Loan type for buy/sell strategy

Gidday Nos1,

As I brace myself for the newbie flaming offer the following thoughts (new to this site, 22+ years in property).

There is no particular loan product that can be generally promoted as the ideal for either of these strategies.
 
However there are probably several needs that arise from your individual strategy, which leads to turning certain features on or off. This defines a loans structure.

Once you have the structure right, it rules in or rule out different loan and lender combinations. Then all you have to do is crunch the costs based on your view.

One general rule you can apply to a buy & sell is to factor in any Deferred Establishment Fees, Early Repayment Penalties (and whatever else the lenders like to call them) that are likely to kick in based on your view i.e. gear then sell within 2 years. That is unless you plan on rolling that debt to another asset – in whcih case, you need portability and should factor in the portability fee.

Another general rule should be to write down the value of offset features for investment based borrowings, because there is no tax advantage, so you are only reaping the spread (which, admittedly, has been getting fatter over the last 18 months).

Anyone who tries to tell you otherwise is a debt merchant trying to sell you some kind of loan.

I totally agree with Michael that lenders realise to cover their interest spread (Because they tell you there is no money to be made in lending it out at standard rate for such a short period of time) they will try and recoup profit by charging an early repayment fee or similar.

I work with many clients that buy and sell and there are still the odd lender that doesnt charge such an fee or where they do it is reduced toan acceptable level to make the deal viable.
Obviously as far as your mortgage broker is concerned anything he / she earnes in the way of a commission is clawed back normally in the first 18 months so for these clients we do it on a fee basis so that their is a win win for both parties.

The other consideration would be the entity you use to purchase the property in especially if you expect to be making a capital gain or trading profit. Structured planning in the early stages will make the end result more palatable.

 
I'm not sure i agree with any strategy that promotes spending a dollar to earn 50 cents. Unless the money that could be offsetting the interest bill is at work earning a return elsewhere, why pay more interest (and, therefore, reduce your yield) than you have to?

Hell, why not do *even better* and increase your deductions by offering to pay your lender a higher interest rate!

Gidday Yossarian,

I'm not promoting any strategy, especially one to lose money. You simply grabbed a snip out of context so I'll try to get it back into  context.

Your snip was from a clarification of an earlier post where I outlined a general rule to "write down the value of offset features for investment based borrowings" because you are only reaping the spread.

To those who are unfamiliar with the term spread, I am referring to the difference between your cost of money and the return on that money. Now remember, I said write down, not write off, which means I agree offset still has some value regardless of individual circumstance, but how much varies to the individual.

Any investor worth their salt has a loan structure that matches their needs well and delivers an effective rate in the range of 4.75% and 5% in current terms. There's a swag full of options that include offset, portability, top ups, etc in this range, so if you want them you can get them pretty easily at 5% or less.

My point is not to get tricked into paying more than you should, simply for the lure of offset. I make that point because new investors often don't understand the severe dilution of the offset value proposition when switching from personal borrowings to investment borrowings. This is evidenced somewhat by Nos1 asking for clarification on the point.

Now I know that some investors may have trouble scratching up a 4.75% return and for those, then an offset probably has a little more value.

However a kid working at Mc Donalds for minimum wage can get 4% (4.5% short) on deposits with any number of government guaranteed banks, building societies and credit unions. So you really have to wonder why investors can't pass the 4.75% yield mark across a balanced portfolio, or even a property biased portfolio in this day and age. I mean crikey, even the ASX200 is pulling close to 5%.

So Richard, if your clients aren't realising 4.75% yield, or have, as Yossarian put it 'offered to pay' the lender a higher interest rate, then yes, you are right. An offset on investment debt probably does make a little more sense for them.

For the record, RP Data has released current rental yield data this week and the top yielding suburbs around the country are: