All Topics / Help Needed! / The cost of credit?

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  • Profile photo of royboyroyboy
    Join Date: 2003
    Post Count: 11

    Hi, and happy new year to all,as this is my first post to this forum I thought it appropriate it be the 1st of the 1st.[^]My daughter gave me Steve’s book for Xmas which has led me here.
    Having recently sold two properties in Sydney and moved to Perth (within the last 3 weeks)I have bought 2 houses in the suburbs for which I paid cash. One will be my PPoR and the other an IP. When I set up the deal with my bank they asked me if I wanted to keep my line of credit, (450K) to which I said yes. To do this I had to term deposit 450K in cash. As I am self-employed and did’nt want to go thru all the paper work etc I thought at the time it was a good idea.
    However the cost of this credit is 6.7% and the Term deposit only pays 4.1%. If you do the sums it’s costing me heaps to keep this credit available. The Title deeds to the two houses should come thru soon and Then I need to decide which way to jump.
    Now should I
    1) Go on a spending spree and give the bank title deeds to everything?[:D]
    2) Reduce my line of credit to free up some cash and reduce the debt?[xx(]
    3) Just pay off the debt and use the equity in the two houses to aquire more real estate.
    If you have any idea’s …..
    Thanks in advance,

    Profile photo of Steve McKnightSteve McKnight
    Join Date: 2001
    Post Count: 1,763

    Hi Lioudmila,

    Thanks for your post and I hope you are enjoying the book. Nice to know I was under an Xmas tree [:)]

    Welcome to the community and thanks for posting. I moved your post to the PropertyPlus area as that is a better spot for it.

    I’ve read your situation with interest. Once I went to the bank for finance and they said that they would lend me $X provided I had the equivalent in cash in a savings account.

    How much interest will you give me on my deposit… 4% How much interest do I pay on my loan…8% Er, why would I have this arrangement?

    I think the same holds true for you. You might find that these days you can find a good cash mngt account that offers higher interest as term deposits are becoming a thing of the past as the financial market matures.

    Now, the first thing we need to do is differentiate b/w your home and your IP. One is lifestyle the other is investing.

    In terms of your IP, by paying cash you have no leverage which makes your CoCR very low. Still, at least you’ll have +ve cashflow as you have no interest. Nevertheless, your money can work harder for you than what is presently the case.

    Some suggestions:

    *Take a mortgage against your existing property and then place a large slab of your TD as a 100% mortgage interest account. It will be at call and will allow you to expand similar to a LOC without the need for cash security.

    *Once you borrow against your IP and use the cash for elsewhere your property will become -vely geared. As such your property will become a growth asset which means you’ll need to consider your investing strategy moving forwartd. Decide on this b4 you buy anything else and also set your benchmark rate of return against which you can evaluate various investments.

    You’re in a good position, but the key will be to maximise your returns from hereonin.

    Well, that’s my 2c worth.

    Have a great day,

    Steve McKnight

    Remember that success comes from doing things differently.

    Steve McKnight | Pty Ltd | CEO

    Success comes from doing things differently

    Profile photo of royboyroyboy
    Join Date: 2003
    Post Count: 11

    Steve thanks, you made me feel unique, I’m probably the only person on this site with a -vely geared LOC!!At least you have some material for your next book,in the don’t do pages.[xx(]
    The more I think about it, the less concerned I am,correct me if i’m wrong but the interest on the loan is tax deductable, and the tax man will get his share from the TD or CM.,take one from the other and at least i will have peace of mind[:)]. Now that has to be worth something and its a position that I think I like.Not having to apply for loans or pay fees, no tax returns and statements from accountants[;)][;)](say no more).
    That is, until the money runs out.


    not sure where i first heard this, think it might have been Tony Robbins,and could be appropriate for some portfolios !!

    If you find some weeds in your garden, don’t procrastinate, just pull the suckers out and move on!

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