Forum Replies Created
Hwd007
Ok @ 80% you can borrow $10,000. You can use this to pay for 20% plus costs. Therefore, purchase $40,000 of property (or $42,000 including costs).
@85% you can borrow $45,000. You can use this to pay for 20% plus costs. Therefore, purchase $180,000 of property (or $189,000 including costs). (financing new purchase at 85% as well)
@90% you can borrow $80,000. You can use this to pay for 20% plus costs. Therefore, purchase $533,000 of property (or $560,000 including costs). (financing new purchase at 90% as well)
I hope that helps.
Cheers
Stu
Property & Finance News
at http://www.prosolution.com.auI get NII students ringing me up now and then asking questions about finance (mezzanine and the like). Often they are very misinformed. I really feel sorry for these people. They have been taken advantage of and it is likely the misinformation will do more harm than good. Furthermore they don’t even know they have been taken advantage of.
I’m sure you get this as well Terry.
I look forward to the day that the law catches up with HK and NII.
Cheers
Stu
Property & Finance News
at http://www.prosolution.com.auHi Everyone
Just to let you know – Watch out for my article on Unlimited Finance. It will be published in Oct/Nov Australian Property Investor magazine (released early Oct).
I hope it answers everyone’s questions.
Cheers
Stu
Property & Finance News
at http://www.prosolution.com.auHi ArchiZEN
A couple of comments for you to consider:
1. Consider not using a line of credit. Offset or basic loans generally let you do that same things at a lower cost. Many people think they need a line of credit but they don’t.
2. Consider using another lender. CBA does not discount its line of credit as much as other banks. E.g. ANZ’s line of credit is 5.97% if over $250,000 (but is based on each separate account). Speak to your broker about this.
Hope that helps.
Cheers
Stu
Property & Finance News
at http://www.prosolution.com.auWhat you are talking about is referred to as ‘capitalising interest’.
Generally, you can capitalise interest only on line of credit product (but not all banks allow this). However, you are not entitled to a tax deduction for the interest charged on capitalised interest (e.g. interest on the additional $50,000 p.a.). This is the subject of an action in the Court of Appeal. The plaintiff being the lovely ATO! They are appealing a decision handed down by the Federal Court of Australia in Hart v Commissioner of Taxation [2001 ] FCA 1547 (2 November 2001). If you want more information then perhaps do a search on the web.
If the ATO wins then there will be legal support for denying deductions. If they lose then I would consider it highly likely that the Government would legislate that deductions are not allowable. Either way the government has too much money to lose and I don’t think they will allow people to enter into these kinds of arrangements.
The case is a bit complex and I think one of the reasons that the Hart’s won is because the loan documents stipulated that they could not repay monies into the investment account. This is quite distinct from electing to capitalise the interest. Maybe something to watch out for.
BUT please seek professional tax advice on this.
Cheers
Stu
Property & Finance News
at http://www.prosolution.com.auThanks Richmond. I hate my name misspelt as well.
By the way, an introduction would be more than appreciated.
Cheers
Stu
Property & Finance News
at http://www.prosolution.com.auMarty – no money offered on my part. It doesn’t appeal to everyone. For example, one high profile business person very happy and another not so obliging.
If you respect and admire the person then why not go and speak to them (and learn from them)? Some people on my list are Steve Vizard (but not responsive), Eddie Maguire, etc.
They were all starting out once…
Cheers
Stu
Property & Finance News
at http://www.prosolution.com.auHi Peter
Millionaires… this forum, read the papers and get names from there, ask around. If you look hard enough you’ll find one. It might take a couple of goes. The first one you contact might not be the right one.
Where to look. If you know the principal then you should know how to spot an undervalued area. Search the Internet (www.realestate.com.au, http://www.domain.com.au, etc). Talk to agents. Go to seminars. Use the forum.
Do a search on the forum for recommended books – there has been a couple of threads on this.
Subscribe to API (www.apimagazine.com.au).
I hope that helps.
Cheers
Stu
Property & Finance News
at http://www.prosolution.com.auMy best advice is find a mentor. Someone that you can bounce ideas off. Someone that is already a millionaire (anything less is not good enough). Pick someone out and get in contact with him or her. You will be surprised how willing some people are to help new starters.
I have done the same with my business. Called up a high profile and successful business owner. Was happy to meet with me and answer my questions. This is invaluable.
But don’t take advantage of the relationship. It is not a substitute for your own research and thinking.
Having a mentor is probably the single biggest thing you can do to reduce your overall risk.
Don’t be too afraid of making mistakes. He who learns makes mistakes… he who doesn’t learn doesn’t make mistakes.
Good luck.
Cheers
Stu
Property & Finance News
at http://www.prosolution.com.au1) Can’t help with this one.
2) The CGT event occurred when you sold the properties and crystallised the profit. It is at this time when you have incurred the tax liability.
3) Yes, I agree do some research to make yourself more comfortable. If you are investing for the long term then timing is of less importance. Remember any change in the market creates opportunities (doesn’t matter if its moving up or down). Plus there may be sectors in the property market that may offer better opportunities than others. Just keep an open mind and I’m sure opportunities will present themselves.
Re: selling Melbourne properties – does matter now… they are sold! Just look to the future. Make sure you have a plan. Set objectives, etc. As it is often said… “He who aims at nothing almost certainly achieves it with unremarkable accuracy”…
Most of all – use this forum. It’s a great resource.
I wish you the best of luck.
Cheers
Stu
Property & Finance News
at http://www.prosolution.com.auYes – if you positive gear you can have unlimited borrowing capacity… if your yield is over 11%!
Yes – purchasing under fair market value = unlimited borrowing capacity. Very hard to lend against value. Bank normally take contract price. You would also need to consistently purchase at least 25% fair market value… good luck.
DO NOT put everything up for security.
Archizen,
Yes, you do need to secure the line of credit with your home. You then pay 20% plus costs from this and take out a separate loan for 80% secured only by the investment property. If you sell it then make sure the loan has portability (i.e. you can substitute the security). Or you just refinance the loan when you move.
Cheers
Stu
Property & Finance News
at http://www.prosolution.com.auI agree with Harold in part.
– You don’t need a line of credit.
– Negotiate on fees but also pay just as much (if not more) attention to the interest rate. Lenders may also discount interest rates.
– No cannot have a fixed rate line of credit (only variable)Cheers
Stu
Property & Finance News
at http://www.prosolution.com.auWhat you want to do is find a loan with the lowest ongoing cost. If you can avoid break fees then that’s good also.
The MACU product will NOT give you the lowest ongoing cost. The comparison rate is 6.46%.
The ANZ Money Saver is getting better. Its comparison rate is 6.13%
How about something like Heritage Building Society Value Plus loan (www.heritageonline.com.au). It’s comparison rate is 6.00%. You can only repay P&I with this loan (no interest only). But all I’m illustrating is I recommend people talk to a broker because they can compare a lot more loans/products with industry knowledge.
I’m not sure how Cannex rates their loans – but I disagree with them.
Now before anyone asks “what is a comparison rate?… here is an extract from our next newsletter
==============================
“On 1 July 2003, it became law for lenders and mortgage brokers to advertise and disclose Comparison Rates to borrowers. So what are they?
A Comparison Rate should represent the total cost of a mortgage product. It is to take into account all ascertainable costs (including the interest rate) at the time of taking out the loan. This cost is then to be reflected in an annual percentage rate (or Comparison Rate). A Comparison Rate schedule is to accompany the application form for residential mortgage products. Comparison Rates are also required to be displayed (or advertised) where any interest rate is displayed. This legislation does not apply for investment or business purpose loans.
This legislation was introduced to assist consumers in comparing loan products. It is particularly useful when comparing a honeymoon product with a normal variable loan. In fact, this legislation will probably result in the death of honeymoon interest rate products (because they revert to a higher rate after the honeymoon period and this is reflected in the Comparison Rate).”
===================================
I hope this helps.
Cheers
Stu
Property & Finance News
at http://www.prosolution.com.auThe only 110% loan that I know of is offered by Liberty. Conditions that must be fulfilled are:
1. 3 years in the same job.
2. Clear credit.
3. Income must be $60,000+.
4. Owner occupied ONLY
5. Metro capacity cities only.Interest rates are around 9.5%. Borrowers have to make accelerated repayments for the first 2 – 3 years to reduce the LVR.
I’m sure that there are other private lenders that do these as well (but I don’t have any relationships in this area).
Cheers
Stu
Property & Finance News
at http://www.prosolution.com.auMost variable rate interest only loans allow principal repayments. Some products specify a minimum payment (e.g. minimum principal repayment of $1,000). Best to check with the lender/broker/loan documents.
I often recommend investors to elect to repay interest only even though they may want to repay P&I. This way they can make regular P&I repayments but if cash flow gets tight they can always reduce the minimum repayments to as low as interest only.
Cheers
Stu
Property & Finance News
at http://www.prosolution.com.auI would NEVER use a financial planner for tax advice! I would only use a CA or CPA (accountant).
Just my advice.
CFP’s (financial planners) only do one subject/topic of study on tax – not enough education.
Cheers
Stu
Property & Finance News
at http://www.prosolution.com.auThe ENJOLady – don’t think he can do this – would trigger CGT event.
Cheers
Stu
Property & Finance News
at http://www.prosolution.com.auA trustee (which can be a corporate trustee – i.e. a company) normally holds the assets in trust for (ITF) the trust. The trust is still the owner.
This is not really going to help you at the moment. However, if you decided to establish a trust you could have your company act as trustee for furture investments.
Re: accessing equity – BDM is correct. The company would borrow more (subject to serviceability).
Cheers
Stu
Property & Finance News
at http://www.prosolution.com.auOne downside is that companies are not eligible for the 50% CGT exemption. This is only available to individuals and trusts. (I.e. individuals and trusts are only taxed on 50% of the taxable capital gain)
What can you do? Not much. It’s likely that you will trigger a CGT event if you move it outside of the company.
Will it affect you? No. Only if you sell.
Cheers
Stu
Property & Finance News
at http://www.prosolution.com.auFrom Steve’s last newletter:
=====================================
Which Loan Is Best For Me – Principal and Interest or Interest Only?
An issue investors must continually re-examine is trying to decide the best way to set up their finances. For example, you need to think about:What percentage loan-to-valuation ratio (LVR) do you seek?
Do you go for a principal and interest or interest only loan?
How long should your loan be? and
Do you ask for a variable or fixed interest rate?
I’m going to discuss these four issues over the coming months, starting now with the issue whether to seek a principal and interest, or interest-only loan.
Let’s start from scratch and explain a definition for each:
A principal and interest (P&I) loan is one where each repayment is the combined sum of the appropriate interest plus a portion of the original loan amount. The amount of each repayment is calculated as a present value, which is a statistical term where the only way to easily work it out is by using a financial calculator.
On the other hand, an interest-only (IO) loan means that your repayments are simply 100% interest and no principal, which of course means that your loan always stays at the same amount.
Applying these definitions provides two essential differences between P&I and IO loans. These are:
The loan balance at the end of a P&I loan should be less than the loan balance at the beginning. Furthermore, unless there is a loan residual (ie. a balance left at the end of the loan), the amount remaining at the conclusion of the loan should be zero.
Because P&I loans contain a principal component, the repayments should be slightly higher than the IO alternative… well, at least at the beginning of the loan that is.
Let’s look at an example to flesh out the concept.
Bette buys an investment property for $150,000. She has arranged finance at 90% LVR and is given the following choice:
Interest-only loan at a variable interest rate of 6.5% for a term of 10 years. The weekly repayment would be $168.75. The loan after ten years would be $150,000.
Principal and interest loan at a variable interest rate of 6.5% for a term of 10 years. The repayment would be $209.92 per week and the residual or amount owing at the end of ten years would be $104,551.38.
Principal and interest loan at a variable interest rate of 6.5% for a term of 25 years. The repayment would be $209.92 per week and the residual would be $0.
Which loan should Bette choose? The answer is whichever loan brings her closer to her investing goal in the least amount of time within the context of weighing up the risks vs. the rewards.
The interest-only loan has the lowest repayments, yet the debt balance does not reduce. The principal and interest loan repayment is higher, yet the balance owing progressively reduces.
P&I Loans
With the exception of commercial loans (for reasons outlined below), all my loans are on a P&I basis. This is a deliberate choice, because I want to reduce my debt. This in turn has the effect of mitigating my exposure to a rise in interest rates.
Of course, when debt goes down so too does my interest payments, which then increases my cashflow in the long-term.
Perhaps the biggest risen for the choice of adopting principal and interest loans is the teachings of my Grandfather, considered a wise man by many, who said “no-one ever went broke because they owed too little.”
I firmly believe that recycling debt, as opposed to repaying debt, places the investor in dangerous and uncertain waters unless an allowance is made to repay debt at a later date.
Interest-Only Loans
There are some circumstances when it’s perfectly appropriate to select an interest-only loan. An immediate example that comes to mind is one of our commercial properties. The bank would only provide a ten year loan term and gave us the option of either interest-only or P&I.
If we had of chosen P&I then our loan repayments over ten years (on the basis of a zero residual) would have made turned our monthly cashflow from positive to negative because of the substantial principal component.
Instead, what we have done is to allocate or quarantine a potion of our cashflow to repaying debt, but just held this cash in a mortgage offset account rather than applying it against the loan. By doing this we arrive at the same outcome (ie. debt reduction), but just from a different angle.
Knowing Which One To Choose?
A common theme that you’ll see reappearing over the next few newsletters is that you need to let the circumstances of your deal dictate the way you structure your loan within the context of your risk profile and long-term goal.
Just watch out for the mistake of borrowing money and not having a structured plan for repaying it. Where possible I’d advocate that a P&I loan be used in preference to an IO loan since the quicker you repay your borrowings, the less risk you have when interest rates rise and also the higher your cashflow will become as you pay lower and lower interest.
========================================Fixed rates:
– History tells us you are financially worse off by fixing your rate.
– You may have to pay break costs if you want to increase your loan during the fixed period.
– Limited extra repayments on fixed rate.
– May not have access to redraw in fixed rate.Variable rates are far more flexible.
Cheers
Stu
Property & Finance News
at http://www.prosolution.com.au
