Case study: Managing cash flow amid life changes
Optimising your cash flow is crucial to reaching your investment goals, so as your circumstances change, such as marriage, children or a new job, investors need to ensure their loans suit their specific situation.
This was evident for a couple who contacted Momentum Wealth with some concerns about their cash flow.
The clients were expecting their first child and the mother-to-be was planning to take at least 12-18 months of maternity leave.
Given the associated costs of having a baby as well as the upcoming reduction in their household income, the couple were concerned that they wouldn’t be able to meet their repayments for their investment property and their home loan.
They were unsure if they should sell their investment property to cut their overall debt position and reduce their monthly loan repayments.
On review of their situation, our mortgage and finance specialist found that they had previously fixed their investment property loan for 3 years at a relatively high rate.
If the client sold their investment property, they would be up for approximately $25,000 in early repayment penalties for breaking their fixed rate loan prematurely.
This made the sale of their investment property far less attractive. It also prevented them from refinancing their investment loan to a lower rate, for the time being.
When it came to their home loan, the clients were paying principle and interest.
We advised them to change this to interest only at a lower fixed rate for 2 years.
This would give the clients a more predictable repayment schedule while their household income was reduced, and cut their repayment bill by $500 per month.
Our mortgage and finance specialist also talked with the clients’ accountant to discuss a PAYG Tax Variation for their investment property in which they could claim their tax rebate monthly instead of annually.
This would further help the clients by effectively smoothing out their cash flow.
In addition to taking these measures to optimise the clients’ cash flow, our broker helped them create a savings plan based on their budget, to set aside funds for expenses once their household income had reduced.
As a result, they started putting aside a large portion of their income as savings. On top of their existing $20,000 savings, they had aimed to save a further $15,000 by the time the expecting mum would take maternity leave.
By restructuring their loans to suit their personal circumstances and undertaking savings measures, the clients were able to hold their investment property despite the additional cost of starting a family and reducing their household income.