Should You Pay Down Your Mortgage Before Buying Another Property?
Dilleen Property Group 2021
From a first time investor’s perspective, paying down your mortgage and having no mortgage prior to purchasing another property may sound like a great idea. However, from my own personal experience this was the one thing I wish I never did…
Mindset
When I first began investing in property it was just after my 19th birthday when my first ever property settled. I was very young at the time, but I was eager to continue building my investment property portfolio. My mindset with debt when I was younger was that I should get rid of all the debt on my first property by putting all of the extra money I had into this mortgage, and have it paid off over the next 1-2 years. I tried paying the mortgage off as quickly as possible, and looking back it was probably one of my biggest mistakes.
The reason why I say that is because, when building a property portfolio most peoples goal is to reach financial freedom. Each scenario is different, but I wanted to ultimately create wealth through building a property portfolio so that I could quit my job in the future and do the things that I wanted to do. The first property I bought was around $138,000, and my mortgage was $120,000. I tried to pay this amount down as quickly as possible. If I could start over again and I was in the same situation, I would not do this.
What I Would Do Instead
I would instead put this extra money into an off-set account. An off-set account is where you can put your savings into and you will not pay interest on that amount for the loan. For example, with my situation if I had put $50,000 in savings into the off-set account, I would only be paying interest on $70,000, rather than $120,000 (left over loan amount). Once you pay off a mortgage it is hard to get the money back out. Keep it on your off-set account rather than paying it all down.
If you are looking at growing your property portfolio you must have accessible cash ready to use. If you do try and pay down your mortgage, and you're going to purchase your second property, your lender will most likely say that you can borrow 100% of the property value. However, the problem with borrowing 100% of the next property that your buying is, you are essentially cross-collateralising (crossing your loans together) your properties together.
In my situation mentioned, I got my loan on my first property down to $90,000, and I wanted to buy a second property for $150,000. What the lender said was that I had equity in the first property and they they would lend me the full $150,000 for the second property. However, my loan against this property now was $165,000. I had now cross-collateralised my properties, and this limited me in a number of ways. This is what you should never do. The downside to cross-collateralising your properties is that when you want to sell off your first property to make some money, the banks will then take a portion of that money you made from selling the first property to put against the second property as the loan is at 100%. This is because you must abide by the LVR restrictions.
If you want to build your portfolio up to 10 or more properties, my number one advice is to never cross-collateralise your properties, and if do you have excess money, put it in an off-set account and not down on your mortgage as you will have trouble pulling it out. This way you can keep it accessible and have cash available to jump onto the next opportunity. One wrong move and you can stop yourself from investing for the next 5 years.
Disclaimer: This is not intended as legal, financial, or investment advice and should not be construed or relied on as such. Before making any commitment of a legal or financial nature, you should seek advice from a qualified and registered legal practitioner or financial or investment adviser.
