We’ve all heard of them. They seem to be offered by everyone. But what really is a Financial Health Check? And what does it do for you?
Obviously I can’t say what other companies offer in their Financial Health Checks, but I can let you know some of the things we look at for you, at Investors Direct.
1. Cost Saving
First, we look at how we could make some savings for you based on the product/s you already have. Now this probably sounds pretty obvious to most investors, however you would be surprised how many people don’t look at their loans on a regular basis. In fact some people take out loans for 25 years and NEVER review them!
So we review your existing finance arrangements because lenders are very good at putting special offers into the market quickly when they want to ramp up their new loans business. If we have a good handle on where your current finance arrangements are at, we can see if there are any offers available at the time of the review that could give you a better deal. But we don’t know what to offer you, if we don’t know how things stand with you currently. If we do know however, then we can help you take advantage of the current opportunities.
2. Release equity
The second most important thing we do, is to check to see if you can release equity from any of your properties. Once again this might sounds quite straightforward but it is often easily overlooked. Having a reserve of funds available provides a safety mechanism for any investor. Notice I didn’t say having equity provides safety.
Equity is only good to you if you can turn it into liquid funds that you can use. That’s where a buffer or reserve comes in. I’ve had some people tell me they don’t want to borrow any more because they don’t need it. In my experience, I believe that you should borrow the money when you can, rather than when you need it, so that in the future if you need it, it’s there for you. Murphy’s Law says that when you need it you won’t be able to borrow it!
Freeing up equity can also enable you to buy another property and keep building your portfolio. If you already have the funds sitting there you are more able to quickly grab opportunities when they arise, rather than waiting for permission from the Bank to buy.
Remember, this freed up equity can also be used for other purposes as well. Investing in a business perhaps or maybe investing in something that will provide a better return than the borrowed cost of the money.
Whatever you are thinking about doing, you should borrow when you can, not when you need to.
3. Risk Management
The third key thing we do, is something that many people rarely consider, but it is highly important to your ability to keep growing your wealth. That is Risk Management.
There are three types of risk to consider here.
Interest rate risk occurs because interest rates move continually. Rates go up and rates go down.
Any borrower who is exposed to the market can be potentially caught out by quick rises in interest costs. To some extent you can mitigate this risk by fixing part of your debt. Of course, you should keep in mind what plans you have for the property in question as breaking the term of a fixed rate loan can be expensive. It makes sense to fix the costs on a long-term hold property where there are no plans to sell or develop. However, it is important to remember that fixing will mean that the rate will stay the same over the term you choose, whether that is say 3 years or 5 years.
Remember that rates will move during that time so you have to be comfortable with your decision without any second guessing. What is important is the role that a Fixed Rate plays in managing your risk. You should not be trying to beat the Bank on rates by speculating on what the market will do.
Security risk is also something that needs to be managed. The main types of properties offered as security include residential, commercial/retail/business and development.
Residential properties pose the least risk. This is obvious if you look at how the Lenders set their Loan -to-Valuation-Ratios or LVR’s. Lenders will often go up to 95% on residential properties but not on commercial or other properties. While borrowing to such high LVR’s is not necessarily recommended it does show you how confident Lenders are with residential property.
If we compare Residential to Commercial/Retail property you will see straight away that there are differences in the exposure that Lenders are willing to take. LVR’s for Commercial/Retail properties are generally restricted to around 60% and that clearly shows the Lenders’ feelings for these types of security.
That isn’t to say that Commercial securities are not good investments, simply that there are greater risks to be managed for a greater yield.
Development properties have their own level of risk. There is the market risk – will the properties appeal to the market on completion and bring either the projected price or the anticipated rental return? Will the costs stay within budget? Can the project be completed on time?
All of the risks mentioned above should be managed by having separate Lenders with no "crossed collateral" involved between categories. It’s recommended that you separate your properties so that each category has a separate Lender. Commercial properties go to commercial Lenders, residential to Residential Lenders for example.
Lastly, you should manage the amount of debt you have with each Lender. This is commonly called Exposure Risk. Your total debt should never exceed $1million to any individual Lender. Of course, the Lenders tell you they want all of your business and go to great pains to offer you wonderful deals to get you to come across. Don’t be fooled.
The important thing is to understand that the more you have with a Lender the more of a Risk you are to them. A higher exposure means they will keep their eye on you closely and when things get tight they will look at their books to identify those larger loans. Believe me, at times like this, you want to make sure you are well under the Lender’s radar!
If you can identify any of these risks in your own current portfolio, may I suggest you come and see me so we can apply these principles now! Or if you’d like to discuss any other aspect of a Financial Health Check feel free to email me at email@example.com