I noticed that when I applied for a LOC the other day,they asked what the funds were going to be used for.They also wanted me to sign a peice of paper to state it was going to be used for investment purposes..
I wonder if they would allow ANY of the LOC to be used for personal use and also whether they consider capatilising interest as 'investment purpose'
Anybody know?
Lenders would not like to hear that you will be borrowing to pay interest. They probably wouldn't like to hear you will be using the money for personal use either – such as a holiday etc. Once you spend it it is gone. Whereas if you were to buy shares you would be increasing your net worth.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Terryw wrote:Lenders would not like to hear that you will be borrowing to pay interest. They probably wouldn't like to hear you will be using the money for personal use either – such as a holiday etc. Once you spend it it is gone. Whereas if you were to buy shares you would be increasing your net worth.I wonder if they would think this about 100% of the LOC because in the not to distant past,banks were actually advertising on TV about using equity to buys, cars,holidays ect ect. I'm sure we all remember the ads. Obviously things are changing at the moment but I wonder to what extent.
Shane
Things have changed to a huge extent.
Most lenders will not even give you a LOC, with undrawn equity. You can purchase something and have the LOC as a product, but not generally get a LOC with more than $10,000 undrawn.
Remember you will only get one crack at it, so be careful.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
I am considering LOE as a genuine option for a least a couple of years whilst I contemplate a career change or full time property investing and development.
In my case after liquidating Investments I will have
PPR value $1600K
Debt of $1000K, but offset with separate account of $900K. So only paying interest on $100K (plus any LOE future drawings.) Hence I can draw out of this account as I wish up the $900K – before I need to even talk to the bank.If my PPR grows at 5% PA, and I draw 80% of the equity growth each year, pay the interest cost each year, I can enjoy about
$55K per annum after paying the interest (say 8%). If property grows at 7%- I can enjoy about $80K.So provided I never take more than the Capital Growth, my equity still increases. In good growth years I can comfortably take more, and in bad- less.
Not a strategy for long term retirement, but defintely an option for 4-6 years whilst I add nuetral or positive properties to the portfolio. I can choose to work a regular job to supplement if I wish.
The magic of excel will keep all factors in check and monitor the growing debt, and equity. The key for my situation is not having to rely on the bank to give me a line of credit for many years due to the offset facility
LOC'S (cash out) and Capitalising interest are done presently and very well.
Terryw wrote:If you just pulled money out of a LOC the interest wounldn't be deductible. So after many years you would end up with a very large loan with none of the interest deductible.I have been thinking about something slightly different.
very roughly (haven't thought this thru properly yet):
what you could do is pull out some equity and invest in shares with high yielding dividends. Maybe even margin loan with a low LVR and then capitalise the interest while living on the dividends.
eg. you have $1,000,000 in equity in the form of a LOC.
1. You take out $50,000 pa to live on. The interest on $50k would be about $3,000. So you get $47,000 to live on.or
2. you take $500,000 worth of shares. get a 30% margin loan and buy another $200,000. so total shares worth $700,000.
Interest is $30,000 on the LOC and $16,000 on the margin loan (assume 8%) = $46,000. You don't pay this interest, but let both loans capitalise.This interest should be totally deductible.Your $700,000 in shares return 7% = $49,000 (high returns because of high yielding shares with franking credits) .
But your interest is deductible so your taxable income is $3,000 and no taxpayble.Your shares grow at say 5% = $35,000 increase in year 1.
Maybe the figures could be improved by borrowing $700,000 from the LOC initially.
I am trying to get to the point where all interest is deductible and you just live on dividends or maybe even rent or a combination.
Hi,
In another forum that I have visited, there are already a number of investors who have utilised this approach of drawing equity from property to invest in shares / start-up businesses to provide additional cashflow for further investing or lifestyle.
The trick is to spend enough time learning about share trading / investing or starting up businesses to the same high level of proficient as one is already in property investing.
Those who succeeded started out in property to accumulate significant wealth before diversifying into shares / businesses for cashflow, the latter is ultimately is the key to financial freedom. Tightening bank criteria limits the LOE approach to funding lifestyle, and the tax-deduction / non-tax deduction affair gets pretty messy as well.
This is based on what I have read up so far.
Cheers
Daniel Lee
Wow this is a huge thread, it is almost not even worth posting.
I am about to buy a property with $0 down (a vendor finance deal), and subdivide it and sell the land. Then live off the proceeds from the land a keep the property. Technically this is not living off equity, but it is a good way to draw out cash to live off while still building your investment portfolio.
Ryan
Ryan McLean | On Property
http://onproperty.com.au
Email MeQlds007 wrote:Sure whatever.Personally i have my portfolio structured that i can live of the rents for the rest of my live and have no need to ever draw on the equity. With a LVR now at 13% over 30+ properties i expect to have the entire debt paid off in 18 months.
Everyone to their own i guess but LOE is not for me.
As time goes by i will merely start to sell off a property here and there and roll the funds into my SMSF.
Hi Richard,
i have just started in the investing game but would love to know your secret. we have 2 properties so far and would love to have a 10- 15 yr plan with retirement at the end.
any advice would be appreciatedlinda Cliffe
Hi Linda
A combination of equity structures and debt recyling in the mid term is the way to go forward.
I assume neither if your current IP's are cross collateralised as if so this could stop you in your tracks quicker than you think.
Takes time admitedly but can be done.
Richard Taylor | Australia's leading private lender
Qlds007 wrote:Hi LindaA combination of equity structures and debt recyling in the mid term is the way to go forward.
I assume neither if your current IP's are cross collateralised as if so this could stop you in your tracks quicker than you think.
Takes time admitedly but can be done.
yep thast right. they are 2 stand alone loans.
Qlds007 wrote:Sure whatever.Personally i have my portfolio structured that i can live of the rents for the rest of my live and have no need to ever draw on the equity. With a LVR now at 13% over 30+ properties i expect to have the entire debt paid off in 18 months.
Everyone to their own i guess but LOE is not for me.
As time goes by i will merely start to sell off a property here and there and roll the funds into my SMSF.
I think we all hope to get here Richard, I know I do. A few people are saying that the original posters theory depends on continued capital growth but isn't that how you got where you are Richard? Your properties would not have been worth as much 10 years ago and your rents would have been alot lower. But because of the capital growth of your properties your rents have increased and increased your CF. I think the original poster is just accessing his wealth earlier in his wealth cycle than you are Richard and because of this he will need to draw into the equity rather than drawing into the CF. I know it doesn't seem like "drawing into the CF" because it is cash and you don't draw back but realistically every one of those dollars could go into another IP and be creating more wealth. There really is no difference between LOE or LOCF except that with LOE you are moving closer to the line of creating more debt than wealth.
Paddy
Dont entirely agree with your anology
There really is no difference between LOE or LOCF except that with LOE you are moving closer to the line of creating more debt than wealth.
I think there is a big difference.
With LOCF your rents exceed your interest repayment, rates, insurance and all other imaginable costs and still add to the bottom line of income yet with LOE you are merely bring forward the day you run out of equity and are back to square 1.
For me i would never take the LOE position unless i had actuarily calculated the amount of debt i was going to draw over my life expectancy and assuming i could still somehow access the equity by borrowing when i dont have an income.
There is no point in giving up work at aged 40 drawing on your equity, then at 50 having to go back to work to support the interest on the debt that has now increased and you have nothing left to draw. You start selling off property to pay down debt that is increasing at an alarming rate.
Richard Taylor | Australia's leading private lender
It makes sense in my head, I'll try and explain.
Your wealth (Just in terms of property) = Equity + Cash (+ Debtors but we don't need to complicate it with them).
Now lets assume I have 2mil in property 1mil equity and CF of 100k pa. (Actual figures dont matter just an eg)
Also ignoring CG on the PI and Int earned on cash for now.Day 0 I have 1mil equity, Total Wealth = 1 000 000
Day 28 I have 1mil equity, with $7692 Cash, Total Wealth = 1 007 692
Day 365 I have 1mil equity, with $100k Cash, Total Wealth = 1 100 000Now If I am living off purely the CF then there is almost zero possibility of running into Neg Equi or CF because I should always have that 1mil equity or more as time goes on. However by using that CF on living expenses you are still spending your total wealth.
This 100k could have gone into another property and then be looked at as equity. Cash is merely unrealized equity. So by spending only the Cash Flow you will be safe into retirement but at the same time you are realistically still living off your equity, just unrealized equity. By Drawing into that 1mil you have saved up there is then less and less buffer zone to counter market swings IR rises etc but as I said, no difference between drawing into LOE or LOCF except that you have a more guaranteed risk management if you only ever LOCF.
Hope this makes more sense
Hi everyone.I am the origonal poster of this topic question and have been watching with interest all the different opinions.
An update for me as I have experienced things is
-its definately harder to borrow money and tap into equity. I even had banks wanting me to sign documents stating exactly what "investment' purposes I was going to use my LOC for. That certainly didn't happen when I last arranged a LOC.In fact I can still spend that LOC on lollies if I want to.
-LVR's are getting lower for me to access equity.Meaning I will have to wait longer,and until property value rises higher, before using equity. (fortunately my and most peoples property is growing at a fast pace at the moment)
All said and done,I think I will end up using cash flow and equity to live off one day.Even if that means selling one of the properties to lower LVR's and have cash flow. Thats why its so important to understand that the "size of your assetts" is important.You could never do this with one property or two.You need properties in the millions (in todays terms) to do it comfortably.
Thanks
Shanematt
P.S does anyone think the banks will repeat the same mistakes one day and credit will once again become easy to get? Even if thats years down the track?Benjamin Csikos wrote:Anyone can live off equity right now if they really wanted to. It's all relative to what level of lifestyle you wanted.Move to india. They live on 500 bucks a year over there.
…I'm just sayin'.
I live off $500 a year in Australia, and there is nothing wrong with my lifestyle………. join me on a bike ride or run one day and I can reveal all.
Paddyomail, there are lots of ways to provide an income, live off equity etc . Yes you are correct!
Thinking outside the square is the difference.number 8 wrote:Benjamin Csikos wrote:Anyone can live off equity right now if they really wanted to. It's all relative to what level of lifestyle you wanted.Move to india. They live on 500 bucks a year over there.
…I'm just sayin'.
I live off $500 a year in Australia, and there is nothing wrong with my lifestyle………. join me on a bike ride or run one day and I can reveal all.
Paddyomail, there are lots of ways to provide an income, live off equity etc . Yes you are correct!
Thinking outside the square is the difference.You can actually live off $0 in Australia. We have a welfare system that allows it.But the question is-what sort of lifestyle do you want and what are you prepared to do for it ( eg go to work ect).
Some people are happy with little material entertainment or comforts but others are definately not.Getting the balance right for you and your family is one of the biggest dilema's in the western world.
Shanematt
P.S does anyone think the banks will repeat the same mistakes one day and credit will once again become easy to get? Even if thats years down the track?[/quote]
Shanematt- the short answer is NO for the next few years at least. Cost and Supply and investor appetite will combine to put a lid on the availability of money/credit for the next few years. Risk will be a dirty word with banks ( in relation to mortgages at least) for the next few years at least. 3 years at least , and probably more like 5 years. People dont generally understand that mortgages are funded with borrowed money. If you were to ask a person on the street where money for mortgages come from, they wouldnt know that our banks don't have anywhere near enough money of their own to lend for all the mortgages they write. Australia's big banks get almost all their money ( probably about 80%) from two places- retail deposits and long term funding ( 3,4 and 5 year bonds) and they get a small amount ( about 20%) from other sources such as securitisation and short term funding ( 90 days). It varies from lender to lender but thats the basic idea. Second tier banks/building societies and credit unions – such as Suncorp, ING, AMP, IMB, Adelaide Bendigo, Members Equity and so on, are similar, but usually have less retail deposits so tend to get a higher percentage of their money from securitisation and non banks are almost 100% reliant on securitisation. At the end of the day its all money, but different organisations raise their money differently before lending it out for mortgages. Whichever of the 4 sources you look at, the costs for all of them has increased significantly. Why do you think banks are competing so aggressively for term deposits ? Also, the GFC is only 2 years old. Major banks have lots of old loans from before the GFC funded on 4 and 5 year bonds at ":cheap" margins, which will have to be rolled over to post GFC margins over the coming 2-3 years. The gap between pre and post GFC money is debatable, but is anywhere from 90-120bpts higher than pre GFC, so nomatter what the RBA does with cash rates, rates are going to continue to creep up as the major banks increase their margins to cover their costs in coming years. So thats the first part of the equation- cost
The second part is supply- APRA has proposed liquidity rules which will require the banks to hold more tier 1 capital than they've had to in the past. This is because the G20 is imposing these rules, and Australia wants to be seen to be in line with the G20 on a regulatory level. What it means for the banks is that they will have to stockpile lots more money than previously to ensure liquiidty in case something like the GFC ever happens again and funding markets dry up. Governments around the world will not pour trillions into keeping banks liquid if this happens again. Bottom line will be that banks will have less money to lend. Interestingly though, these rules wont apply to smaller lenders and non banks.. so maybe you'll see them relax credit rules sooner than the banks. Dont bet on it though. Securitisation markets are still pretty closed and its not as easy for non banks to raise new money to lend, either.
The third part is appetite. Basically, Australia is pretty much the only country on earth where 90 and 95% loans still exist. By sheer luck, our banks didnt buy into massive amounts of Lehmannesque toxic debt and have been able to continue to fund loans and raise new money thanks to the Govts Guarantee. But dont think for a moment that the same big investors ( pension funds, super funds, institutional investors etc) who fund British, Spanish, German, Irish, American, Portugese, Dutch banks etc are going to forget about the huge beating they have been enduring for the last two years and for years to come, and suddenly lower their standards regarding the quality of loans and lenders they will invest in. No one will be in a hurry to write risky loans again. This is why you're seeing restrictions on Lines Of Credit and cash out. This is why no docs disappeared, and why lo docs are barely available anymore. Its why every lender is cheery picking who they will and wont lend to. Its only going to be more of the same for the next few years. The banks have to make sure that they can raise money- and no one will invest in them if they are writing risky loans.
I wouldnt be surprised if credit gets even tighter throughout 2010. Its clear that even the two biggest lenders CBA and Westpac are pulling back. They need to slow down their lending. Its getting harder to attract retail deposits and they need to start provisioning for the new APRA requirements that take effect in 2011. But, one day it will all open up again. There will be 100% loans, Lines Of Credit with unlimited cash out etc…. history always repeats!!!!
Thanks for your in depth answer 'euro73'.
I want banks to be responsible with their lending as that protects my property values as it lessens the chance of a bubble through less defaults,but I also hope that restrictions on what I can spend my equity on,loosen a little.
I would hate to have to sell a property to access the equity to be able to use at least some portion for whatever I want to.
I do want Aust banks to remain strong.I can still remember those ads on TV with banks enticing people to use their home equity to live the good life with pictures of boats,cars,holidays ect, flashing across the screen. I am sure that those ads will make a return as human nature will demand it.Its just a matter of time I think.
I know we have had a credit crisis/crunch a couple of decades ago.I haven't studied it,but it would be interesting to see what happenned in that cycle and how long it took for credit to free up again.
Thats still possible shamematt. You'll still have access to equity but its just stricter now. No ones saying you cant get a Line Of Credit for legitimate purposes or access equity for legitimate purposes. That hasnt changed. The real difference now is that banks will no longer give anyone money with a "no questions asked" kind of approach, just because they have lots of equity and can service the loan. Banks want to know what the money will be used for and they want to be perceived as being more responsible in their lending practices. They'll give you the money but will demand to see evidence/quotes for what you are spending the money on. So if you legitimately wanted to get money to do renovations or purchase a car, thats fine. You'll now have to make a declaration regarding the purpose of the funds in the loan application.If you were renovating they'd ask for quotes, building plans etc. If you were just doing an internal tidy up such as paint or tiles or new shower or kitchen they'd just ask for some quotes. But be sure that you use the money for what you said you were going to use it for, because when you go back in 2 or 3 or 5 years looking to tap into equity again , they'll be taking a very close look at you assets and liabilities, and they'll expect to see some of the assets you said you were going to buy with the last money they gave you. All in all, still possible, but its just stricter and you have to have a clear idea of what the money is for BEFORE asking the bank for it.
As for the credit crunch you are referring to from a decade ago. There was a recession about 18 years ago, but there's never been a GFC like this. The Depression of the 30's was the closet thing from a perspective of scale and cost, but mortgages/lines of credit/equity loans werent really part of the picture then. It was stockmarket related. The difference with this particular crisis has been the trillions of securitised funds being written off- they're called RMBS Residential Mortgage Backed Securities. As I outlined in my previous post, thats a big part of the reason why there will continue to be stricter control and tougher entry criteria for mortgages for several years yet.
We just need to realise that we arent exempt from the effects of the northern hemisphere, and its not going to be as easy as it was 3 or 4 years ago to get cash for anything we want.
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