Loan Tip: How Having All Your Loans With One Lender Can Allow for a Faster Retirement

At first glance the choice of lender would seem to have no affect on the speed at which a person could retire. But here I will show you how it could.

It all comes down to the ability to substitute security for a loan.

Where 2 loans are secured by 2 different properties with the same lender it might be possible to change the security for one loan from the property that it relates to to the other property. You can then end up with one property unencumbered. In general this will have no affect on deductibility of interest.

This is generally not possible, or very difficult to do, where the loans are with different lenders.

Where a person has an unencumbered property they could then sell this property to fund retirement, yet keep the loan open. At this point it will affect the deductibility of interest – interest will no longer be deductible where the asset that the loan was used to acquire is gone.

The next step would be to Loan Recycle – reuse that loan to invest as outlined here
Loan Tip: What is Loan Recycling?
Loan Tip: What is Loan Recycling?

So the borrower can release the equity from the property by selling it, use that cash to fund the next 5 years of so in living expenses and at the same time buy a replacement property which will be able to generate further capital growth to fund retirement much further down the track.



See the example I used in my tip Loan Tip Restructuring Loans in Anticipation of ‘Retirement’ Loan Tip: Restructuring Loans in Anticipation of ‘Retirement’



Example

Its 2001 and Homer is at the peak of his earning power. He buys 7 properties all in the same year using 100% loans. Let’s say these were $400,000 each and he borrowed $400,000 on an interest only basis (to make my example easier).

Now it is 2021 and each property is worth $1,600,000 (doubled twice in 20 years).

Homer still doesn’t have enough rent coming in from these properties to allow him to retire. But he can service easily – but perhaps not enough to tap into the equity.

What he could do is choose the 2 properties he is most likely to sell. Property A and Property B.

Each of these has a $400,000 loan secured by it with the loan relating to the purchase of that property only.

Homer talks to his broker and rearranged a refinance where these 2 loans will become secured by Property C.

Property C will then have 3 loan splits secured against it.

Loan A used for Property A, Security Property C

Loan B used for Property B, Security Property C

Loan C used for Property C, Security Property C



Property A and Property B can be sold anytime without paying out Loans A and Loans B. These loans could then be ‘loan recycled’ or reused to invest further, without having to requalify for servicing. This could even be done in a way that allows the interest to be tax deductible.