Forum Replies Created
Hi Fiona,
Some good words from Steven there – maybe some thoughts appeal to your current situation?My thoughts are that the current situation calls for caution – i.e. have a little bit spare cash in your back pocket, and don’t go stretching. Maybe for you, that means selling one to bolster others. You haven’t shared any numbers, so you would need to run your own numbers to determine “Which one?”
And maybe two? Steve himself was saying just a few weeks ago that now is a good time to consider selling any IPs that aren’t pulling their weight. How are yours doing? Do any have “future potential” – e.g. a reno, or development, to add equity? Are you planning to (as Steven mentioned) do some flips to create some spare cash? Or are you looking to sell one or two to enable a better purchase that will give you some reno possibilities, also with equity growth?
Are you neg gearing? Are you wanting to “Grow” out of it – i.e. become pos geared? Do you have income stability? What are your goals re investing?
Re “values not grown much in last 5 years”, I totally agree – but I think I see the green sprouts of growth appearing in Bne…. It is just a bad time from other perspectives, leading to a lag in better values, but I suspect they will be coming. Meanwhile, are you better off selling one or two, to enable you to buy a “worst house in best street” so you can add value yourself, thus allowing it to “build” your next deposit, rather than having to “save” it.
What do you think?
Benny
Hi Toby,
From my recollections of what others (particularly Terryw) have said, I think your accountant might not be right. But then, I am no adviser – so you must depend on others.Look for Terryw to pop up – and did you check out those links yet? I’m pretty sure Terry shared some really useful and “not well-known” info re CGT in those links.
Benny
Hi all,
A recent discussion re whether going from an IO loan to a PI loan would help serviceability led to some interesting learnings. From a Mortgage Broker(MB)’s perspective, it seems that a lender will only approve an IO loan by calculating it as though we were paying P&I (Principal and Interest) and at a higher rate (the Qualifying Rate). i.e. The lender needs to KNOW that you have the spare funds or income to cover the higher repayments of a P&I loan before the IO loan is given. All “as expected” – but wait, there’s more……First, go here – https://www.propertyinvesting.com/topic/5048770-will-moving-some-investment-loans-from-io-to-pi-reduce-serviceability/#post-5048803 – then read up and down from there to get context around the whole discussion.
You see, despite the words that said “your serviceability will improve by changing to PI”, I see there is a lot more hidden beneath those (no doubt true) words. The link summarises my thoughts. And to me, the big takeaway from the whole topic is to “Be very sure you KNOW what the new numbers will be BEFORE you go changing from IO to P&I” If you don’t, I suspect you may get a very rude awakening (and possibly even rock the foundations of your portfolio).
For me, “run the numbers” took on a whole new look after thinking that one through. Though the final outcome was nowhere near the 45% increase in cost that I had first thought it might be, it was still going to be a 26% increase (going from IO to PI) – which is still a substantial increase, and needs to be known before taking the leap.
Good luck,
BennyHi Tobyn,
First off, I am not an adviser, but I might be able to point you to one….. Your situation sounds a little complex, but those “in the know” can usually point us in the best direction. Perhaps one or two of them might pop in…..But for now, try this:-
https://www.propertyinvesting.com/topic/4410491-the-big-picture-for-new-readers-especially/page/2/#post-5006553If you check out that post, and look to the “PS” area, there are two links there that talk of situations that sound a lot like your own. Have a careful read in them to see if they shine some light on your situation. For me, two big learnings in those posts (from Terryw) were these:-
“Terry shows an example of two properties that have been lived in, thus both COULD be PPOR’s, but that the nomination of the PPOR occurs ON SALE of one of them (and not before).”
and
“Fed PPOR nomination and State PPOR (for Land Tax) are two separate nominations, and CAN be at odds with each other”. Wow !!
I can’t comment further Toby, but I hope that helps you to realise that there might be a better way for you if you chase down someone who knows this stuff backwards…. (look for Terryw perhaps, or someone with similar knowledge amongst your favourite advisers).
Benny
Thank you, gents.
With the extra help from you, I think I now “get” the whole picture. And, reading back, the first two replies said it all anyway – i.e. that even if you are paying IO currently, the initial borrowing was only granted because the lender deemed your total “free” income allowed you to make repayments even when you later change to a PI loan. And at the higher qualifying rate too (7%?) rather than the actual rate.Now, knowing that, it helps me to realise there would be other outcomes that could become pretty hairy based on that. e.g. Given my earlier point, that ACTUAL expenses increase markedly if changing to PI, all of a sudden a bunch of other thoughts hit me:-
1. We had better be VERY mindful of the need to revert to PI when “Sizing up” a potential purchase (like Steven said) as any change from IO payments to PI payments will increase our day-to-day costs out of sight. Our mortgage costs are likely to almost double if my earlier comments are anywhere near correct. (addendum – in earlier days it was simply “Oh, no worries… just refinance with another lender and get a fresh 5 years of IO” – that may not be so easy in this current climate! Ouch !!!)
2. The change such as Deepak is considering – going from IO to PI – WILL add hugely to his monthly outgoings, and hitting his cashflow hard. Does his current situation allow for this? Or was his earlier loans formulated at a time where things were far less restrictive? Could it be that Deepak might not have got such a loan based on today’s criteria? If that happens to be correct, then it would be worthwhile to sit in front of a Broker to get a clear picture BEFORE any changes are made.
3. If one WERE to go PI from IO, and still have sufficient capacity to pay the extra repayments, that’s great – but suddenly a previously positive cashflow will have taken a huge hit. Is the investor now depending on Negative Gearing tax advantages to offset some of that extra cost? If so, where are they at if we have a change of Govt next year and Neg Gearing goes away? Hmmm?
4. When “running the numbers”, do we allow for “future PI repayments” that can cruel our income after 5 years? Or have we been basing the numbers only on actual expenses here-and-now? Five years can come around quickly. Further to that, we must be VERY mindful to not over-commit to extra IP’s without having taken future “IO to PI changes” into account.
5. How much have things changed since you bought your IP’s? Were the loans taken out in a time of “easy loans”? How would you be if you had to refinance today – do you KNOW? Did you know that above extra data about the huge cost increases when going to PI from IO loans? How will your portfolio stack up under that bright light?
6. If you have been considering buying more, have you really thought the above through with respect to YOUR current IPs? Can you really afford to go again – or is discretion the better part of valour?
What this topic shows me is how MY lack of knowledge in that area could have been quite damaging. I guess that shows we must depend on professionals – and we should refer to them (more) regularly, and not just when we think they are needed !! This recent tightening of rules (APRA induced) will have laid traps for many who are already in heavily mortgaged situations but who aren’t yet aware of all those points above.
What’s the time then?
Time to take a long hard look at our own scenarios with some of the above uppermost in mind. And maybe time to sit down in front of our favourite adviser.
Thanks to all who have contributed thus far, and I look forward to more input on this thought-provoking scenario,
Benny
Hi Terryw,
Well, I didn’t know the following – suddenly what you say makes sense.Yes the cash flow consequences would be entirely different, but here we were discussing serviceability. The lenders will treat any IO loan as if it was a PI loan.
So, if a lender treats either loan similarly from a serviceability perspective, then that changes lots of things. Does that mean they DON’T look at actual cashflow, but treat both loans as if their mortgage cost is identical? Seems weird to me – it seems there is a very definite meaning of “serviceability” that the average layperson is unaware of. I suspect Deepak might have thought along the same lines that I did.
Anyway, thanks for the “behind the scenes” look at things. Would you humour me a little more, please, by outlining what effect the “cashflow consequences” might be in a case where one goes from IO to PI? If it doesn’t affect serviceability, where does it “show up”?
Surely such a huge jump in an investor’s outlays must have an adverse effect on their ability to refinance…. or show up in some way.
Thanks,
BennyHi Terry,
I see what you mean, where a shorter term is increased to a longer one. But I think we are walking up different roads here nonetheless…. The point I was aiming at is that a PI loan REPAYS the total over a defined period. True? Now, if it 20 years, your repayments must be larger, or less if a longer term loan (30 years).But while Interest Rates are SO LOW today, the principal repayments now make up a WAY BIGGER portion of a mortgage repayment than they used to. e.g. 20 years ago, a $200k loan taken over 30 years is repaid at 3.3% pa (so, Principal repayments averaged out to $6,666 per annum, while Interest back then might have been at 9% – so Interest was $18,000 per annum). Interest is near 75% of the mortgage payments, and principal repayment only 25%.
TODAY, it has all changed surely (???) Let’s say a $500k loan over 30 years must be repaid at $16,667 per annum but Interest is currently only 4.5%, so Interest paid is $22,500. Near enough?
This must surely mean that Principal repayments are now taking up nearly 45% of the repayment amount (coming close to doubling the payment that IO alone would be). Doesn’t this mean then, that any change from IO to PI must come with a whopping lift in repayments, thus affecting serviceability?
It is that huge shift in amounts (Interest Only vs P&I) that is having me thinking IO must surely be cheaper. As you say, making a shorter term loan into a longer term one WILL have a positive effect on serviceability – but will it make up for that huge jump (going from 25% to 45% of total repayments?)
Anyway – I’m not a MB, and you are, so I am likely missing something else. I hope you can help to clear my mind re what I have shown above – am I missing something there?
Regards,
BennyHi Deepak,
The loan amount must have a bearing too – e.g. if you changed a 30 year IO loan for $800k over to P&I, the payback of the $800k must be taken into account. It would increase repayments by an average of $2200 a month. But if the loan was just $300k, then less than $850 a month is added to IO payments.Also, what interest rate difference would be needed to offset this increase in repayments? If the loan interest rates were to reduce by 3.3% or more, then it would make going to P&I monetarily worthwhile. Is that possible? The 3.3% comes from this being a 30year term. (30yrs x 3.3% = 100% = you have paid it off)
So, based on that, I am struggling to see how it can make your serviceability better by going P&I no matter what size loan – as I doubt the P&I rates are going to be 3.3% less than IO rates. Of course, there can be other reasons to go P&I – but to my mind, serviceability wouldn’t be one of them.
Benny
GST was meant to signal the end of Land Taxes and Stamp Duties, wasn’t it? Would’ve been good !!!
Oh, and do check on Land Tax in YOUR State if you are considering buying an IP in a Trust. Qld at least has a different algorithm for a Trust-owner – and it hurts big-time!!
Benny
Hi Bec,
Ideally I’d love to learn how to be my own mortgage broker. Is that possible?
I’m sure it would be possible, but that would happen better if you were dealing with someone who has a wide knowledge of Broking in the first place. Terry, Richard, Ethan, Jamie and George have all shown they know the “ins and outs” of broking to a very detailed degree. Surely these are the people to learn from…. The thing is to find someone who exhibits this knowledge, and who seems to “speak your language”, meet with them, do a deal or two with them, and along the way, discuss with them all of your concerns and short-comings of knowledge.
If you have deals that are a little out of the ordinary, learn from them how to handle these things even as they earn their commissions. Call the commissions your “education fee” (that you don’t even pay usually). Discuss with them how they got started, and even ask what they would suggest for you if you wanted to “go direct”. I am sure you could do it, but how much would you be risking by going direct without first learning from those who know?
One of my fave mantras is “If you think education is expensive, try ignorance!!” :)
Good luck with your journey,Benny
Hi Terry,
borrow against your existing house at the same bank for the deposit and costs. Make sure this is done via a separate loan.
Then borrow 80% secured on the new property, ideally at a separate bank.
Result = 105% loan without cross collateralising securities giving maximum asset protection and deductibility of interest.
That works well if Tom were buying an investment property – but he’s not:-
I own an investment property worth 600k with a 120k mortgage and am looking to buy a house to live In (about 550k).
I know that will change your suggestions for him – I’m also interested to see whether there are some neat ways to do that (i.e. buy a fresh “own home” using equity from an IP).
Benny
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Benny. Reason: Adding a quote
Hi Molly,
With a few of the “numbers”, some thoughts become a little clearer. I am guessing that the first two properties have some mortgages and I’ve assumed 80% LVR. If anywhere near correct, then that tells me that Tannum Sands is the one causing the most bleeding. Your current portfolio up there must be costing you plenty each week. Even if your mortgages are IO, your Gross is still short a few dollars a week – and other costs (Ins, RE fees, maintenance, etc) haven’t even been factored in.As such, here are a few thoughts based on the little I know so far:-
1. Gladstone’s growth is looking shakey – thus you probably wouldn’t want to “hold” these for Capital Growth.
2. The returns are poor too, so unless you can find an option that returns a higher rent, you probably wouldn’t want to keep them for Income either (except maybe Clinton). Thinking of Incomes though, can they be increased in any way? e.g. airbnb-style letting, or finding a local business that has people “coming and going” and they need local accommodation other than expensive hotels?
3. Because of (assumed) mortgages, if you sold one you might need to sell Clinton as well, to have its equity pay off the other’s loss. That would then leave you just one negative geared property up there, and help with your DSR calulations when looking to any future IPs.
4. From what I hear, Perth might have “bottomed out” – although I believe we never know “bottom” until it has already passed. Thinking though that future Growth is more likely to come from Perth than Glastone, look at buying something far better in Perth once you have your DSR sorted once more.
5. Without more accurate numbers, I can’t add much more except that general viewpoint (above). Main thing is to work out what the numbers tell you. How much better will your position be once you have quit one or two of the Gladstone IPs (or even all three)?
6. As I mentioned earlier, taking a loss ahead of any Capital Gain helps to lower CGT from other sales, and losses can be “carried over” to be offset against gains in future years too (I think that is all correct, but do get proper advice).
7. Though taking a loss is never good, doing so earlier (or sooner) might be preferential to having a poor investment drag on for years, making the Banks rich while you struggle. Maybe, like they say in the sharemarket, “Cut your losses and let your winners run”. I do realise that even taking a loss can temporarily set you back – and some can’t even afford to sell (but that is not you, thanks to Clinton).Molly, do take this in the spirit in which it is given – i.e. NOT as advice, but as a collection of thoughts that might help you to focus on other possible options to help you out of a bad investment or two.
Benny
Hi Molly,
Ouch !! I would be interested to hear thoughts from others too. Meanwhile, can I encourage you to add a bit more info (vague if you like, but as near factual as possible) so that the bigger picture comes into view.e.g. are you renting 4 properties currently, for what rents, vs what mortgages, and what are estimated values. There might be some goodness in selling one Gladstone property (even at a loss) to “stem the bleeding” – and that would give you an advantage when you later sell a profitable property. I have always heard “Take your losses first – they can be carried forward to offset future Capital Gains” – but check that comment with your adviser in case things have changed, or in case your structure needs a different path taken.
Let’s see what others have to say,
BennyHi Bec,
It may be you have come across this already, but if not, I didn’t want you to miss it, as the post linked below guides you to other threads that get into “What does and doesn’t work with x-coll!”Benny
Hi Valluvan,
As Terry has indicated, there are MANY more things to consider before making a call one way or another. As just one more example to think about, I could argue that living in your newly-built PPOR for 2 years, then SELLING it, might turn out to be a far better option than keeping it as an IP. But you would need to confirm that first with your favourite adviser, as my example may not work for you and your situation.So, if you speak with your adviser, and they take you through the benefits of “Selling after 2 years” as opposed to renting it out, then the subject of “Whose name to buy it in” could change markedly too, depending on which path you choose to take.
In short, you need to know just which way you are planning to act in the future BEFORE making decisions NOW. If you change your course of action halfway through, that could lead to massive extra expense (just because you changed your mind). Far better to KNOW in advance which way is best – and that means having ALL questions answered before you make your first move.
It would be awful to find you have bought in the wrong entity, costing you heaps in CGT in years to come, just because you weren’t sure which way was best when you first started out. I hope that gives you pause…. I’d hate to see you jump in when you haven’t yet fully learned what you are jumping into. As Terry said, go get some legal advice, along with any other education on the subject you deem necessary.
Benny
“If you think education is expensive, try ignorance!”
Hi MM,
Wow. I’ve been out of it awhile, so my “numbers” might be a little out-of-date – but that quote just blew my mind !! My first thought would be to get two more quotes (at least) and have them itemise the expenses – i.e. If they are not providing the DA part, where does all of the expense come from? Are there major earthworks to be done? ‘Cos if not, I’d think that first quote you mentioned is likely to be providing his Bali holiday later this year !!Benny
Hi Kengw,
Good for you for having a plan. That alone is a very good start.i’ve made every assumption along the way very conservative
1. I agree it is very conservative.
2. Your PPOR may not be quite as flexible as other IPs, so would its $3m be as accessible for investment as the others? Of course, you might downgrade to something smaller and have the extra to invest…..
3. Will a $450k purchase next year be achievable? That depends on where you are, and where/what you are buying. Maybe not in Mel or Syd? Or will they drop in value to meet your projection?
4. Assumption is that lending parameters will be flexible enough to allow you to buy as projected.
5. You’ve calculated this as though you are not paying down any debt on each property. Very conservative, or were you looking at neutrally geared (or -ve geared) properties?
6. Huge economic disasters aside, it sounds eminently “do-able”. Just don’t try to run before you can walk. Cashflow is King.
7. You sound like your head is screwed on well – make it even more secure by continuing to educate yourself – then go, go, GO !!!I predict you could blow this away in real terms once you have learned how….
Well done,
BennyHmm, my lack of knowledge of Units is showing – I only ever did buy houses.
Anyway, Kengw, the other thing that I recall the Body Corp might be doing is imposing a “Special Levy”. That might be another name for Sinking Fund – or it might be they don’t use the term sinking fund at all, but they might instead have a Special Levy that all owners must pay. Whatever it is called, these are all costs to you if you buy into a deal like that. Be sure you are aware of ALL such costs (no matter what they are called) before going to contract.
Benny
Hi Kengw,
First points to me would be these:-
1. Many lenders won’t offer finance on “tiny units” – and for those that do, they might only offer 60% as a mortgage. Would you have a spare $80k to cover Dep/Costs?
2. “What are your Body Corp costs for this place?” These could be a large outlay monthly – might include large Sinking Fund payments that could cruel any profits. Check with the Body Corp before you offer.
3. Gross return is just short of 10% – not bad, but once you take the above into account (along with the other “usual suspects”), what is your return then?
4. Though a smaller mortgage (thus smaller Interest costs), your money invested (Deposit) is now “stuck there” until you sell. So be very sure of your exit before you enter !!As you mentioned, the Opportunity Cost could factor heavily with this one.
Benny
Hi Dave,
If the sellers can’t see a good deal when it is presented, I’m wondering if you simply need to pay full price.However, if you don’t mind “playing games” and are wanting to twist a few arms, you might wish to put a sunset clause into each offer. That clause might simply state that they “Have 72 hours in which to accept (or start negotiations) after which the offer will be void.”
To ramp it up a little, maybe offer a price that, after 72 hours will DECREASE by $10,000 for each day that passes until another date 14 days into the future. The idea being to “get their attention early” and have them take notice !!!
What do you think?
Benny
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