Article in Fin Review
- Thread starter JoannaK
- Start date
Deposit Bonds
There is no doubt that if you purchase a property using a deposit bond there are many advantages.
However the first rule should always be, never purchase anything you cannot afford to settle today. If the opportunity allows you to onsell for a profit terrific. This should not be the reason that you purchase the proprerty in the first place.
A deposit bond allows you to use your cash or equity for other things during the constuction period.
Finally if you are going to use deposit bonds choose your property carefully, remember if it is a in a block that will appeal to owner occupiers then the property should have reasonable capital growth. Make sure the property is close to public transport shops ect, follow some of these common sense rules and you are less likely to invest in a poor performing property.
Nigel Kibel
The Investment Institute
There is no doubt that if you purchase a property using a deposit bond there are many advantages.
However the first rule should always be, never purchase anything you cannot afford to settle today. If the opportunity allows you to onsell for a profit terrific. This should not be the reason that you purchase the proprerty in the first place.
A deposit bond allows you to use your cash or equity for other things during the constuction period.
Finally if you are going to use deposit bonds choose your property carefully, remember if it is a in a block that will appeal to owner occupiers then the property should have reasonable capital growth. Make sure the property is close to public transport shops ect, follow some of these common sense rules and you are less likely to invest in a poor performing property.
Nigel Kibel
The Investment Institute
Nigel, good common sense stuff.
But unfortunately I believe a lot of people using deposit bonds are almost speculating rather than investing.
Using the deposit bond as a alternative to locking your deposit money away is a good idea. The operative word here is "your deposit money".
Henry Kaye uses deposit bonds as a cheap vehicle for entering the market, but I wonder how many participants using this strategy are then in turn hoping to get strong cap growth during the construction period such that in 2-3 years (ie. when construction of a large complex completes) the valuation is much higher than purchase price. So high, in fact, that hopefully the original purchase price is only 80% of the new valuation, and the so-called investor can essentially purchase the property for no-money down (except the original cost of the deposit bond), and assuming they can find a bank who will finance at 80% LVR rather than 80% contract price.
I think it is this class of investors whom the RBA is concerned about.
It is one thing to use a deposit bond when you already have the deposit available (albeit possibly tied up somewhere) but I wonder how many people have taken the much-higher-risk approach of hoping the capital growth is sufficient to find their [non-existent] deposit.
But unfortunately I believe a lot of people using deposit bonds are almost speculating rather than investing.
Using the deposit bond as a alternative to locking your deposit money away is a good idea. The operative word here is "your deposit money".
Henry Kaye uses deposit bonds as a cheap vehicle for entering the market, but I wonder how many participants using this strategy are then in turn hoping to get strong cap growth during the construction period such that in 2-3 years (ie. when construction of a large complex completes) the valuation is much higher than purchase price. So high, in fact, that hopefully the original purchase price is only 80% of the new valuation, and the so-called investor can essentially purchase the property for no-money down (except the original cost of the deposit bond), and assuming they can find a bank who will finance at 80% LVR rather than 80% contract price.
I think it is this class of investors whom the RBA is concerned about.
It is one thing to use a deposit bond when you already have the deposit available (albeit possibly tied up somewhere) but I wonder how many people have taken the much-higher-risk approach of hoping the capital growth is sufficient to find their [non-existent] deposit.
Thanks Kevin
There is no doubt that many people are using deposit bonds to speculate, however this is due to poor advice and ignorance.
I act as a mentor and trainer to help people invest without making the mistakes that so many make because they do not arry out due diligence. Deposit bonds are a great tool but like any tool should only be used when you understand fully understand what you are doing.
Nigel Kibel
The Investment Institute
There is no doubt that many people are using deposit bonds to speculate, however this is due to poor advice and ignorance.
I act as a mentor and trainer to help people invest without making the mistakes that so many make because they do not arry out due diligence. Deposit bonds are a great tool but like any tool should only be used when you understand fully understand what you are doing.
Nigel Kibel
The Investment Institute
deposit bonds
nkibel & Kevin
Just to add another prospective regarding these bonds..
Firstly YES i agree that there is alot of people who r being hood winked into these concrete Cities via Bonds & just following the scene of others..
Seeing the Brother or sister make $100k profit over the last 12 mths is inviting to get in...
I had a meeting last month debating with a room of senior Bankers... The Banks may do something drastic over the next 6 months... U might see max Lvrs in the SYD DISTRICT OF 70 - 80% .. This will cause a slow down in purchases & correct the rising trend...
But I have to stick up for the poor deposit Bond!! I Continue to use it twice a month... It is such a powerfull tool!!
I think that more criticism should be aimed at the investors & not the bond.. If the investment is sound there is no issue .
But YES lets roast the miss informed SYD OTP unit investor!! Who go into these deals blind foldered from hear on! (not the past!!!!!! ) (ALL 1997 - 2003 otp buyers I congratulate you!)
Cheers Ocean
nkibel & Kevin
Just to add another prospective regarding these bonds..
Firstly YES i agree that there is alot of people who r being hood winked into these concrete Cities via Bonds & just following the scene of others..
Seeing the Brother or sister make $100k profit over the last 12 mths is inviting to get in...
I had a meeting last month debating with a room of senior Bankers... The Banks may do something drastic over the next 6 months... U might see max Lvrs in the SYD DISTRICT OF 70 - 80% .. This will cause a slow down in purchases & correct the rising trend...
But I have to stick up for the poor deposit Bond!! I Continue to use it twice a month... It is such a powerfull tool!!
I think that more criticism should be aimed at the investors & not the bond.. If the investment is sound there is no issue .
But YES lets roast the miss informed SYD OTP unit investor!! Who go into these deals blind foldered from hear on! (not the past!!!!!! ) (ALL 1997 - 2003 otp buyers I congratulate you!)
Cheers Ocean
Deposit bonds can be very useful. The saved my A** in my last deal.
It was a short term thing. I'd been refused LMI on a block of flats (they're "commercial" for LMI, but not for a loan)- my banker arranged a loan which relied on guarantees signed against another property (cross collaterisation, yes, I know). The trouble was, even the 10% deposit was awaiting settlement.
The solution was the deposit bond. The bank knew I could honour it - the only problem was the timing.
It all worked out well. I have the property- and I avoided the $14K LMI bill I had expected.
It was a short term thing. I'd been refused LMI on a block of flats (they're "commercial" for LMI, but not for a loan)- my banker arranged a loan which relied on guarantees signed against another property (cross collaterisation, yes, I know). The trouble was, even the 10% deposit was awaiting settlement.
The solution was the deposit bond. The bank knew I could honour it - the only problem was the timing.
It all worked out well. I have the property- and I avoided the $14K LMI bill I had expected.
Hi all
Would not disagree with the total thrust of the article though typically full of old news and inaccurate information which may become folklore because its espoused by the governor of the RBA (assuming the media has him quoted correctly).
In what decade do these people live ?
Quote
Other new products mentioned by the RBA included split purpose, interest-only and non-conforming loans as well as redraw facilities and offset accounts. Unquote
Interest Only NEW ?
Capitalising split NEW ?
Offset accounts NEW ?
Redraw Facilities NEW ?
On average these loan features (rather than products) have been around for more than 15 years.
Even the non-conforming loan per say has been around in the form of solicitors funds for many decades.
ta
Rolf
Would not disagree with the total thrust of the article though typically full of old news and inaccurate information which may become folklore because its espoused by the governor of the RBA (assuming the media has him quoted correctly).
In what decade do these people live ?
Quote
Other new products mentioned by the RBA included split purpose, interest-only and non-conforming loans as well as redraw facilities and offset accounts. Unquote
Interest Only NEW ?
Capitalising split NEW ?
Offset accounts NEW ?
Redraw Facilities NEW ?
On average these loan features (rather than products) have been around for more than 15 years.
Even the non-conforming loan per say has been around in the form of solicitors funds for many decades.
ta
Rolf
Ocean
I could not agree with you more, deposit bonds are a great tool, like any tool if you do not use them correctly you may find yourself in trouble. I spend a great deal of time teaching investors how to buy correctly and certainly if it is an off the plan purchase then deposit bonds are great.
The articles sole point is that if you use a bond to purchase a property that you cannot afford this is a mistake.
This one of the few industries where people are foolish enough to buy things they cannot afford.
If you could afford a $30,000 car you would not buy a new $100,000 one and yet people purchase properties this way.
Seek professional advise as to what you can afford to purchase before you start your research.
If you follow some basic rules deposit bonds are a terrific
tool.
Nigel Kibel
The Investment Institute
I could not agree with you more, deposit bonds are a great tool, like any tool if you do not use them correctly you may find yourself in trouble. I spend a great deal of time teaching investors how to buy correctly and certainly if it is an off the plan purchase then deposit bonds are great.
The articles sole point is that if you use a bond to purchase a property that you cannot afford this is a mistake.
This one of the few industries where people are foolish enough to buy things they cannot afford.
If you could afford a $30,000 car you would not buy a new $100,000 one and yet people purchase properties this way.
Seek professional advise as to what you can afford to purchase before you start your research.
If you follow some basic rules deposit bonds are a terrific
tool.
Nigel Kibel
The Investment Institute
I think the main reason for the statement from the RBA is to try stop lazy people making dumb mistakes.
As previously stated within this thread, people are buying units that they quite simply can't afford by using dep bonds. All of us here, are people who have, or are, taking the time and making the effort to educate ourselves about investing.
Unfortunately, lazy, greedy people do things without thinking it through and then blame everyone else for there mistakes, usually the various layers of governments.
I think the RBA is covering their own tails, (and rightly so) by clearly stating that dep bonds create a commitment which must be honoured sometime in the near future.
Macca
As previously stated within this thread, people are buying units that they quite simply can't afford by using dep bonds. All of us here, are people who have, or are, taking the time and making the effort to educate ourselves about investing.
Unfortunately, lazy, greedy people do things without thinking it through and then blame everyone else for there mistakes, usually the various layers of governments.
I think the RBA is covering their own tails, (and rightly so) by clearly stating that dep bonds create a commitment which must be honoured sometime in the near future.
Macca
reply to jas
Jas
If you were broke, did not have a job and lived in a commission house you would not get the deposit bond in the first place.
After all this is an insurance policy and you still need to meet certain standards to qualify, such as existing equity or proof that you have a borrowing capacity.
Nigel Kibel
The Investment Institute
Jas
If you were broke, did not have a job and lived in a commission house you would not get the deposit bond in the first place.
After all this is an insurance policy and you still need to meet certain standards to qualify, such as existing equity or proof that you have a borrowing capacity.
Nigel Kibel
The Investment Institute
A few years ago, people who bought off the plan and settled at the peak of the boom did very well. But now the environment has changed.
When you buy off the plan, your purchase cost is fixed, but if property prices stagnate or fall, you could end up paying more than the property is worth, especially if interest rates rise up as they are likely to next year.
I have come across a few people who are due to settle on proprties bought off the pan with deposit bonds and they are unable to settle now. They have put their properties on the market but there are no buyers at anywhere near the price that are going to have to pay in a few months to settle. I know that a number of investors have been told to cut their losses and sell now anyway!
This makes for interesting times as a number of desperate vendors are going to come up in each of the many apartment buildings that are being completed.
In the current environment I feel you must be very, very careful buying off the plan. Some bargains may be coming up.
When you buy off the plan, your purchase cost is fixed, but if property prices stagnate or fall, you could end up paying more than the property is worth, especially if interest rates rise up as they are likely to next year.
I have come across a few people who are due to settle on proprties bought off the pan with deposit bonds and they are unable to settle now. They have put their properties on the market but there are no buyers at anywhere near the price that are going to have to pay in a few months to settle. I know that a number of investors have been told to cut their losses and sell now anyway!
This makes for interesting times as a number of desperate vendors are going to come up in each of the many apartment buildings that are being completed.
In the current environment I feel you must be very, very careful buying off the plan. Some bargains may be coming up.
Re: reply to jas
Originally posted by nkibel
If you were broke, did not have a job and lived in a commission house you would not get the deposit bond in the first place.
I admit I'm generalising... but in a Henry Kaye introduction, one of the success stories came from a single (non-working) mother. A few years back, depoist bond providers where a bit more lax.
Now, they have tighten themselves up.
Jas
Originally posted by nkibel
If you were broke, did not have a job and lived in a commission house you would not get the deposit bond in the first place.
I admit I'm generalising... but in a Henry Kaye introduction, one of the success stories came from a single (non-working) mother. A few years back, depoist bond providers where a bit more lax.
Now, they have tighten themselves up.
Jas
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