Advice on LOC situation needed please !

M

murrayo

Hi ,

Please may I ask the forum their opinion;

Situation is;
bought PPoR @ $475k outright.
Needs $100k reno.
I have $50k towards reno costs
(House will be conservatively 'worth' $650k after reno.-but it is a long term PPoR - not an IP)

I need to borrow $50k towards reno costs (LOC)
I am thinking of borrowing a further $100k (therefore $150k in total LOC) & investing in a managed fund that should return 8% + p.a (fees are 1% + $1400 set up costs for the LOC)

What is playing on my mind is that with only $100k at a possible 8% return , is it worth it?!? (with the set up costs & risk etc?)

Looking forward to hearing your thoughts !

Thanks,

Murrayo..
 
murrayo said:
Hi ,

Please may I ask the forum their opinion;

Situation is;
bought PPoR @ $475k outright.
Needs $100k reno.
I have $50k towards reno costs
(House will be conservatively 'worth' $650k after reno.-but it is a long term PPoR - not an IP)

I need to borrow $50k towards reno costs (LOC)
I am thinking of borrowing a further $100k (therefore $150k in total LOC) & investing in a managed fund that should return 8% + p.a (fees are 1% + $1400 set up costs for the LOC)

What is playing on my mind is that with only $100k at a possible 8% return , is it worth it?!? (with the set up costs & risk etc?)

Looking forward to hearing your thoughts !

Thanks,

Murrayo..
Click to expand...

ps. I am aware that the $50k for the reno would not be tax-deductable ! thanks !
 
Well, for a start, I certainly would not mix private and investment borrowings in the one LOC.

You are creating an accounting nightmare for yourself.

Always keep private and investment borrowings separate.
Marg
 
As Marg stated, keep funds seperate. LOC for MF & LOC for reno.

In regards to the return on the fund I cannot comment. You would need to talk to someone licensed.

Regards
Steve
 
Do banks offer a type of split account in one LOC which could allow you to use 1 LOC for more than 1 item ?
 
Totally agree Rolf.

Talking to them they spent hours copying the Dragon policy and proceedure manual on that one. At least it is more competively priced this week.
 
You are referring to the St George Portfolio loan ( for the OP ).

For the other posts, it will be interesting to see the product.

Imitation is the sincerest form of flattery... lol
 
murrayo said:
Hi ,

Please may I ask the forum their opinion;

Situation is;
bought PPoR @ $475k outright.
Needs $100k reno.
I have $50k towards reno costs
(House will be conservatively 'worth' $650k after reno.-but it is a long term PPoR - not an IP)

I need to borrow $50k towards reno costs (LOC)
I am thinking of borrowing a further $100k (therefore $150k in total LOC) & investing in a managed fund that should return 8% + p.a (fees are 1% + $1400 set up costs for the LOC)

What is playing on my mind is that with only $100k at a possible 8% return , is it worth it?!? (with the set up costs & risk etc?)

Looking forward to hearing your thoughts !

Thanks,

Murrayo..
Click to expand...

Hi Murrayo,

I'd agree with other's thoughts on being careful to separate the LOC into private and investment usage.

You are right to assess the risks involved in investing your money in a managed fund. Every investment has risks (even cash) and you are wise recognizing these. Have you thought of an investment strategy? What is the purpose of investing in the managed fund? Where will it lead you? You could be planning to use any gains to:

1) Pay down your renovation costs ($50,000).
2) As a deposit on an investment property.
3) As an investment to keep for the long term, and add to when you have the funds.
4) Fund a holiday, school fees, or life style expenses.
5) Funds for a rainy day.

The list could go on!

The other thing you could do (if you haven't already thought of it), and seeing as this is a property forum it could be appropriate to raise the idea! :)

You could use the $100,000 LOC to fund a deposit on a $350,000 well located investment property. (You'd probably need around $87,500, including stamping, leaving around $12,500 in your LOC as emergency money). At today's low interest rates, the property wouldn't cost much to run. I'd be taking into account though, that interest rates will eventually rise and factor this into the equation.

Looking forward to hearing what you decide to do.

Regards Jason.
 
jingo said:
Hi Murrayo,

I'd agree with other's thoughts on being careful to separate the LOC into private and investment usage.

You are right to assess the risks involved in investing your money in a managed fund. Every investment has risks (even cash) and you are wise recognizing these. Have you thought of an investment strategy? What is the purpose of investing in the managed fund? Where will it lead you? You could be planning to use any gains to:

1) Pay down your renovation costs ($50,000).
2) As a deposit on an investment property.
3) As an investment to keep for the long term, and add to when you have the funds.
4) Fund a holiday, school fees, or life style expenses.
5) Funds for a rainy day.

The list could go on!

The other thing you could do (if you haven't already thought of it), and seeing as this is a property forum it could be appropriate to raise the idea! :)

You could use the $100,000 LOC to fund a deposit on a $350,000 well located investment property. (You'd probably need around $87,500, including stamping, leaving around $12,500 in your LOC as emergency money). At today's low interest rates, the property wouldn't cost much to run. I'd be taking into account though, that interest rates will eventually rise and factor this into the equation.

Looking forward to hearing what you decide to do.

Regards Jason.
Click to expand...

Curious to find out this bit......

If a $350k property is purchsed using $87.5k LOC (out of avaialble $100k), then you would be up for interest on $262.5k mtge and LOC mtge...hard to find a cf+ place, you'd have to pay to hold it.. If you let the interest on the LOC capitalise, you'd reach your limit soon and would then be up for exhorbitant interest rates or you'd increase it by revaluing I guess ? Is $12.5k available LOC enough of a buffer ?
 
jaycee said:
Curious to find out this bit......

If a $350k property is purchsed using $87.5k LOC (out of avaialble $100k), then you would be up for interest on $262.5k mtge and LOC mtge...hard to find a cf+ place, you'd have to pay to hold it.. If you let the interest on the LOC capitalise, you'd reach your limit soon and would then be up for exhorbitant interest rates or you'd increase it by revaluing I guess ? Is $12.5k available LOC enough of a buffer ?
Click to expand...

Hi Jaycee,

Yes, there would be a shortfall that would need to be covered. The LOC would be there as an emergency only, and I wouldn't suggest capitalizing interest with such a small amount available.

Anyway, you set me a challenge. This is what I came up with looking around an area I am familiar:

This house here is selling for between $300,000 and $330,000.

http://www.domain.com.au/Public/PropertyDetails.aspx?adid=2007783481

It is reasonably well located, close to transport (zone 1 train into the city), shops and schools. You could possibly purchase it for around $310,000. Here are the figures:

Purchase Price: $330,000
Stamp Duty @5% of purchase Price: $16,500
Conveyancer etc: $1,500

Total: $348,000

Finance:

80% on a Standard Variable Mortgage with One Direct = $264,[email protected]% = 13,305.60 p/a

LOC used to fund the 20% plus costs amounting to $84,000 @ 6% (With other bank) = 5,040

Total Interest costs amount to: $18,345.6

Realistic rent @ 310 p/w * 52= $16,120 (Based on a similar property in a similar location)

http://www.domain.com.au/Public/PropertyDetails.aspx?adid=6233697


Interest shortfall p/a = $2,225.60.
Holding Costs (Rates, Water, Insurance, management fees) = $2700
Total Shortfall p/a = $4,925.60

(Tax implications are not considered).

Should rates rise to 7 or 8%, the shortfall would rise considerably! :eek: This would need to be considered when the property is purchased.
 
jaycee said:
Do banks offer a type of split account in one LOC which could allow you to use 1 LOC for more than 1 item ?
Click to expand...

It seems that Westpac have a LOC facility , IO variable at 0.7% discount ,$520 fees all inc. ,

& they are able to seperate the funds ie.$50k for Reno, $100k for Managed fund etc...... (one the 1 account - so no extra fees for a further LOC )

I am leaning towards just getting the reno done, & decididng what to do do in a few months when the dust settles !
 
Hi Murray, good idea to tackle one item first (reno work @ $100k).

Consider really carefully the managed fund route - we did that some years ago, then got out and with some self-education went the ASX path. That way, you stand to gain or lose according to market conditions at the time.

Remember that fund managers will still draw their fee regardless of prevailing conditions!!;)
 
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