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  • Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,173

    In another post, Rob the mortgage broker asked me how a cashbond could improve sericeability.

    https://www.propertyinvesting.com/forum/topic/17212/3.html?sortfield=&sortorder=

    here is an example:

    Say a person with an income of $90,000 had a property worth $1,000,000 unemcumbered.
    It may be hard for them to borrow much more than $500,000 due to failing serviceability tests.

    So they borrow $500,000 at 7% to buy an cashbond/annuity of $500,000, payable in monthly installments over 5 years.
    This would work out to be approx $110,000 coming back to them from the annuity per year.

    From a taxation perspecitve only approx $10,000 pa is income, the rest is the return of capital.

    However, certain banks are willing to count the whole $110,000 as income for serviceability puposes. So their new income, for serviceability, jumps to $200,000.

    On an income of $200,000 they can now borrow an additional $583,000!!!!

    (this is a simplified example, potential rent etc not included, I am not sure of the actual rates for an annuity, 4% is a guess and the ‘income’ can be increased by having a shorter term)

    There will be a loss on the annuity as they are paying 7%, but only getting 4%. This may be deductible if the purpose of the cashbond was to increase serviceability for investment purposes.

    I am not an advocate of this method. It is costly, costs about 3% for financial planner to setup the annuity, and there can be a large shortfall in income.

    These days there are low doc (lie doc) loans and No Doc loans available. Sometimes rates may be slightly higher, but it would still work out cheaper than using a cashbond.

    Terryw
    Discover Home Loans
    Mortgage Broker
    North Sydney
    [email protected]

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of Robbie BRobbie B
    Member
    @robbie-b
    Join Date: 2004
    Post Count: 2,493
    Originally posted by Terryw:

    In another post, Rob the mortgage broker asked me how a cashbond could improve sericeability.

    Terry, your lack of attention to detail astounds me. I never asked for you to explain how a cash bond works. I asked how one works to improve serviceability using YOUR example of costing 7% per annum and returning 4%. This is negative.

    Now to break down your explanation (using a 50% marginal tax rate for ease of the example) and why it does not improve serviceability…

    $90,000 Gross Income
    $45,000 Tax

    $45,000 Net Income

    $1,000,000 Property
    $500,000 Loan
    7.00% Interest Rate
    $35,000 Cost first year assuming interest only
    $17,500 Tax Deduction

    $36,250 Net Income after interest expense

    A 4% return on $500,000 would be $20,000 in year 1, $16,000 in year 2 on $400,000, $12,000 in year 3 on $300,000, $8,000 in year 4 on $200,000 and $4,000 in year 5 on $100,000. The avergae is $12,000 which I will use for the example.

    $12,000 Income from annuity first year
    $6,000 Tax

    $42,250 Net Income after annuity income

    However, certain banks are willing to count the whole $110,000 as income for serviceability puposes. So their new income, for serviceability, jumps to $200,000.

    I doubt any lender will take into account a non-taxable return of capital but will love to be proven wrong on this one.

    In any case, the cash flow in year one is less than what it would be if this structure is not used so serviceability, which is done on the day of application, is reduced.

    On an income of $200,000 they can now borrow an additional $583,000!!!!

    Assuming some psychotic lender allowed the return of capital to be used as income, I am interested to know if they will approve a thirty year loan based on an income that will only last a maximum of 5 years. This is highly unlikely.

    At the end of 5 years when no more annuity is coming in and your ‘income’ reverts back to $90,000 gross per annum, what will the position be? Where is the return of capital supposed to go while you are receiving it?

    I am not an advocate of this method. It is costly, costs about 3% for financial planner to setup the annuity, and there can be a large shortfall in income.

    Wow, I wonder why you would not advocate it. So when including the 3% to set it up, net income in the first year drops even further which would, in turn, retard serviceability even further and kill cashflow. What does the investor live on if they were facing difficulty servicing much more than $500,000?

    These days there are low doc (lie doc) loans and No Doc loans available. Sometimes rates may be slightly higher, but it would still work out cheaper than using a cashbond.

    It seems you are suggesting people commit fraud to borrow money. I don’t think this is something anyone should do as the result could be bankruptcy!

    I am amazed you tell your clients about these high-risk, and sometimes illegal, crazy structures. I will look forward to hearing which lenders accept return on capital (which was borrowed) as income for your every day investor or professional investors.

    Robert Bou-Hamdan
    Mortgage Adviser

    http://www.mortgagepackaging.com.au

    Investor Links

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,173

    Robert

    You asked me to explain how a cashbond improves serviceability.
    I did this.

    You then insult me and claim I tell my clients “these high-risk, and sometimes illegal, crazy structures.”
    I don’t. I merely explained a strategy that one financial planner has been using successfully for years.

    I suggest you calm down and stop trying to defame me publically.

    There are people other than you (and me) on this forum. Some may find benefit in discussing various ideas. Whether we implement them or not is beside the point.

    Terryw
    Discover Home Loans
    Mortgage Broker
    North Sydney
    [email protected]

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of Robbie BRobbie B
    Member
    @robbie-b
    Join Date: 2004
    Post Count: 2,493
    Originally posted by Terryw:

    Robert

    You asked me to explain how a cashbond improves serviceability.
    I did this.

    Sorry Terry, but I don’t believe this was done.

    You then insult me and claim I tell my clients “these high-risk, and sometimes illegal, crazy structures.”
    I don’t. I merely explained a strategy that one financial planner has been using successfully for years.

    I apologise if you feel insulted by my comments. Unfortunately, I do not think it is prudent to outline such high-risk structures without qualifying those comments in a forum such as this. People who read it act on information they read here when it is posted by someone they have grown to respect such as yourself.

    I suggest you calm down and stop trying to defame me publically.

    I am very calm. Maybe you read my typing in another light because I don’t use happy faces etc. I have no control over your interpretation. Regarding me trying to ‘defame’ you publicly, this is certainly not my intention. I merely disagree with many of your comments and I am airing my opinions regarding those comments. I believe this is what a ‘discussion’ forum is supposed to involve but it seems that this forum does not believe in people passionately discussing various topics.

    There are people other than you (and me) on this forum. Some may find benefit in discussing various ideas. Whether we implement them or not is beside the point.

    This is my point. I thought we were discussing a topic extensively and in depth. I believe that if anyone implements what you have outlined on more than one occasion regarding different topics, they are heading for problems or greater expense than they should incur. Am I not entitled to my opinion if it is in opposition to yours? A less skilled investor may act on partial information so I believe complete information should always be provided in public forums.

    Steve has already scolded me for my comments directed at you and it seems I am heading for the sin bin AGAIN as a result of my passion regarding finance issues. I believe that if I get the sin bin AGAIN, it will be forever and I will actually miss this place. As a result of my reluctance to get the old boot AGAIN, I will refrain from any further discussion relating to comments made by you Terry.

    I hope this satisfies you and that you never feel defamed in the public forum again by me.

    Robert Bou-Hamdan
    Mortgage Adviser

    http://www.mortgagepackaging.com.au

    Investor Links

    Profile photo of DerekDerek
    Member
    @derek
    Join Date: 2004
    Post Count: 3,544

    Hi all,

    When I last did the Steve Navra course 3 years ago the bank he used, as per Terry’s example, to increase serviceability was one of the big four.

    Lending the additional funds was never an issue as the bank in question fully understood the ‘Navra approach’ and saw risk levels that were in keeping with their guidelines. They were comfortable that the investors were fully conversant with the cashbond approach, had substantial high quality advisors working with them, that the investors were growth focussed and could sustain their commitments over the investment timeframe.

    Using Navra’s rental reality formula an investor is able to determine when property reflects value for money, thereby increasing the likelihood of success.

    So buy using an additional borrowing capacity of $580K to buy a high growth/undervalued property would give an investor the capacity to considerably expand their investment portfolio. So, for a big picture investor, the cost of 3% would be largely inconsequential in the grand scheme of things.

    This approach is certainly not one that every investor could use, nor is it one I am using at the moment, but it is certainly one that I could access into the future if I so chose.

    If this moment in time were to arise the first thing I would be doing is jumping on a Sydney bound plane and making an appointment with one of Navra’s advisers to tease out the detail.

    Derek
    [email protected]
    http://www.pis.theinvestorsclub.com.au
    0409 882 958

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