Cashbonds for Dummies

Rather than hijack this thread...

http://www.somersoft.com/forums/showthread.php?p=224020#post224020

I thought Id start a new thread regarding cashbonds. I have a number of questions Id like to ask and certainly dont want to take the previous thread any further off topic than I have already done so.

Hopefully Rixter can explain further any questions regarding cashbonds as Im keen on learning!

Original post below...

Rixter said:
Mustang,

This is how I have used a Cashbond/Annuity to keep purchasing IPs. I use it in conjuction with my CGA Strategy -

When you have a few IPs under your belt Serviceabilty will eventually become an issue. The banks/lenders will not lend you money due to you not meeting their standard lending criteria. As you know banks/lenders work out seviceability under 2 modules - LVR & DSR.

Where the majority of investors start to reach their borrowing capacities is in relation to the DSR or Debt Service Ratio. In other words not enough cashflow income to service your IP debt. Now this isnt really a problem if you can increase your income. But how can you do that

Obviously there are many ways as the mind can conjure up. But the main ways most investors know of is to increase you PAYG income and/or increase your IP rental income. As these methods are fairly well reliant and restricted to market conditions alot of investors dont know where to go to from there. Alot forget about the store of Equity they have with their low LVR's created over time by past capital growth.

Thats where a Cashbond or Annuity comes into play - which is method I have implimented to get me around the lack of serviceability issues and allowed me to keep borrowing to build my Portfolio.

A cashbond basically works by converting existing equity into cashflow for the purposes for increasing your income in the eyes of the banks/lenders.

The way it works is as follows - you purchase a Cashbond/Annuity or guarranteed income plan from an insurance company. That Insurance company then pays that back to you plus interest over a nominated term - usually 5 years. You purchase the Cashbond using funds with drawn from a LOC.

For example if you purchased a $100,000.00 cashbond over a term of 5 years, each year you would get $20,000 plus interest paid back to you. Now when you go to the bank for a loan to purchase your next property you can show 100% of that $20,000 income on the INCOMES side of your loan application on top of your existing Payg Income & all your other rental incomes...In other words You have effectively increased your borrowing because you have an extra $20,000 income in the eyes of the banks. Pretty neat hay

You can also use that cashbond income to service your portfolio holding costs as well.....this giving you sleep at night factor knowing you can service the debt comfortably.

This how I have been able to keep purchasing. Now I know this method is not for everyone. It all depends on your circumstances, goals, time frames & your individual investor risk profile.

Hope this has provided you & everyone else with some food for thought.

Awesome post Rixter - have provided KUDOS! ;)

Just slightly off topic - what are typical amounts invested into cashbonds? 100K, 250K? What provide best returns? And when you say an "insurance company" what do you mean by this? Whos door do I have to knock on to make this happen?

RJ
 
Rixter said:
Hi RJ,

I basically purchased a $100k Cashbond/Annuity or the product name known as "Guarranteed Income Plan" from a financial services company named Challenger Financial Services.

There are many financial/insurance companies including some banks that provide these type products. You can approach them direct yourself or via your own registered financial advisor for a quote, and to find the best returns available.

Hope this provides you answers.

Awesome! This is exactly the answer I was looking for.

Is it best to invest your own money rather than borrowed money? I mean if you borrow to invest, wont you then have to make loan repayments which include interest which would inturn erode profits?

Would I be correct in thinking that its just a matter of drawing down from the equity gained in property and pushing it directly into cashbonds?

Just roughly what sort of returns are there on a $100,000 cashbond investment, and at what rate is the interest calculated.

Thanks mate,

RJ

PS. I like this bit! :D "Income payment frequency The frequency of annuity payments that are made to an annuitant; either monthly, quarterly, half-yearly or yearly"
 
I just read that it is possible to invest your superannuation directly into a cashbond? Is this true?

RJ
 
Whats the return interest rate? Im reading over this document on challenger and they mention 5%. Is that right?

So If I invested $100,000 over 12 months into a cashbond and set my income payments to monthly, would that mean that I then receive $8333 per month + 5%?

Also, 5% of what? $100,000 or $8,333 :confused:

What would be monthly income payments equate to?

RJ
 
Ramone

Cashbonds are typically used once you have a substantial equity base, from reading other posts of yours I don't think you're at the level to need a cashbond, concentrate on getting started, you should be able to get a few properties without a cashbond, but depends on your income and returns.

Rixter has a substantial equity base (So does Steve Navra who recommends them) which allows them to purchase a cashbond to overcome servicability issues.

They are typically for asset rich people. They use a LOC to purchase a cashbond, this gives them ability to borrow more money to service more loans to buy more property. You would only use a cashbond if you think you can generate more in capital growth than what the cashbond costs.

Rixter will be able to answer the nitty gritty questions about returns.
 
Please correct me if l am wrong with this Rixter.
When you buy a cash bond you borrow $100,000 you get $20,000 plus interest paid back to you each year for 5 years.You use this money for holding costs or buying more ips.
BUT you never pay off the loan of $100,000 so even though your earnings has increased so has your debt. Correct?
So you have a debt of $100,000[from cash bond] the interest on the $100,000 has to be serviced as well.Correct?
cheers yadreamin
 
yadreamin said:
Please correct me if l am wrong with this Rixter.
When you buy a cash bond you borrow $100,000 you get $20,000 plus interest paid back to you each year for 5 years.You use this money for holding costs or buying more ips.
BUT you never pay off the loan of $100,000 so even though your earnings has increased so has your debt. Correct?
So you have a debt of $100,000[from cash bond] the interest on the $100,000 has to be serviced as well.Correct?
cheers yadreamin

Yep spot on, the 100k will usually come from a LOC. The rationale behind it is that you can increase your net worth by more than 100k during that 5 year period with the additional funds from the cashbond.
 
hello,

so you use your line of credit, pay 7.32% interest and get 5% back from cashbond (plus you capital as such).

so you are down 2.32% (approximately)

is the 5% return based on the one-off initial capital(purchase) or is it based on reduced capital (as they are handing your money back every year)

thankyou
myla
 
Hi all,

Is there income tax to pay on a cashbond income?

and just on the Banks lending criteria, why do they ignore the fact the cashbond will dry up in, say (5) years?
I had one particularly pesky 'ANZ home-buyers line' consultant remind me that the term of the loan was 30 years and that the reason I was at my DSR wall was because "You have to pay it back, you know".

duuuuur...:confused:

"How are you going to service the loan when the annuity ends?"

grrrrrrrrrrrr....

Probably time to take a deep breath and find another lender.
 
yadreamin said:
Please correct me if l am wrong with this Rixter.
When you buy a cash bond you borrow $100,000 you get $20,000 plus interest paid back to you each year for 5 years.You use this money for holding costs or buying more ips.
BUT you never pay off the loan of $100,000 so even though your earnings has increased so has your debt. Correct?
So you have a debt of $100,000[from cash bond] the interest on the $100,000 has to be serviced as well.Correct?
cheers yadreamin

There have been some really long posts in the posts in the past about Cashbonds and Steve Navra ( because he was their initial proponent ). NOne for a while as I think every one involved ( especially those who had nothing personally to gain from the debate ) suffered from burnout.

http://www.somersoft.com/forums/showthread.php?t=19649&highlight=disaster

http://www.somersoft.com/forums/showthread.php?t=19620

http://www.somersoft.com/forums/showthread.php?t=21496&highlight=Disaster

Are three to start with , But do searches on Narva , cash bonds , Number of threads > 100 etc and you will come up with lots of reading material and even more opinions......

See Change
 
Hey RJ

Probably stating the obvious here, but anyway..........don't forget that if you borrow from a LOC (or anywhere else) to purchase a cashbond, say $100K over 5 years, that after the 5 years is up, you have spent the $100K but still have the loan for it which still needs to be serviced.

Regards
Marty
 
In answer to everyones questions -

CON's -When you use a CB you are effectively purchasing (at a cost to you) an Income you can then use to increase your servicability in the banks eyes. Also you have locked your equity away for the CB Term purchased.

The cost to puchase this income is brought about by the difference between your borrowing to puchase rate and your return rate being paid back to you from the insurance company for them to use your borrowed funds. This rate difference can range between 2-3% depending upon who you decide to puchase through.

PRO's - The advantages of using a CB over Lo/No doc is it allows you to keep building your property portfolio and hold more propertys and increase your aset base over what you would normally be able to purchase without a CB. For example a CB will allow you to increase your aset holdings to approx four times the CB purchase price over and above your current capacity. ie $150k CB will allow you $600k approx extra aset base.

The extra CG achieved by increasing your portfolio aset base (providing you have done your homework & bought well) more than offsets your CB purchasing cost over the five year term.

Other added bonus- Because you require the CB funds to allow you to keep building your income producing property portfolio the ATO allows the rate difference/shortfall to be claimed as a tax deduction, plus you can use some of the funds being returned to you cover your property portfolio holding expenses, thus increasing your SANF.

In summing up - You are effectively purchasing an income so therefore it comes at a price. You should examine your own personal sitution and decide whether its for you only after you have explored and/or exausted all other less inpacting options available.

Hope this helps you.
 
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Ray Brown said:
Hi all,

Is there income tax to pay on a cashbond income?

and just on the Banks lending criteria, why do they ignore the fact the cashbond will dry up in, say (5) years?
I had one particularly pesky 'ANZ home-buyers line' consultant remind me that the term of the loan was 30 years and that the reason I was at my DSR wall was because "You have to pay it back, you know".

duuuuur...:confused:

"How are you going to service the loan when the annuity ends?"

grrrrrrrrrrrr....

Probably time to take a deep breath and find another lender.

The interest the CB pays you is declared income so therefore taxable.

At the end of the 5 years you are only left with a small amount of the original loan. This is bought about by the interest rate difference between your LOC & the CB being returned to you. This difference is tax deductable.
 
kissfan said:
Hey RJ

Probably stating the obvious here, but anyway..........don't forget that if you borrow from a LOC (or anywhere else) to purchase a cashbond, say $100K over 5 years, that after the 5 years is up, you have spent the $100K but still have the loan for it which still needs to be serviced.

Regards
Marty

Not correct.. Your intial principle is returned to you less the difference between your LOC interest rate & CB interest retrun rate.
 
myla said:
hello,

so you use your line of credit, pay 7.32% interest and get 5% back from cashbond (plus you capital as such).

so you are down 2.32% (approximately)

is the 5% return based on the one-off initial capital(purchase) or is it based on reduced capital (as they are handing your money back every year)

thankyou
myla

Cashbond purchase price divided by term (in years) multiplied by % return, divided by your dominated payment frequency (monthly, quarterly, 6 monthly etc)
 
FrankGrimes said:
Yep spot on, the 100k will usually come from a LOC. The rationale behind it is that you can increase your net worth by more than 100k during that 5 year period with the additional funds from the cashbond.

Not exactly....the rationale is your increased borrowings increased your net worth by more than what the CB costs you ( Rate difference between LOC & CB return) over its purchase term.
 
ramone_johnny said:
Whats the return interest rate? Im reading over this document on challenger and they mention 5%. Is that right?

So If I invested $100,000 over 12 months into a cashbond and set my income payments to monthly, would that mean that I then receive $8333 per month + 5%?

Also, 5% of what? $100,000 or $8,333 :confused:

What would be monthly income payments equate to?

RJ

Yes basically, however you would need to purchase a CB with a longer maturity period (ie 5 years min) for it to be recognised by the lenders.
 
Myla

hello,

so you use your line of credit, pay 7.32% interest and get 5% back from cashbond (plus you capital as such).

so you are down 2.32% (approximately)



Would the Interest on the LOC be calculated on a 25-30 yr term though, meaning that the Monthly Income (interest)and Funds (Monthly capital return)you get back via the cashbond is more than enough to service the loan and the shortfall on another IP?

Or am I going off track here.........?

:confused:

Redwing
 
Last edited:
redwing said:
Would the Interest on the LOC be calculated on a 25-30 yr term though, meaning that the Monthly Income (interest)and Funds (Monthly capital return)you get back via the cashbond is more than enough to service the loan and the shortfall on another IP?

Or am I going off track here.........?

:confused:

Redwing

Obviously it all depends on the level of IP shortfall. It does well & truly in my case.

rough guide - $100k CB = 20k + interest CB return per annum = $1666 per month.
- Now 100k LOC x 7% = $7k interest per annum = $583 per month

BEar in mind the above rough guide isnt including interest income , and your $100k LOC is deminishing with subsequent montly CB payments to you.

hope this helps.
 
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