Three Mortgage Strategies Used by Successful Investors

If you’re a serious investor these strategies are well worth considering. They are not for everybody, but they have been used to dramatically increase the wealth of investors in the property market.

For some people the following strategies will represent radical and even scary ideas. They run counter to everything they have been told about buying and owning property, but successful property investors have been using these ideas for years and they are recognised as legitimate strategies for growing wealth.

Let’s start with the traditional view.  We’ve always been told we should pay off our properties as quickly as possible by shovelling as much cash into them as we can. Our parents and grandparents drilled that into us because they remember the days when a bank could take someone’s home at the mere hint of a problem.

But those days are gone.  Legislation prevents lenders from acting unfairly and with increased media scrutiny and competition they are loath to throw people onto the street.

Clever and successful investors recognise the ground rules have changed and that there are now other mortgage strategies which can more quickly achieve the same result and dramatically boost their wealth.

Strategy 1: Borrow to the Max

Putting your own cash into an investment property is an inefficient way of using money.  It is far better to use other people’s money.

Take two investors who each have $100,000 in cash.  Each decides to buy an investment property worth $500,000.

Investor one borrows the lot.  Investor two puts in $100,000 in cash. While investor two’s borrowings will be reduced along with the repayments, his deposit has not exposed him to any additional capital growth.  All other things being equal, both investors' will enjoy exactly the same capital gain.

Investor two’s $100,000 will save him around $7500 per year in interest and it may also save him the cost of lender's mortgage insurance.  On the other hand, investor two still has $100,000 to invest into another property. If she bought another property worth $500,000 and it grows in value by 8% per year, she could potentially enjoy a capital gain of $40,000 per year, and that would put her ahead of investor two by $32,500 in the first year. This amount would increase each year. This example illustrates how by using other people's money, where possible, you can accelerate your wealth creation.

Obviously you must take into account all of the risks involved and you must be able to service the debt. As always, you should consult your financial advisor. Everyone’s circumstances are different.

Strategy 2:  Pay Interest Only

This is an excellent strategy when combined with strategy one.

To begin with interest only loans are cheaper. You can save between $200 and $300 a month compared with a Principal and Interest loan. There are tax advantages that can give you even more spare cash. So, at the end of the day you have more money available to increase your borrowing power and the ability to turbo charge your investments.

Some serious investors take interest only loans out on their homes to free up their cash reserves which enables greater borrowing which in turn allows them to increase their wealth far more quickly.

It’s a strategy suited to younger investors with a long term view.

Strategy 3:  Make Smaller Home Loan Repayments

This controversial strategy also runs counter to the accepted view that we should pay off our homes quickly.

It’s an extension of the argument that equity left unused in a home is a poor and inefficient way of generating wealth. Indeed, proponents of this approach argue that rather than trying to reduce your mortgage by making higher payments more frequently, it is actually better to extend the repayment period and make the repayments as small as possible. The argument goes that if the bank is charging you 7% a year to borrow its money and you are earning 10% a year investing the spare cash you might otherwise have stashed into the mortgage you are way ahead.

In fact, buy the right investment property, or the right shares and hold them for the long term then you may end up paying off the mortgage on your house a lot sooner than by the traditional methods.

All of these strategies are used by successful investors, but it’s unwise to embark on them without planning, confidence, knowledge and advice from a good financial planner and accountant.

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