Investment Finance

The Banks Secret Weapon: Part Three

Friday, June 25th, 2010

Lets find out what Gordon and Sally’s Grave Mistakes were;

Firstly, none of this had to happen.

This whole tragic scenario could have been avoided if only Gordon and Sally had sat down with a financier who was skilled in correctly structuring finance for property investors.

They had made many financing errors, but it was three key mistakes that lead to this disaster:

1. They gave the bank financing their investments access to their home as joint security – albeit, they had no idea they had done so.

2. They had not allowed for a safety net for this instance, to cover an interruption of income.

3. Their exposure to a single lender was way too high leading to fast action by their bank to recover the debt. An “A” class client can very quickly plummet to “D” class.

A skilled “Financial Architect” would have structured his finance to ensure maximum asset protection, particularly for the family home.

Structuring for Protection

.A Financial Architect would have structured Gordon and Sally’s finance to achieve four key objectives:

1. Provide maximum protection for the family home and key assets
2. Protect and maximise cashflow to prevent a repayment default
3. Preserve and protect tax benefits for the future
4. Maximise returns leading to passive income

.Now let’s have a look at how a Financial Architect would have structured Gordon and Sally’s finance.

Protecting the Home

First and foremost, the home would have been protected. This is achieved by isolating it from the banks providing the investment loans, virtually negating the dreaded All Monies Mortgage provisions.

This is done by using a separate lender. The Financial Architect then arranges a “cash transfer” to fund the “hurt money” and costs. This would have reduced the home’s exposure to debt by about 76% or $840,000.

Under a “cash transfer” the home would be exposed to just $598,000 instead of $1.438M.

Guarding against Default

Secondly, Gordon and Sally would have been provided with a safety net to negate the effect of the rental default which caused them to default on their loans, putting their home in jeopardy. If the rent doesn’t come in or there is some other interruption to your income (or you over-spend on your holidays), you can ride it out until things return to normal. We recommend your buffer covers you at least 6 months.

Optimising your Returns

Thirdly, there’s only one reason to invest in property… to make money. Everything you do should revolve around optimising your returns because while you are making money you won’t go broke. “Washing” all your income through your non-deductible home loan can eliminate your home loan very quickly, but it must be structured correctly with the right loan products, money flow and purpose to meet strict tax office rules and court judgements.

Get advice for your situation and circumstances before commencing this strategy.

.On the next post, we talk about why Gordon and Sally’s finance wasn’t structured correctly and how do you know if you are at risk…..

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