Loan Tip: Restructuring Loans in Anticipation of ‘Retirement’

There are many loan strategies to consider in advance of retirement. One good one is to try to get at least some of your properties unencumbered as early as possible.

Ideally these would be the properties you are most likely to be selling first. This will allow you to sell those properties yet keep the loan facility available for future investing.


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.

 

Terry, can this be described as loan portability if all 3 loans originally with the same lender?
I assume this may also work with all 3 loans taken out from 3 different lenders and end result of
all ending up with one lender?

 

Terry
Thanks for the valuable advice. Can the property C in the above example be a PPOR? and then the loans A & B will be tax deductible? Thanks

 

Yes

Deductibility depends on what the funds are used for, not the security so there would be no change.

 

Yes some lenders call it loan portability. It can work with 3 different lenders, but will be harder to implement.