Advice request - loan structure

[dreamer007]

Hi all,

I have 4 IPs now with following structures:

1) WA - loan $360K - estimated value $420K - IO Fixed for 3 yrs at 4.84%
2) NSW - loan $410K - estimated value $520K - IO Variable around 5.16%
3) NSW - split loan -
(i) $185K P+I, fixed at 4.84% for 3 years
(ii) $260K IO, variable at 5.16%
4) QLD - loan $295K, estimated value $370K, IO Variable at 5.6%

I'm highly geared and a high risk taker. Aim is to achieve financial freedom as soon as practically possible.

- Is this a very bad loan structure? Should I always have left a little bit at variable, so that I could refinance? Would you consider selling or refinancing and pulling out all equity?
- Bit scary without a safety buffer to be honest....advice please!

Any suggestions please?

 

[Terry_w]

Are you living in No. 3?
any cross collateralised?
Where is the offset account?

Variable rates are a bit high.
Might be pretty hard to change lenders now.

 

[Paul@PFI]

Gearing v's taxable income ? What the marginal tax rate on your last dollar of negative gearing ?

Have you projected when the -ve gearing becomes +ve ?
(I'm talking cashflows after tax)
PIA can help with this.

If you were forced to sell one property is it one on a variable rate loan ?? What would the CGT cost be for that property ? After CGT and payout how much cash is left? What would you do with it?...remember paying down fixed can result in penalties. Would that sale change your financial committments suffciently so that another sale isnt needed ??

I always ask clients to consider that "what if" scenario. It comes from a client experience. Had multiple commercial props (hardware group) and recall how his major bank treated him..They were all fixed and cross collateral was maxed and highly leveraged. They insisted out of blue all be sold OR they would liquidate the properties and his hardware chain. No warning...Three months in a illiquid time for property.

The sale netted enough to pay out loans but his rents rose 30%+ and business wasnt viable. Moving wasnt viable....Refinance not viable. Sale of business was the final option.

Always have an exit plan. If your bank called you and expressed concern with your gearing that plan could be difference between pass and fail.

 

[dreamer007]

Are you living in No. 3?
I did for 6months, but now renting elsewhere. Plan to go back and live there before 6yrs expires to avoid CGT.

any cross collateralised?
No
Where is the offset account?
Against 3 (i) - so the P+I loan has offset against it

Variable rates are a bit high.
Agree...so perhaps I could refinance the variable loans?
Might be pretty hard to change lenders now.

--------------------

Gearing v's taxable income ?
Not sure what you mean...I guess, Gearing around 90%, Taxable income from salary about 130K.

What the marginal tax rate on your last dollar of negative gearing ?
Again not sure, but I guess Around 30%

Have you projected when the -ve gearing becomes +ve ?
The NRAS ones are close to neutral now. Others are only very slightly -ve. Should be positive if I could put in about 40K into the two non-NRAS properties...so maybe in 4-5years if I pay down after the fixed interest terms ends

If you were forced to sell one property is it one on a variable rate loan ??
Yes, (3)
What would the CGT cost be for that property ? After CGT and payout how much cash is left? What would you do with it?...remember paying down fixed can result in penalties. Would that sale change your financial committments suffciently so that another sale isnt needed ??
Hopefully no CGT, as I plan to move back into it within 6yr period to avoid CGT. Looking at the area growth it should be sufficient for other shortfalls

Thanks a lot Terry and Paul, appreciate it very much!

 

[Terry_w]

It might be a bit difficult to move lenders at the moment as you would be up for LMI again. I would just ask the existing lender for a discount and wait 6 months and then reassess.

Also we didn't discuss where the deposits for the investments came from.
Did you use cash, redraw or set up new splits?

 

[Paul@PFI]

If you were forced to sell one property is it one on a variable rate loan ??
Yes, (3)
What would the CGT cost be for that property ? After CGT and payout how much cash is left? What would you do with it?...remember paying down fixed can result in penalties. Would that sale change your financial committments suffciently so that another sale isnt needed ??
Hopefully no CGT, as I plan to move back into it within 6yr period to avoid CGT. Looking at the area growth it should be sufficient for other shortfalls

No - If you were forced to sell it there will be a CGT issue. How much is it? Work it out so you know how much cashflow it can release. Does the residual cash amount to enough so that financial commitmets can be eased and a further sale avoided ?? Good to hear your loan of the "firesale" IP is variable.

If most props are neutrally geared you shouldnt have any issues. If property took a dive you wouldnt have to sell. Unless rental income dropped ?

Its important to review strategy and portfolio and look at it critically from time to time. Some investors think they have huge debt and risk when its quite low risk. Look at the worse case issues and if you can sell one and aleviate any concerns its probably a good setup. If all loans are fixed it could add problems. Variable is good for breaking the loan and/or reducing debt with surplus cash. It comes with a marginal extra rate cost but thats not so bad. Remember fixed rates will end at some point anyway.

Your loan structure may not be as bad as you think if you have some contingencies. The worst ones are where the borrower has a marginal tax rate that is very low (19% or 0%).

 

[dreamer007]

Terry, All deposits from genuine savings.

Paul, not that much capital gains as they are all only a couple of years old max...I would say none that will let me refinance without paying LMI...so yeah...little bit of a tight squeeze at the moment, but hopefully in 6months to a year, things will ease...but the challenge is I just got married and wife isn't working at the moment, so expenses may sky rocket...hard to build a cash buffer for a rainy day...

 

[Terry_w]

Terry, All deposits from genuine savings.

This is going to cost you dearly in more tax over the next 30 years.

Next time consider borrowing to pay the deposits, increase deductions and decrease non deductible debt.

 

[Redom]

Hey dreamer007, just note that it can be more difficult to equity release NRAS investment on refinances. A lot of the good NRAS lenders (90%+) only allow dollar for dollar refinances.

You may be able to get around it, but your likely to have a more limited span of choice in lender (beyond the normal NRAS limitations).

Have you projected when the -ve gearing becomes +ve ?
The NRAS ones are close to neutral now. Others are only very slightly -ve. Should be positive if I could put in about 40K into the two non-NRAS properties...so maybe in 4-5years if I pay down after the fixed interest terms ends

 

[dreamer007]

Yes, NRAS is not bank's favourites...I seem to have learnt that just recently! Atleast got a couple of non-nras under my belt, so that should help in the long term. So I guess, my options are to either reduce the debt (increasing offset buffer rather) in the next 3yrs (my fixed interest period), and let off the gas pedal a bit and not go into deeper debt...

 

[Redom]

Depends on the bank, some lenders have pretty good NRAS policies that dont differentiate much compared to non NRAS securities.

You should be able to refinance NRAS debt (as per normal guidelines), but taking out any equity can be difficult.

Not certain whether this will help you, but you can refinance NRAS debt to rates as low as 4.69% with one lender, who have particularly strong servicing.

 

[Peter_Tersteeg]

The challenge with NRAS properties is that most lenders more long term. Most lenders won't recognize the tax benefits in their affordability calculators, they'll only use the actual rent the tenant is paying.

The effect of this is that whilst you might be getting good cash flow from the property, from some lenders perspective, the cash flow is quite bad, thus reducing what they'll lend.

This isn't a problem with every lender but enough to reduce your longer term options.