- Hey, it's Connie from Prosperity Finance.
Sharing the best of financial tips
so that you can be more successful
with achieving your financial goals.
We all know the coronavirus
is really having an impact on the economy.
If you're a small business owner,
especially you are in the service industry,
then you probably get hit the hardest.
Now last weekend,
I went out with my family to have a dinner.
I normally come to this restaurant
and I have to wait for my table.
This time I was shocked,
the restaurant had no people dining
and all the lights are off,
except just at reception area,
there was a small light, it's still on.
And I have to press the bell to get attention.
A lady came out who's the owner of the restaurant,
looks really sad.
While I was waiting for my food,
I had some chat with her,
and I understand that her business
was impact a lot by the virus.
I really feel the pain,
because back two years ago,
when the property market went through the downturn,
and the same time
the bank tightened up credit policy,
my business was hit as well.
As a business owner,
there's always some external factors
that outside our control.
What do we do?
How can we overcome that kind of a downturn?
If we can survive,
then our business can grow tremendously,
and we can provide food and shelter for our family.
So it's really important
that we can perceive those risk
and then deal with it.
I know I can't help
these business owner
to come out of kind of a business recession.
But as a financial adviser,
I'm just thinking,
if they have a home loans,
what are the five area or five tips
I can provide to them,
so at least their personal assets has minimal impact.
Today I'm going to give you these five.
So number one tips is
not to put all your eggs in one basket.
Now what I mean by that are two-folds.
Number one is, make sure your property security
are split with the different banks.
Now if you have a home and a couple of investment property,
make sure they are provided
the security with different banks.
There's many reasons for that
but probably the most relevant scenario would be,
say, if you want to sell one of your rental property,
just to release some cash
from selling the property.
What you probably don't know
is that if you have other properties
secure with the same bank,
it's not just you pay off the loan
that you borrowed in the first place
against that property.
It's actually the bank will take a fresh look,
they will reassess your borrowing capacity.
In the worst scenario,
if your business is not doing well,
they will ask all the sale proceeds,
so you won't able to keep one cent of the sale proceed.
It could be heart broken.
And it's real, 'cause I, from time to time,
I hear people telling me,
"What do I do?
"The bank ask me to pay back everything I sell for."
That's true.
That's how the bank assess partial discharge
which means you still have other loan
and other security with the same bank.
So make sure you split the security.
On the other hand, is make sure different accounts type
with the different banks.
For example, business account with one bank
and your home loan with another bank.
Sometime, I heard people say,
"It's so convenient for me to borrow money
"if my business accounts and my personal accounts
"are with one bank
"because they can just see everything."
Yes, I agree.
It's very easy, very convenient.
But it's very dangerous as well.
So sometimes you have to choose,
what is the most important.
Is the protection the most important?
Then you have to compromise the convenience.
Okay, so try to separate different account types
with different banks.
So that's what I say by splitting your eggs,
not put in one basket.
Number two tips.
Make sure you have either revolving account
or offset account.
Every bank in New Zealand has a revolving account.
Some banks also have offset accounts,
the difference between the two are really subtle,
there are two main benefits,
number one, is that as a business owner,
we know our cash flow is not constant.
Sometimes you have a good month,
sometimes you have bad months.
Normally we set the repayment amounts for our home loan
is at a comfortable level.
You know, at least you can service that amount of payments.
What if you have a good month?
What if we can use that extra money
to offset our home loan,
so that we can minimize the interest cost.
So that's one main benefits with revolving offset accounts.
Now the second benefits is that your money is still the,
you can still control,
but offsetting against your home loan
doesn't mean that money is gone.
It's there.
Instead of paying the loan off,
you will lose that flexibility.
So make sure you always have some revolving facility.
Back to 2008,
when the GFC happened,
some people had to,
unfortunately mortgagee sell their property.
That was because their cashflow is broken.
They can't service the repayment.
If they had revolving accounts,
they could survive
and their wealth probably doubled by now.
So it's important that you use revolving
as for emergency,
and always have some money put aside.
So that's number two tips,
is have revolving accounts or offset accounts.
Number three, make sure you only pay principal for one loan,
and keep other loan on interest only.
The purpose of this,
is make sure that you can pay off that loan quicker
'cause you kind of focus all your cash flow
into these accounts,
and pay the minimum on the interest only alone.
That way, you can pay off that loan quicker,
and discharge your property,
which means your property become mortgage free.
So there will be less control from the bank
against your personal assets.
Normally, the principal,
the one that you pay in principal is your family home.
Once your family home is paid off,
then you start paying principal on your rental property.
And then once that paid off,
pay the next rental property.
Not pay principal on all accounts,
otherwise all your security are there forever.
So that's number three tips.
Only pay principal and interest for one property,
and keep interest only on others.
Number four tips is also to do with protection.
Make sure your assets are not under your personal name.
We all have a good intention,
in the client best interest,
and grow the business,
but you never know one day,
you'll cause fire.
So if anything happens,
you're potentially liable for something,
then your assets,
personal assets also is under that kind of a risk,
they can sell your property,
to repay your obligation.
So make sure your assets are not under your personal name.
What entity is the best?
You need to consult with your account or solicitor
'cause it's outside of our service scope,
but I just want to point it out to you,
make you think.
Now the last tips would be
make sure your loan is not too big.
If you have,
a lot of a loan, like big size of a loan,
make sure that each trench,
each accounts is relatively small.
There's no standard kind of size,
but I would say, rule of thumb,
if your loan is over half million dollars,
make sure you have more than one account
to split the balance,
the reason being is,
when the loan come off rate fixed,
if the rates goes up
then at least only a portion of your loan,
you have to pay more,
whereas other loan is still,
keep the constant payments.
So that help you to minimize repayment risk.
So I believe these five tips are extremely important,
especially if you are small business owners.
It doesn't matter you are running a restaurant
or any other type of industry,
you're always exposed to some external factor
that out of your control.
So please make sure your home loans
has these five things in place.
And if you don't have any of these
and you want to know how to improve,
feel free to contact us and we'll help you.
And if you have your family, friends,
are business owner,
please feel free to share this article with them,
so that they can benefit from that as well.
Thank you for watching.
I will see you next time.