Strategies: Deleverage or Cash Settlements?

Hey all,
Just thought I'll throw the question out there to see what people are currently doing and what you would do in our situation. I'm sure most people are starting to run into the same issue despite having enough savings, that is running out of borrowing capacity (with the main banks anyway). Currently we are spending no more than 40% of our combined salary and it will reduced to no more than 20% by the start of next year when we move out of our PPOR and rent it without being burdened by the CGT (via 6 years of absence). We do have an option to borrow another 400k with more aggressive lenders (thanks @Redom for assessing our situation). We do have a IO loan expiring in 3 years (others are 4-5 years time). However, if we do borrow for another place we may not be able to refinance out of it (portfolio currently ~90% depending on which valuation is used).

Given our situation, would you deleverage one or more properties (and potential fix rates with PI rates so low) or would you use all your savings to buy one or two more high yielding cheapies in Adelaide/Hobart or regional cities (with the highest population growth rates and jobs). The attractive thing about cash settlement is that I can improve my borrowing capacity in the long run, higher CF, deposit/buffer will grow faster (even though I will likely start from close to zero dollars again). The downside is that I will not have much deposit/buffer for little while which is ok as I still have at least 3 years before I need to refinance again. I guess cash settlement is to some extent a type of deleveraging, as your whole portfolio have now reduced in debt.

Thanks all in advance!

 

Isn't this a personal choice, to do with your goals and strategies? Its hard for me to offer any advice. How comfortable are you with your overall LVRs and cashflow?

For my own personal situation, I've never really had a dilemma with deciding strategy ever. I know my strategy, and basically if I see a property that fits my criteria, and I can afford it, then I pull the trigger.

I guess my risk profile is well above whatever the banks will lend to me in any event, so I don't need to think about it much.

 

Completely understand it's a personal choice just wondering what people's thoughts are as I've seen most people deleverage through switching IO to P+I and haven't anyone suggest cash settlement and wondered why and whether I missed anything. Just want people's thoughts on whether there's any other risk or things that I haven't thought about as it currently stands, I can't see too many downsides to cash settlement.

 

I can't see many upsides to borrowing less than 80% (or the max LVR you can get without incurring LMI or extra fees).

Wouldn't you just borrow the 80% and chuck the rest in the offset for flexibility later?

 

This. Unless you're bad at money management or have a gambling problem I don't see why anyone would do otherwise.

 

I said in my spiel that I was worried about not being able to refinance out my other loans if I keep borrowing, hence why I want to do a cash settlement on my next property to reduce this risk and also improve my cash flow. I still want to continue accumulating but I'm wondering what the best way is. We have no problems with spending as I indicated as well.

 

I love a good strategy, but have some questions first Pentol

have you paid off that main residence loan?
Do you plan to move back into it or into another?

Paying cash for an investment may not be good if it leaves you with high non-deductible debt in the future.

 

Hi @Terry_w , thanks for responding.
We have only started accumulating slightly less than a couple of years ago and have used our PPOR to go towards another purchase recently. So it's still at 90% at its current market value.

We are unlikely to move back but there may be a very slim chance it may happen.

Thats true, I just thought that it will help tremendously with CF for the time being and opportunity to use it down the track to purchase another property. I thought it might be the most sustainable way of accumulating properties with the APRA restrictions. Whats your thoughts?