How To Conduct a Mortgage Health Check on Your Property Portfolio

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If you own any property, either your own home or an investment (or both), it is a good idea to conduct regular mortgage health checks on your portfolio. This allows you to determine whether it is worth re-financing - either to access equity, or to save money and improve cashflow by getting a better interest rate on your loan.                                                                                             

Take the following steps: 
  1. Conduct property market research - to determine the estimated value of each property in your portfolio. Subtract the current value from the total outstanding loan amount to determine the current equity you have in the property.   
                                                                       
  2. List your properties in a spreadsheet - with the following details:
    a) Estimated Value
    b) Loan Amounts (if multiple loans on the same property, list them separately)
    c) Equity (Estimated Value minus Loan Amount) and Loan to Value Ratio (LVR)
    d) Current Loan Information – lender, interest rates, monthly repayments, type of loan (interest only or principal and interest), fees and any other relevant details such as potential break costs if you have a fixed rate loan.
  3. Research the current loan products and interest rates available on the market - add these to the spreadsheet.
  4. Compare the current market rates to your own loans - determine whether it would make sense to change your loan product, taking all costs/fees into account (as well as the associated time and effort, there is typically a lot of paperwork!). All lenders have slightly different policies. If you own more than one property, you may with to consolidate lenders (re-finance all your properties with one lender) or maintain diversification with multiple lenders to keep your options/flexibility open and to take advantage of different products. You should also look at the fixed rates versus the variable rates on offer.

    A note on Fixed vs Variable:

     Choosing between these two options is a personal decision and depends on your financial situation. The banks have excellent knowledge of the financial markets so it will be tricky to beat them at their own game by fixing a loan rate, especially for a longer timeframe (3-5 years). Generally speaking, the best reason to go for a fixed rate is to have certainty on your loan repayments, or to make a guaranteed saving when re-financing. During my last re-finance about 12 months ago, I fixed a number of my loans for certainty of repayments, additionally the fixed rates were ~0.5% below the variable rates at the time. A practical option is to have a mix of both (you can split the loan into any ratio you choose e.g. 70% fixed, 30% variable).
  5. Look at the equity in your portfolio - decide whether you would like to access this equity for further investments. If your LVR is 70% for example, you may wish to borrow an extra 10% of the property value to take your LVR back to 80% and use the equity available.
Even if you find that it is not worth re-financing or you don’t have any available equity, this is a worthwhile exercise to ensure your property portfolio is in a healthy financial position! I personally do this exercise once every 2-3 years.  You may wish to do this more frequently in certain circumstances e.g. at the end of a fixed loan period, after a change in personal situation (job/location change or starting a family) or significant changes in the official cash rate (for accessing better loans) or local property market (for releasing equity). 

Simple Property Portfolio Health Check Example:

Property #1 (Place of Residence):

Estimated Value: $1m
Lender: CBA
Loan Amount: $700k total
LVR: 70%
Current interest rate: 
5% on a 5 year fixed rate with 2 years remaining and a break cost of $5,000. 

In the current loan market, NAB offers a 2 year fixed rate at 4%. 

You decide to refinance based on the calculation below, costing $5,000 in break fees and an extra $1,000 in additional fees. 

1% interest rate saving on a $700k loan = $7,000/year. 
Total interest rate savings over remaining life of the loan (2 years) = $14,000.
Total costs = $6,000 (break cost + mortgage discharge fees etc)
Total savings from re-financing = $8,000. 

Additionally, your lender advises that you have the borrowing capacity to go up to an 80% LVR, and you notice that you have $100k of equity available. At the same time as you re-finance, you increase your loan amount to $800k and use the equity for a property investment purchase. 

Property #2 (Investment Property):

Estimated Value: $650k
Lender: ANZ
Loan Amount: $550k
LVR: 85%
Current interest rate: 4.5% variable rate

In the current loan market, Westpac offers a 4.4% variable rate. 

You decided it is not worth switching lenders to only save 0.1% interest rate ($550/year) as it would be a big hassle, and variable rates are known to change all the time. Additionally, your LVR is already high so there is no further equity available.  You can sleep easy knowing you are getting the best deal on your investment loan!



If you want to get in touch, please send me an email:
micahkg@gmail.com

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