- blueheeler wrote:Sorry if im confusing the subject but if the 20% deposit from Equity Finance Company is interest free then i see a great savings. This is not an expense it's a savings.
Look forward to your positive feedbackYou're not being charged the loan interest on that 20% but when it comes time to sell you're going to pay 40% of your capital gains to the lender (40% is the cut adelaide bank wants of any capital gains, according to some googling). That's what elka was illustrating a few posts back.
If you don't get any capital growth from your property then it essentially would be a free loan – you just pay back what they loaned. If your property increases in value by 100,000 then they get their principal plus 40,000
Using Elka's example of a $255k house, 20% is 51k. If i borrow on a "normal" loan, and picking an average interest rate of 9% over 15 years I would pay $84k of interest over that 15 years. Suppose instead of borrowing that 20% from a traditional lender i get a shared equity loan.
For the shared equity loan to work in my favour, 40% of my capital gains at the time i sell must be less than $84k – ie. in 15 years my property hasn't increased by more than $210k. If the property has increased by more than that then i would have been better off getting a normal loan rather than shared equity.
In Elka's case the property is now worth $920k. That's $455k more than the property would have been worth if it had only increased in value by $210k – the bank is getting 40% of that $455k! I'd rather keep that extra $182k (40% of 455k) in my pocket.
Someone pick me up if i've got my maths wrong here.
I do understand that but, ur using someone else's "money", not yours, someone elses . I cant see where you have lost out on this transaction, 60-40% ratio is pretty good.
Whats happening here is people are forgetting, from the start, the "money" wasn't yours to begin with. U have to be happy with a 60-40% "money" ratio?
Now! For u to benefit from this using their "money" you must, hold on to the property and capatilize on
"capital" and "exponential growth"…………if your plan is to invest in more properties,this is the key element. If u sell early then you maybe selling yourself short of the mark.Look forward to your positive feedback.
Sorry if im confusing the subject but if the 20% deposit from Equity Finance Company is interest free then i see a great savings. This is not an expense it's a savings.
My point is, as Else has explained above, that the cost will be very significant if the property has good growth. Just because the the cost doesn't come in monthly payments does not mean it is not material. This is all fairly pointless discussion, because the product is not available for investment, but if it was I don't think it would be a very effective weath creation tool.Products like this and the cashflow mortgage mask their real cost by offering a short term improvement in cashflow. I hope everyone on here has a good look at the real cost, or potential cost in the case of the equity mortgage, before using them.
blueheeler wrote:I do understand that but, ur using someone else's "money", not yours, someone elses . I cant see where you have lost out on this transaction, 60-40% ratio is pretty good.In the simplest possible terms, if I loan you $10 today and want it back in a week's time (next friday), would you rather:
a) pay me $1 every day until friday (total $7), and then repay my $10 on friday
or
b) pay me nothing until friday, then pay me $20.If you picked shared equity finance then you just lost $3.
Blue Heeler,
My earlier point related to the situation where you had a 20% deposit. Once again, this is all a moot point because the product is not available for investment, but nonetheless you suggested taking the equity mortgage product, putting the 20% deposit into an offset account so you are paying interest on 60% of your loan. Lets say the property grows by 10% pa, therefore you are giving away 4% pa on a loan for 20% of the property, effectively 20% interest. You may be not using the 20% in the offset account, but its tied up nonetheless. However way you want to spin it, its a 20/80 loan, not a 60/40 and you are being charged 40% of the capital growth. Not a good deal in my book.
Kind Regards,
Cameron Perry
Director
Perry Financial Strategies
Level 13, 30 Collins St
Melbourne VIC 3000
Ph (03) 9662 1999
Fax (03) 9662 2044
http://www.perryfinance.comI think it's pointless continuing on this discussion and thank your for your comments, appreciate that.
I think for the situation that was given earlier in the post, the 20% deposit loan wouldn't work in your favour. however, if you were to get the 20% deposit on multiple properties you would then expose yourself to a greater capital gain than if you were to buy a single property. Wouldn't that be a benificial way to use the deposit loan, even if it is only hyperthetical as you can't use it for investments.
TattsYeah, that's a great idea. That's why i was trying to explain capital and exponential growth, thanx for the comment
"I think for the situation that was given earlier in the post, the 20% deposit loan wouldn't work in your favour. however, if you were to get the 20% deposit on multiple properties you would then expose yourself to a greater capital gain than if you were to buy a single property. Wouldn't that be a benificial way to use the deposit loan, even if it is only hyperthetical as you can't use it for investments."
The only way it works out to be better is if there is no or very little capital growth, if you model this loan and assume a strong return (which I'm sure you would be looking for) you would lose out significantly. I would encourage anyone interested in this product to go over their numbers very carefully. There is a place for it in the market, but I would not class it as a great wealth creation tool.
Regards
Alistair
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