Hi All,
A few days ago I attended a session with a finance expert — his approach is rather different, to the point of disbelief.[blink]
He suggested that I could borrow a substantial amount from the bank — way beyond my ability to service the debt. In response to my concerns, he suggested I take out a line of credit to pay for any shortfall in interest repayments. So his approach involved creating new debt to service old debt. This obviously requires quite a mind shift, one I am not completely comfortable with.[hmm]
I was also concerned that lending institutions would see through this ploy and put a halt on lending funds beyond my capacity to service the resulting debt. He disagreed.[eh]
I know there are very experienced investors out there with considerable expertise in relation to finance. Does this strategy make any sense; is it manageable; what problems, pitfalls can you forsee. Or is this approach the right one to support a broad investment programme.
Gee guys — any and all advice on this one greatly appreciated.[cap]
Regards,
HelenNot bad in a steeply rising market – what happens if the market goes sideways for a few years?
I think there is also issues with the tax deductibility of capitalised interest…
Cheers,
Simon Macks
Mortgage Broker
http://www.mortgagehunter.com.au
0425 228 985Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
Hi MortgageHunter,
thanks for the reply. Any chance of expanding on the two points raised. I’m still at a loss regarding the whole concept.[blush2] Feel free to elaborate (in as much detail as possible).
Thanks
Helen [biggrin]Well if you are increasing your debt without increasing your overall net worth then you really need to have rising property values to justify such a strategy.
If you are paying interest on interest then I don’t believe that the tax office allows you to claim the second lot of interest as a deduction.
I am no taxation expert – perhaps someone else can contribute here.
Cheers,
Simon Macks
Mortgage Broker
http://www.mortgagehunter.com.au
0425 228 985Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
I’d call this a high risk strategy.
What’s your risk-tolerance?
Also get a second & third opinion on the legalities – you don’t want to cross a line somewhere….
Cheers,
Aceyducey
In theory, there is no difference between theory and practice. But, in practice, there is.– Jan L.A. van de Snepscheut
Hi Helen
So i get this right if you borrow a certain amount then you have to service it.
Lets assume interest rates 7% service this loan per month $1000.
You have a LOC dedicated to investment and this picks up any shortfalls. So say interest rates went to 10% your cost for the loan now say 1200 per month. Then instead of you putting in money from your own pocket the LOC would pay the difference. So at the end of the year the LOC is say 2400 in debit.
Have i got this right.
regards
AlfBut who’s going to give you the line of credit in the first place? You still need to prove serviceability?
This strategy is very risky and stupid. What qualifications did he have? Did he even know what he was talking about?
Yes, Simon was correct. The interest expense on the new line of credit debt what not be tax deductible.
I put this advice in the same basket as someone suggesting to rob a bank.
Who was this person? They should be reported to ASIC and other forum members should be made aware.
Cheers
Stu
Thanks Stuart,
Wow!!! Strong words.
Initial serviceability would not be a problem (line of credit) because of existing unencumbered property. So I could invest (1-2 properties) without too much concern. However when the broker mentioned that I could borrow over 1 million (actually closer to $2 million), my immediate thought was serviceability.
[sweaty].I am concerned with the notion of borrowing to service debt. I guess I am rather cautious, although I am willing to maintain a certain level of debt — but it has to be manageable. [worried]
I was wondering if any other members of the Forum have pursued this path with any success.[blink]
Regards,
Helen [biggrin]Hi Alf,
in response to your question. The simple answer is “yes”.Hope this helps.
[cap]Regards,
HelenThere are a few people around that promote a similar strategy. it will work as long as you are not borrowing more than your portfolio is growing each year-say no more than 80% of growth. It is not a bad strategy, but very risky.
There are also lenders out there that will lend to you based soley on the security value. So as long as you have equity, you can continue to get finance.
Terryw
Discover Home Loans
North Sydney
[email protected]Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Yes, there are many things you can do in terms of increasing your borrowings but you should always ensure you can afford the debt.
The road to riches is not a short one for 99.9% of people. It takes years. If you choose to take high risks in an aim for getting rich quicker then be prepared to suffer the consequences.
Anyone educated and licensed would not provide this sort of advice. Unfortunately, its the less educated people that suggest stupid things. DON’T TAKE FINANCIAL ADVICE FROM A MORTGAGE BROKER.
If you read any books but successful (rich) people none of them take wild risks. They all take educated risks and only do things that make sense to them.
Cheers
Stu
Hi Helen
Well there seems to be some good responses on this.
At the end of the day you have to be comfortable with the amount of debt you take on.
In relation to a LOC its quite sound, i am doing it and as far as my accountant is concerned it is tax deductible. The LOC is only dedicated to Investment. So whether i chose to use it as a deposit or to pick up some shortfall then it is still dedicated to investment income producing property.
So it can act as a buffer incase of an unforseeable event.You also hav tax refunds etc you can put back into the LOC etc.
It really depends on the amounts and security that is in question. If it is all at 80% LVR then it shouldnt be a problem.
According to my accountant its sound and doable with the right set up.
If you feel its too much and are uncomfortable dont do it. Forget the get out of your comfort zone arguments.
Don’t forget we are in a falling market generally speaking. Interest rates are more likely to go up than down. LOC are dearer.
regards
alf
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