or bad? It is almost as important to talk about how to use it and who should use it.

The Cash Flow Mortgage™ is one of those newly invented tools, it is incredibly useful, but it is also not for everyone.

Just like any other mortgages, you need to use it with care. Whether it is a Cash Flow Mortgage™ or a standard mortgage, the fact remains that you are taking on debt, which has inherent risk anyway.

Does the Cash Flow Mortgage make your position riskier?

The LVR of the Cash Flow Mortgage does not going over 90% of the original property value regardless of what LVR you start at initially. So in relative terms the product is not a high risk mortgage product as the mortgage industry has products that go over 95-100%LVR. There are now even products that go to 105% LVR.

While no mortgage provider or real estate agent can guarantee property prices going up each year, technically anyone who has taken a mortgage could be facing the possibility of having negative equity if property prices drop below the mortgage value. This can happen to high growth properties and cash flow properties, standard mortgages and the Cash Flow Mortgage™.

What about Tax benefit?

Whether the negative gearing tax benefit can be utilized in full with the Cash Flow Mortgage™ is entirely up to the ATO and the tax lawyers. But what we can say is that so far in the 16 months since the product was launched in June last year, we haven’t heard from any tax advisors or the ATO that this is a problem.

On a separate note, compared to traditional cash flow properties, you will be taxed on both the additional cash flow you receive every month and capital gain when you sell (if there is growth). This is not to say buying cash flow properties is not a valid strategy, we believe all strategies have their usefulness and can suit different people in different circumstances.

What we are saying is that the Cash Flow Mortgage™ has not attracted anything undesirable in terms of taxation so far.

Is the Cash Flow Mortgage™ too creative?

The Cash Flow Mortgage™ makes use of a simple feature that most mortgage products could have - interest capitalization, i.e. delaying interest repayment into future days. This feature has been widely used by lenders for many years, maybe just not in the way that has been applied to the Cash Flow Mortgage™.

Banks use honeymoon rates to allow first home buyers to buy furniture to move into their new homes. The Cash Flow Mortgage™ allows investors to breathe easier while their property rental is at its lowest when they first purchase their property. So it uses interest capitalisation in a creative way to solve a big problem for investors. This is not only ethical, but also very necessary for many investors.

Is the Cash Flow Mortgage™ expensive?

The Cash Flow Mortgage™ is not an expensive product by any measurement, if you compare the interest rate to other comparable products in the market; the pricing is fair for what it does. After all, people do frequently pay more for products that provide them with comfort, convenience and most importantly, an effective solution to their needs.

Many new mortgage products come to the market at a slightly higher rate due to their relative small take up in the market place. Lenders need to wait for their mortgage book to get bigger before they can lower their price, this is similar to volume discount in other industries.

There are many mortgage brokers that are delivering this product at the moment, the lender (not the brokers like Investors Direct) controls the pricing. Some brokers may add a margin onto the lender’s rate at their discretion. For those who have been with Investors Direct for the last 6 years, you know that we don’t do that as per our company policy, what we receive from the lender is what our clients get.

Why the Cash Flow Mortgage?

Many of our colleagues in the mortgage industry ask us why we even bother to distribute such a complex mortgage product. There are other higher paying mortgage products we can distribute with less time and effort to explain the product to our customers.

The truth is that it takes one to know one, you need to be a property investor yourself to understand the pain of another property investor.

While many of us are investing in high growth properties, we often find ourselves and our clients suffer from the lack of cash flow while holding onto those properties. This lack of cash flow can be so stressful for some it can affect our health and personal relationships.

Many investors choose to postpone spending to give their family a better financial future and can live a better lifestyle one day. The problem is that they are putting their family through hell right now and hurting the people they care the most through the process.

It is not hard to see why many mortgage professionals have chosen to distribute this mortgage product to the suitable clients. Not because they will be paid more or spend less time to do the deal, but because they genuinely feel the pain of their clients and want to help them out.

Let’s look at another current example, with interest rates on the rise and tipped to keep rising for a short while, a lot of property investors will be facing the possibility of having to sell their investment property due to cash flow pressure.

If you’re one of those investors who have high growth properties, and you hold the view that interest rates can’t be too high for too long (as history has shown), then the Cash Flow Mortgage™ could help you to ease your repayment burden for a few years.

The benefit of not having to sell now could mean a lot of selling costs savings ie. Capital Gains Tax, agent fees and stamp duty for the next property, etc. Not to mention the forgone future capital growth of a sold property. This goes to show how a sharp tool can be useful in the hands of the experienced.

In summary…

We welcome and respect different opinions in the market place. Public debate is good for the general public if it serves to make people more aware of all the options available to them. Everyone is entitled to their opinion, and all opinions have their supporters and challengers. It always pays to listen to both sides of the opinion.

Let me ask you, is a supermarket better or a milk bar better?

Just in case you haven’t noticed, usually a lot more people go to the supermarket these days than the local milk bar.

However the answer is: it depends.

Regardless of how many people choose to go to the supermarket, the fact that you only want a bottle of milk in the next 2 minutes makes the milk bar a better choice for you at that moment of your life. So who is to say which is better than the other?

So while we’re listening to both sides of the debate, it is always more important to listen to your own.

This article was written by Tim Riley, Marketing Manager of Investors Direct and Editor of the Investors Direct monthly e-newsletter. Tim is an active investor and developer. He has been investing for 3 years and has 3 investment properties.

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