Cash Flow Mortgages?

Personally, I think it's gambling, and would never do it, unless I had a very low LVR and fell on hard times. Our LVR is currently 58%; quite low, and I wouldn't even consider it.

Some investors are very aggressive, and see no problem with this strategy, but my guess is they haven't seen a property market slump yet.

You are letting the interest on the loan accumulate, in the hope that the property will go up in value more than the accumulating interest.

If there is a downturn in the market, and you need to sell quickly, you could find you owe more than the property is worth, and make a disastrous loss.

The benefit is that you get less repayments now, and the accumulating interest is tax deductible, but at what cost in the future?

I am an originator for these types of loans and have a view from both sides, no type of structure involving equity being used to handle repayments suits anyone but agressive investors hence…

1. if you look at the structure of the Cash Flow Manager loans they are not at all disimilar to obtaining a Line of Credit to 90% LVR and using this LC to handle approx. 1/2 the repayments.  As per the comment above I am comfortable using a LC for this purpose but many of my clients dont want the hassle of managing it and choose the Cash Flow Option because it is set and forget.

2. if you use the spreadsheet available (email me for one if you like) you can see that over the 5 year period if you get no growth at all you now owe 90% instead of the 80% you started at.  A break even point would be between 4%-5% growth.

3. I use them and like them, they have allowed me to restructure many -ve geared properties to provide money in mine and my clients pockets allowing us to get on with our wealth creation instead of worrying about day to day cash flow.

4. Yes there may be an issue if markets slump, but this is always the case when gearing heavily and no matter how you have done it the risk remains the same.

All in all its a good product for some people, not for others, no different then structuring a Line of Credit yourself except for the set and forget aspect

Here is what I think:

1. The property is not really positive cash flow as the interest charged is still the entire amount – you have just avoided paying some of it in the first few years. Cash flow is determined by income, plus tax breaks, less expenses. Your 'expenses' are still the full amount of the interest charged. You are just deferring payment of it.

2. Reliable information about the tax deductibility of capitalised interest on an investment loan is a grey area. If you are using one of these loans, there is a high chance that you will not be allowed to claim the increased interest as a tax deduction in future years.

3. Most importantly, the scheme relies on rising markets. You cannot predict future growth. If you don't get capital growth, you will end up with a loan higher than the value of property. In short, you will have dug yourself into a hole of negative equity.

Happy Investing

Most long term investments other than 'true' +ve cash flow rely on the hope of some rise in markets over 7-10 years so I dont believe this is an issue. 

Of course you are taking a gamble on rising markets over the longer term.  Personally I use a 5% long term growth objective when crunching numbers and any more great any less I knew what I was getting into and have several back up plans.

I find it interesting that some people think a concept like 'cash flow mortgages' dodgy when the same concept has been used and continues to be used by almost every property investor I meet  who have the ability to have lines of credit to handle any -ve cash flow they may experience.

I would imagine even some of the posts above have used equity before to fund a shortfall?

I am happy with the tax opinions I have regarding the product and would suggest people get their own Private Binding Ruling from the ATO for their own circumstances if in doubt.