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Lowest rate at the moment is 4.99% for a one year honeymoon rate. Variable and fixed rates are all low at the moment for deals that can be placed with banks. There is no one size fits all loan in commercial, you get very different products depending on what type of property, the amount and LVR, but the 4.99% rate is available across a fair cross section of scenarios.
My view is that people should always pay down debt, the most expensive first. Non investment debt is generally more expensive because it is not tax deductible, so for most IO for investment debt is an absolute must. However i usually suggest IO for any and all debt where possible, this is not because I don't think paying down debt is a good thing, quite the opposite, but all P&I does is set a higher minimum repayment, having an IO loan does not mean you can't pay it down, it makes principal repayments a choice. I have a strong preference for making my own choices and encourage clients to do the same.
having said this, there are some people who freely admit to lacking discipline with regard to saving, if you are in such a class, certainly P&I can act as a forced saving and would be desirable, but this is not a financial decision it is a behavioral decision.
Hi ML,
From what you have written it seems that there are a few misunderstandings in both directions. The banker would have to assess your current debt as well as the proposed new loan, as both are counted in the serviceability calculation. This doesn't mean any changes have to be made, but it is still part of the application. Your borrowing capacity with regard to accessing equity will be dependent on both the security available and your capacity to service the debt.
One problem that comes up a lot with people accessing equity is that it is extra debt with no offsetting additional income being generated. Where the loan is for the purchase of a property, you can use the proposed income of the property which in turn greatly increases your borrowing capacity (in terms of servicing). If you have servicing issues it may be wise to reduce the size of the application for the equity loan and throw in a pre-approval for the new purchase.
You really should sit down with a broker to have these discussions, particularly as it may be that you should use a different bank for the new purchase, this can increase servicing capacity in itself because of the way servicing calculators work). There may also be better options for the existing debt and you may as well explore these now as it would be no greater hassle to refinance and buy as compared to accessing equity and buying.
I hope this helps.
Hi,
You have sufficient capital to invest in commercial property. If you are keen for positive cashflow you should have a decent look at this area, the cashflow is higher quality than that from resi property as generally the tenant pays for upkeep and expenses.
Even things such as non disclosure of a home phone number can adversely effect credit score, I know this definitely is the case with at least one lender. Credit scoring is weird and makes no rational sense, it's basically trying to come up with a statistical calculation to predict human behaviour, but its something we all have to concern ourselves with.
I'm sorry but I can't seem to find where I said printing money is a good idea. My opinion of Krugman is probably not much different to yours. None of this changes the fact that Japan's debt is largely in Yen, they can,have and have stated they will continue to create more Yen. Flooding the domestic financial market will keep rates low and will drive inflation and falls in the currency. How much debt the BOJ holds is largely irrelevant, your graph just means that there will be even bigger problems for Japan's people and financial institutions, but the country won't go broke. If they have no concern with the living standard of their population they can print away for as long as they like.
Japan and the US are not apples and oranges in the context that they can both print as much money as they want, same as any country who issues it's own currency. I'm not commenting on Japan's future, it may be bleak but it won't include it going broke and neither will the US. Countries using Euros are another matter.
i haven't read the article re Germany, but I think currency wars are well an truelly underway and have been for some time.
Freckle wrote:APerry wrote:Where did you get this little pearl? Interest rates don't automatically go up because there is inflation (that's what would happen in a market not being manipulated by Government or central banks). Further, inflation will help the Japanese Government pay its debts, which is largely denominated in Yen, as it represents a reduction in the value of the money they owe.
C'mon Al I thought you understood this stuff.
Inflation drives savings/capital to look for a better return. Japan then has to compete at higher rates to sell bonds. 60% of income will go on debt this financial year. Much of that debt is near 0%. If debt costs rise even 0.25% as it rolls over bonds and raises new ones Japan is all but gone.
It's what the likes of Bass and others are saying. The risk is increasing over time that as Japan is forced to look to external sources of funding for financing its debt and deficits it will eventually go belly up. Bass has upped his time line to 12 – 18 months. He expects to see the first signs of this as downside changes in margins on swaps if I understand him correctly.
Simple rule of economics as I understand it (and maths for that matter) – you can't inflate your debt away at 0%. What's the other saying; You can't have your cake and eat it too.
What you are saying would be true in an open market, Japan's central bank will continue to drive bond yields down though, so they won't go up, this is part of their stated policy. The Japanese central bank can keep buying Gov bonds at 0% forever if it chooses as it creates Yen. The cost of this in terms of inflation would be horrendous, but it doesn't change the fact that the level of inflation and interest rates can be disconnected in an economy that is being manipulated.
Countries can and do inflate away debt, at the cost of large drops in their exchange rate. The US are doing the same thing. This will come back and bite them in terms of lower standards of living, but they won't go broke. It is pretty simple, a country that controls its own currency can not default on debt denominated in that currency, unless it is their choice to do so. The choice to print more money is always there and that is what Japan, and the US have decided to do. Greece doesn't have this luxury, just as private individuals and corporations don't because they don't have their own currency, they have to default openly, not by stealth (this is what inflationary policies are, default under a different guise).
Simple maths and economics is that interest rates are lower when there is more money in the system (supply and demand), putting more money into the system, without and equal or greater increase in the amount of consumer and prodcucer goods (i.e. real wealth) leads to a reduction in the unit value of that money, this is the very definition of inflation.
Adam2011 wrote:Hey all,I have been considering US property investment but just can't be convinced it's a good idea long term.
Mainly because as most will know the US is broke. And with all the money printing going on over there, this could potentially lead to a currency crisis.
What are everyone's thoughts on this? When/if America goes broke, how will you make any money/wealth from properties over there if the US currency continues to be devalued?
I'm really interested to hear what people think on this and hopefully the discussion will help to dampen my and others concerns.
Cheers Adam
Hi Adam,
It's not possible for a country which has its own currency to go broke, particularly when its debt is denominated in its own currency as there is always the option of simply issuing more currency. The danger is inflation, i..e. its own citizens and the rest of the world losing confidence in its currency. You are already seeing this in the comparative rise of the A$. In an inflationary environment you want to either be holding assets, be a borrower or both.
I remain neutral on whether people investing in US real estate at the moment will make money, but I would tend to think that those buying quality assets and leveraging into the market will do OK. The biggest issue is the risk on the initial capital sent over there being whittled away by further falls in the value of the $US..
Freckle wrote:. Most pundits consider a 2% inflation rate for Japan as suicidal (pushes up the cost of govt borrowing to unsustainable levels given the size of their debt). We shall see I suppose.Where did you get this little pearl? Interest rates don't automatically go up because there is inflation (that's what would happen in a market not being manipulated by Government or central banks). Further, inflation will help the Japanese Government pay its debts, which is largely denominated in Yen, as it represents a reduction in the value of the money they owe.
Money is not wealth, money is how modern societies transact wealth. Wealth is the mixture of goods and services used by consumers and businesses. For those who find this confusing consider if a country had 10 units of wealth and 10 units of money, each unit of wealth (in an efficient economy) would be worth 1 unit of money. In this situation if the central bank decides to print a further 10 units of money, this has no effect on real wealth but would cause 100% inflation i.e. each unit of wealth would now be worth 2 units of money. In this case if there were funds borrowed prior to the money printing the debt would be exactly half as onerous. This is very basic economics!
Hi Sam,
The benefit of NRAS is that it is tax advantaged. It doesn't make much sense to put it somewhere at a lower tax rate than what you are paying outside of super (assuming your marginal rate is greater than 15%) as this benefit is reduced.
I operate a small consortium in Bundaberg with 21 houses in it, there are a couple of consortium members who want to sell, I would be happy to do an introduction for a private sale if you like this area. The price point you mentioned is about right, you would have to borrow at 80% or lower though as it is not registered with any of the majors (this will change as I'm likely going to pass management over to Questus (the largest private consortium in Australia) pretty shortly).
Hi Kate,
banks will most likely make their determination based on the use, but sometimes properties like this get through as residential if the lender doesn't order a full valuation. If it was vacant possession the lender would be able to accept it as a residential property if they discounted the cost of converting it back into a house. Unless you were wanting more than 80% it won't effect what you can get in terms of rate or lvr much anyway.
It's not rubbish, there used to be a few lenders that would except trust profit or loss in their servicing calculator rather than placing the rent and interest expense or debt. This was helpful because most lenders only include a portion of rent and benchmark up interest. There are far fewer lenders post GFC that do this, but most commercial lenders will allow loan proposals to be structured this way still.
Option 1 just doesn't make a lot of sense, there wouldn't be a cost difference, the problems are.
1. Why choose P&I this just sets a higher minimum repayment, if you choose IO you can still make principle reductions or achieve the same reduction in interest cost by using an offset.
2. You're maximizing the debt against your PPOR, while the risk might not be great why expose you most valuable asset, not to mention one that has a direct effect on your lifestyle.
3. There are greater far more barriers to drawing on equity than borrowing for a purchase
None of these probably matter that much for this purchase, but why set up a sub optimum loan structure when it is no more difficult and no more expensive (if anything it will be less expensive) by setting yourself up properly. You can also set yourself up to make future investments easier to fund.
Jamie's sample structure is spot on, the only thing I would add is you should have an offset account against one of the loans (which you should not put borrowed funds in) for you to bank out of and I would set the other loan up as a LOC and would place a limit on it which is greater than what you immediately need, this you could use to fund deposits for further property purchases or for alternative investments.
Hi David,
There are unlikely any taxation implications with however you structure your loans. I would suggest, however, that you should take out a loan for at least a large portion of the amount against the IP. You can get lower rates at lower LVR's with some lenders, so perhaps you don't want to go to the full 80%. There is no cost saving from taking one loan over two if you use the same lender by the way, for most lenders there aren't any valuation fees and if its a pro pack than you can have multiple accounts for the same annual fee with most lenders.
How you best structure this purchase probably has more to do with your longer term plans than just this property.
Regards
No problem Ben, There are quite a few things you need to consider. You tax position now is important, but also in the future. At the moment yields are relatively high compared to the cost of finance, so probably your property will be positively geared even if you max out the borrowing. As Terry mentioned you can access -ve gearing benefits by using a unit trust if this is not the case, but this does not have the flexibility of a discretionary trust and may be less tax effective in the future. If tax is a big issue for you, you should also consider the type of property you buy, newer commercial properties often have very attractive depreciation benefits for example.
You might also want to consider that if you buy on lower LVR you can potentially borrow without giving a guarantee.
Hi Ben, I would suggest you not do that. It is far easier to get a loan for a purchase than to access equity at a later date. You can always set up LOC's against the existing properties and pay the commercial loan down to $0 post settlement, there are plenty of loan options with free redraw. Commercial rates are not always more expensive anyway, you can get 4.99% for one year at the moment through one lender.
i wouldn't want o comment specifically on tax deductibility on a forum without knowing the specifics of the situation, but generally if the purpose of the debt is to purchase an investment then there shouldn't be a problem.
No, a loss is a loss. If you are moving a large amount of cash out of one currency into another that captial is at risk from exchange rate swings and they don't necessary go up and down over the long term, in this case i think it will simply be down for a very long time. Don't take this as meaning i don't think people should invest in Japan, I know little about its property market. But they should be aware of this risk on their initial capital when making a decision, as they should if contemplating investing anywhere overseas., it is an added layer of risk.
The problem is that once a Gov goes down the path of solving a debt problem with money printing it becomes a very slippery slope. I would have to agree that the Japanese people and institutions will probably better receive what their Government is in the process of doing to them, but this does not change the fact that the Yen is most probably going to dive in value and cost of living pressures will increase.
One of the effects of QE is the banking system lending a far higher portion of their funds to Government at the expense of businesses, this is happening in Australia too by the way. This is a problem as Governments tend not to be very good at allocating resources efficiently, and the only way to overcome inflation in this scenario is for large increases in efficiency.
How this will effect property prices I wouldn't know, their will be upward pressure from inflation but downward pressure in terms of affordability. I think the greatest risk for Australian investors is with the exchange rate.
What this article is saying is that Japan has a policy of defaulting on their debt by proxy by reducing the value of the currency in which the debt is denominated. It then goes on to say this is good because it will help exporters, but what about bond holders and people in Japan with savings, they are the victims.
In short, the Government has spent above its means and is now going to tax those who have supported it and those who have been responsible and not spent above their means, by inflating away the value of their Yen.
Hi Wendy,
You might find the below Youtube cartoon on Cross Collateralisation of interest, we created it for clients because most people do not understand why it is not a good thing.
