Cashbonds for Dummies

[kissfan]

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

Hi Rixter.

You are obviously very knowledgable on the subject of cashbonds and I am not (i.e have never used them), but the way they were explained to me was that after the 5 year period (in the example of $100K over 5 years), you have exhausted your LOC i.e drawn down the $100K, to service other loan/s. The LOC (now standing at $100K) interest still has to be paid as well as the loan/s that the cashbond was initially purchased for.

Have I missed something?

I realize you get paid interest on the cashbond but assume that also goes on loans.

Regards
Marty

 

[Rixter]

Hi Rixter.

You are obviously very knowledgable on the subject of cashbonds and I am not (i.e have never used them), but the way they were explained to me was that after the 5 year period (in the example of $100K over 5 years), you have exhausted your LOC i.e drawn down the $100K, to service other loan/s. The LOC (now standing at $100K) interest still has to be paid as well as the loan/s that the cashbond was initially purchased for.

Have I missed something?

I realize you get paid interest on the cashbond but assume that also goes on loans.

Regards
Marty

Marty,

Your original $100k (putting aside interest rate diifferences) is returned you over the term of the CB.

I think you're confusing the purpose of the CB (for increasing servicability) with the new loan/s to purchase the investment property/s. They are 2 totally separate structures - ie 1/ CB allows you to keep purchasing by satisfying the bank/lenders servicability criteria, and, 2/ IP loan to fund the IP purchase itself.

You are going to have new IP loans anyway with or without the need to use a CB structure, therefore it doesnt come into the equation.

Now having said that, if you decide to use the funds coming back to you via the CB to fund any IP cashflow shortfalls (depending upon how well you purchased) then thats entirely up to you - but it is an option you have available.

Hope this explains it a bit better for you.

 

[kissfan]

I think you're confusing the purpose of the CB (for increasing servicability) with the new loan/s to purchase the investment property/s. They are 2 totally separate structures - ie 1/ CB allows you to keep purchasing by satisfying the bank/lenders servicability criteria, and, 2/ IP loan to fund the IP purchase itself.

Hope this explains it a bit better for you.

Yep.

Was looking at it from the point of view in number 2 above, i.e to fund the loan on new purchase.

Regards
Marty

 

[BBarnes]

Now having said that, if you decide to use the funds coming back to you via the CB to fund any IP cashflow shortfalls (depending upon how well you purchased) then thats entirely up to you - but it is an option you have available.
Hope this explains it a bit better for you.

Hi, Rixter and kissfan,
Great thread, but I'm still confused.
I was always under the impression that a cashbond was to be used to provide an extra income to service an IP debt. And in which case, if that cashbond return is used soley to service an IP debt, then the initial cost of the cashbond ( LOC ) is still to be repaid at the end of term. I would imagine that the borrower would hope to have capital gain on his investment at greater value than the cost of the cashbond LOC.
However, if a cashbond is used wholly to show a lending institution that you have 'additional income', (read serviceability) and the monthly cashbond return is repaid into the LOC, then the cashbond LOC is fully repaid at the end of term.
Am I correct here with these two scenarios?
And if I am, is one correct and the other, not?
Appreciate the views of the experts.
Bill

 

[Rixter]

I was always under the impression that a cashbond was to be used to provide an extra income to service an IP debt. And in which case, if that cashbond return is used soley to service an IP debt, then the initial cost of the cashbond ( LOC ) is still to be repaid at the end of term. I would imagine that the borrower would hope to have capital gain on his investment at greater value than the cost of the cashbond LOC.
However, if a cashbond is used wholly to show a lending institution that you have 'additional income', (read serviceability) and the monthly cashbond return is repaid into the LOC, then the cashbond LOC is fully repaid at the end of term.

Bill, a cashbond is used to increase your serviceability so as you can keep purchasing property as part of a "Capital Growth" investment strategy. Because a CB is effectively purchasing an income stream your increased asset base must be greater than your income purchasing costs. Otherwise there is no point in pursuing this option in the first instance.

You are basically correct on your 2nd issue. The CB will be repaid back into the LOC at the end of the term apart from a small residual balance (tax deductable) which is brought about due the difference in LOC interest rate and CB interest return rate. This effectively becomes your income purchasing cost as mention in my first paragraph above.

Hope this helps.

 

[duncan_m]

You are basically correct on your 2nd issue. The CB will be repaid back into the LOC at the end of the term apart from a small residual balance (tax deductable) which is brought about due the difference in LOC interest rate and CB interest return rate.

Hi Rixter,

Does the NETT cost of the cashbond cost less then the cost of a ( Standard Loan Product - Low Doc Loan Product ) ?

 

[Rixter]

Hi Rixter,

Does the NETT cost of the cashbond cost less then the cost of a ( Standard Loan Product - Low Doc Loan Product ) ?

I dont think it would. All the CB does is allow you to keep purchasing when other options (ie lo doc, other income forms) have been exhausted.

IMHO its a last resort strategy for continued purchasing.

 

[willy008]

hey i was just thinking how safe is your money in a cash bonds ans can you just invest $100,000 cash if you have and recive the intrest and money like for rent in sted of having an IP.

 

[rj]

Man Im going to have to read over this thread again - I still dont get it!

Im still seeing a shortfall of 2.something percent here

Then again, what I lack in intelligence, I make up for in determination

RJ

 

[see_change]

At a time when prices are increasing I can see a place for cashbonds.
If you have a low LVR ( not talking about 70-80 % ) I can see a place for cash bonds.

You are relying on your capital growth significantly outperforming your increasing debt. You are relying on being able to continual refinance on the basis of your increasing capital bases. You are relying on the banking system ( which currently is very free ) allowing you to do that. One wonders what the banking system would do in the senario of a recession , decreasing property values , and someone with such a set up coming up and asking for " more please " when they have minimal outside income.

24 years ago as a newly graduated doctor , I couldn't get a loan of a bank to buy a unit in homebush for 45 K because I didn't fit their criteria as far as a track record of savings. Things change.

If you have a high LVR and low growth , or " god forbid " negative growth . There could be problems.

My understanding is Rixter has a relatively low LVR , correct Rix ?

See Change

 

[rambada]

Which financial institutions are still accepting CB's? I'm with Westpac and they have changed their lending policy with CB's and no longer accept them if purchased with a LOC, has to be a P & I loan or personal loan (something like that). Who else is out there accepting CB's?

 

[redwing]

Thinking about my situation and the possible application of a CashBond strategy then;

I’m sitting at around 62% LVR however DSR is an issue rather than a problem, I’ve established a $150k LOC and would be looking at a property under 10 years old (Depreciation benefits) for say $240k renting at $250 p/wk which equates to around 5.41% Yield or at 48 Weeks rented 5% Yield assuming a benefit for depreciation of 1% (Max) that gives me a yield of around 6%.

Now with that $150 LOC (at 7%) I can either;

• Put a deposit down for the IP of $70k, put $50k into a Managed Fund for Income (looking at 10-12% return) and keep $30k as a safety Buffer
  
  OR
  
  
• Put the same deposit of $70k down, purchase a CashBond at $50k (return of say 5%) the additional return of Funds would be paid back into the LOC, Interest on the CB however would be used to service the IP Interest along with rent and again I would keep $30k as a safety Buffer.

At this stage I’m not even going to look at the possibility of Leveraging into the Managed Fund as well

My question is..am I looking at these two options correctly?

Redwing

 

[Rixter]

At a time when prices are increasing I can see a place for cashbonds.
If you have a low LVR ( not talking about 70-80 % ) I can see a place for cash bonds.

You are relying on your capital growth significantly outperforming your increasing debt. You are relying on being able to continual refinance on the basis of your increasing capital bases. You are relying on the banking system ( which currently is very free ) allowing you to do that. One wonders what the banking system would do in the senario of a recession , decreasing property values , and someone with such a set up coming up and asking for " more please " when they have minimal outside income.

24 years ago as a newly graduated doctor , I couldn't get a loan of a bank to buy a unit in homebush for 45 K because I didn't fit their criteria as far as a track record of savings. Things change.

If you have a high LVR and low growth , or " god forbid " negative growth . There could be problems.

My understanding is Rixter has a relatively low LVR , correct Rix ?

See Change

Correct Seech. A CB is a "Servicability Tool"for conjunctional use within a "Capital Growth" LOE investment strategy. For converting equity to cashflow to satisfy the eyes of the banks/lenders.

The "cost" to use this tool must be out performed by the CG on the increased asset base brought about by this tool for it to be a viable proposition.

 

[kissfan]

in which case, if that cashbond return is used soley to service an IP debt, then the initial cost of the cashbond ( LOC ) is still to be repaid at the end of term. I would imagine that the borrower would hope to have capital gain on his investment at greater value than the cost of the cashbond LOC.

This is the point I was trying to make.

Looks like Rixter is using CB to prove servicability to banks (don't know if he actually using the CB to service loans), whereas in my example , I was physically using the cashbond (over a 5 year period) to service loans, in which case after 5 years, the cashbond has been 'spent' but the interest on the LOC (that was used to pay for CB) is still payable.

In this scenario, you would have to get another CB or funds from another means after the 5 year period.

Is this making sense Rixter

Regards
Marty

 

[Rixter]

hey i was just thinking how safe is your money in a cash bonds ans can you just invest $100,000 cash if you have and recive the intrest and money like for rent in sted of having an IP.

Nothing stopping you putting your own cash into the CB. The interest rate between the CB and having the cash sitting in the banks would be around the same. The cash sitting in the CB would be increasing your serviceability.

 

[Rixter]

Which financial institutions are still accepting CB's? I'm with Westpac and they have changed their lending policy with CB's and no longer accept them if purchased with a LOC, has to be a P & I loan or personal loan (something like that). Who else is out there accepting CB's?

Ramada,

How would Westpac know how the CB is funded. If they ever ask you I hope you tell them from your Annuity provider - thats all they need to know

 

[Rixter]

Thinking about my situation and the possible application of a CashBond strategy then;

I’m sitting at around 62% LVR however DSR is an issue rather than a problem, I’ve established a $150k LOC and would be looking at a property under 10 years old (Depreciation benefits) for say $240k renting at $250 p/wk which equates to around 5.41% Yield or at 48 Weeks rented 5% Yield assuming a benefit for depreciation of 1% (Max) that gives me a yield of around 6%.

Now with that $150 LOC (at 7%) I can either;

• Put a deposit down for the IP of $70k, put $50k into a Managed Fund for Income (looking at 10-12% return) and keep $30k as a safety Buffer
  
  OR
  
  
• Put the same deposit of $70k down, purchase a CashBond at $50k (return of say 5%) the additional return of Funds would be paid back into the LOC, Interest on the CB however would be used to service the IP Interest along with rent and again I would keep $30k as a safety Buffer.

At this stage I’m not even going to look at the possibility of Leveraging into the Managed Fund as well

My question is..am I looking at these two options correctly?

Redwing

Redwing are you aware the interest being returned to you via the CB will be 2-3% less than the interest you are paying on your LOC used to fund the CB in the first instance?

 

[Rixter]

This is the point I was trying to make.

Looks like Rixter is using CB to prove servicability to banks (don't know if he actually using the CB to service loans), whereas in my example , I was physically using the cashbond (over a 5 year period) to service loans, in which case after 5 years, the cashbond has been 'spent' but the interest on the LOC (that was used to pay for CB) is still payable.

In this scenario, you would have to get another CB or funds from another means after the 5 year period.

Is this making sense Rixter

Regards
Marty

Yes . If you have an existing LOC after the 5 years is up you could just capitalise the interest providing your overall portfolio asset base is appreciating faster than the capitalising debt. ie as in a LOE strategy.

 

[willy008]

hey rixter
how safe are these cash bonds
what are your chances of those companys going bust that you
invest into with these bonds

 

[Rixter]

hey rixter
how safe are these cash bonds
what are your chances of those companys going bust that you
invest into with these bonds

A CB is purely an Annuity and is just one of many financial products available from many Insurance, Banking and Financial service companies out there.

Just like any form of product or service its up to the consumer to conduct their own due dilligense to satisfy themselves on the product/service and the company supplying it before going any further.