Bank guarantee vs cash

[arruga]

Hi
I gotta put down a 40k deposit
Deposit bond is off the table as not enough equity in other property.
Bank guarantee is an option:
Bank gave me these figures on bank guarantee:
250 est. fee
1.25% pre payable fee every 6 months
Term deposit interest rate:3.75%

Making the numbers, after 18 months, the total fees are higher than interest earned, after tax...better off just paying cash...am I missing something ? Are the fees on the bank guarantee tax deductible ?

Thanks
a.

 

[Aaron_C]

....try another bank?

 

[EN710]

Hi
I gotta put down a 40k deposit
Deposit bond is off the table as not enough equity in other property.
Bank guarantee is an option:
Bank gave me these figures on bank guarantee:
250 est. fee
1.25% pre payable fee every 6 months
Term deposit interest rate:3.75%

Making the numbers, after 18 months, the total fees are higher than interest earned, after tax...better off just paying cash...am I missing something ? Are the fees on the bank guarantee tax deductible ?

Thanks
a.

Hi Aruga,

I'm no expert, though the fees seems like what the big banks quoted (I went with Commbank).

Depends on the circumstances, it might worth it, e.g. Off the plan purchase that's not going to settle in 1-2 years.
I locked the rate at 5.8% in 2011, the $250 fees was one time only plus 1.25% yearly fees, so it well worth the 2 years interest rate

Legal wise, I can't say anything...

 

[Paul@PFI]

Guarantee v Deposit

The buyer may want the deposit proceeds upfront and a guarantee is a turnoff as they wont see a cent until settlement. Ditto the agent who gets paid from the deposit so dont expect the agent to be too receptive.

That said, the seller might have no need for the $$ today and be happy for a guarantee. I sold a property this way and was able to negotiate a slightly higher price as the buyer didnt have immediate access to cash from his settlement. I guess the higher price is a form of interest. Win-Win.

I'm not sure about tax deductibility of a guarantee. The cost doesnt appear to relate to a cost to acquire the property for purposes of producing income as there isnt a "loan". The guarantee isnt a loan until vendor calls for the payment which they may never do. Its a undrawn facility (that is the theory) that the vendor can use if you pull out. I suspect that may make it a capital cost.

Paul
www.pricefinancial.com.au

 

[arruga]

Hi Aruga,

I locked the rate at 5.8% in 2011, the $250 fees was one time only plus 1.25% yearly fees, so it well worth the 2 years interest rate
...

The interest rate you got is a lot higher, I got 3.75%
And your fees are 1.25% yearly...I got 1.25% per six months
Same establishment fee, 250
I found out that fees are not tax deductible, therefore I make a net loss aer tax with the term deposit...what kind of term deposit is this where the fees are higher than earnings after tax ?.?.???