Cash Flow Mortgage

[VYBerlinaV8]

2 thoughts from me...

1) Anything that allows people to buy larger items with less cash and short term cost drives the market up. Because we have knowledge of longer term trends, we can see that an overinflated market burns people - usually the newbies using this type of product to 'get in'.

2) Experienced investors understand how this kind of product works, including the equivalence to capitalising interest and making smaller, arbitrary payments. There are times when this sort of flexibility is great, but it takes an experienced investor to use such a tool properly (not get their fingers cut off, as it were).

I would discourage anyone I know from using such a product, as I don't know any investors personally that I would consider sophisticated enough to use it, <deep breath> including myself. I would be a lot happier 'simulating' such a product through other strategies, but I think I'd struggle to effectively manage the associated risks to a level I'd be comfortable with. When I've done more investing (and have some more scars) I'd be willing to reconsider.

 

[alexlee]

An important point about the 'on average property returns x% a year' concept. This is over the long term. You need time for the average to kick in. So if you buy right near the end of a boom, you may well see years of growth BELOW the long term average, because the 'above average' returns happened before you bought. You may then have to wait the next cycle before you get to the long term average.

The danger of using what is basically an interest capitlisation product is that you start thinking 'since the cashflow is neutral I can afford to hold it forever' and most likely you'll end up paying too much because you *think* you can afford it. Overpaying, in a market that may well be near or at the peak.....

I don't trust myself with a cashflow mortgage type product. I don't even trust myself to capitalise interest at the moment.
Alex

 

[DavidMc]

This has been discussed many times. Try the search terms 'cashflow mortgage'.

If this is what you wanted to do, the same thing can be achieved at a cheaper rate through no frills products once you have a little bit of equity.

 

[tubs]

Ianvestor is correct, I agree as well.

You could also borrow 80%, then get a second loan against the property up to, say, 95%, then use this second loan to pay any difference between rents and interest.

The things I dont like about the product are:
1. Limited to 80% LVR

2. High break fees

3. Needs a LOT of discipline, as the low initial rates could promote a more expensive lifestyle, which will come crashing down in later years, especially if rents do NOT go up as expected.

4. You're locked in with a lender who has full power over when and if you refinance the property to take advantage of your new equity. If they knock back the loan, you're stuck!

5. You're locked into the lender's rates, so cannot take advantage of possibly better rates out there in the market place.

The method of creating a second loan, or getting a high LVR loan and using your deposit to fund the shortfall is (IMHO) a far better solution to doing this.