Many Kiwis want to invest in property. They get excited, find a property they think will make a good investment, then apply to the bank for money. And just as it seems like they’re on the path to financial freedom, the bank says “no”.

Heartbreak.

What should these clients do? They still want to get ahead financially and think investing in property is the way to do it for them, but they can’t get a loan to invest. At least, not yet. For the most part — in fact, in almost every circumstance — these investors are left on their own. Bankers don’t want to help because they don’t fit the box, and brokers don’t want to help because there’s no payday in sight, so the clients are left to figure it out for themselves.

Now, over time the amount they can borrow from the bank will increase. Their equity will improve as their house increases in value, and their incomes will rise through inflation and advancing their career at work.

So, if you can’t get a mortgage for an investment property today, perhaps you’ll be ready in six years. But that’s still a long time away. Couldn’t you shortcut the process? Could there be a way to get it down to one or even two years? That’s what our process for getting investment-ready is all about.

It gives you six real strategies that you can use to get investment-ready faster. Over the next six issues I’ll break down those strategies.

Strategy One - The Mortgage Buster

The Mortgage Buster is by far the most popular and helpful strategy. It’s the one strategy I think every borrower can adopt. In simple terms it involves the use of a revolving credit to help you pay off your mortgage more aggressively.

This strategy:

• Increases the equity you have to invest, and

• Decreases expenses the bank thinks you have (since your mortgage is smaller)

Both will increase the amount you can invest. But, there is a bit more to it than just making extra repayments. It needs to be set up in the right way.

The Problem It Solves

Increases your equity and improves your servicing.

The Commitment

In order to use this strategy effectively, your current home loan should be less than 75 per cent of your property’s value (as a ballpark). This is what the banks call LVR (loan to value ratio). However, don’t get too focused on that LVR as this strategy can work for anyone.

You’ll also need some extra cash per pay cycle to put towards your mortgage.

Exactly How It Works

You set up a minimum of two mortgage accounts. In the interest of keeping things simple, let’s just stick with two. One is a standard home loan with a fixed interest rate. That’s the home loan you already have.

The other is a revolving credit or offset account (offset is only available at a few banks). This is where a small part of your mortgage acts like an overdraft. If you pay money into this account, you reduce the interest you’re charged. But, like an overdraft, you can also take that money out at any time. The strategy is to make minimum repayments against the standard home loan and then put any spare money into the smaller revolving credit or offset account. At the end of a year, if you’ve stuck to the plan, you’ll have paid off the revolving credit, and there’s money available in the account.

You then use that money to make a lump sum payment off your mortgage. With your revolving credit empty, you start again, paying off that revolving credit for the next 12 months. This keeps going until you’ve paid off your mortgage.

Setting up your mortgage in this way has two main benefits:

1. The revolving credit acts as a goal. If you set your revolving credit to $10,000, that’s how much extra you need to save over the next year.

2. If you have unexpected expenses or accidentally save more than you can afford, you can take the money back out and spend it. You can’t do that with a standard mortgage. If you make an extra repayment against your regular mortgage, you need a whole new mortgage application to borrow that money again.

Steps Required

• Calculate how much extra you can pay off your mortgage per year. That’s the size of your revolving credit, e.g. $10,000.

• Break a portion of your primary mortgage and set it up as a revolving credit, e.g. if your mortgage is currently $500,000, break $10,000 off as a revolving credit. It’s worth pointing out that this restructure will require a full bank application. This could be an opportunity to shop around for a better deal, or simply negotiate with your current bank. This is also where having a mortgage advisor who understands what you’re trying to achieve is really important.

• Set up an automatic transfer from your main bank account, so your extra repayments automatically go into the revolving credit.

This strategy Improves your Equity and Servicing and if used well can bring that “yes” from the bank a lot closer than you think!

Insider Tips

If you have additional savings, e.g. for a holiday or emergency fund, you can use these to pay less interest. In this case, make your revolving credit larger, or talk to your mortgage adviser about using an offset.