Calling financial wizzes?? Rolf?



From: Donna Larcos

I was just looking at one of my favourite
sites, Hugh's Calculators, and made a
very interesting discovery that I would like
to run by you. I have just refinanced a
home loan of $140,000 payable over 25
years paying $960 p.m. at 6.69% fixed. On
this repayment schedule $180 a month is
a principal repayment the rest interest.
After ten years my principal is 109,000
and at 20 years it's around $50,000
outstanding. Now, if I had taken an
interest only loan and just paid the $780 a
month and Invested the $180 principal
repayment into a high growth share fund
such as International shares or small
cap. company fund etc, at ten years
compounding at a conservative 12% I'd
have a balance of $41,000 against capital
paydown of $31,000 on a normal home
loan. Where it gets really interesting is, if I
continue to invest for 20 years the capital
balance of the share fund would be
$178,000 which would pay out the home
loan and leave me $38,000 five years
before pay out of the home loan. If I
managed to achieve a more realistic
average return of about 15% on a high
growth share fund it reaches an
astronomical $269,000 in twenty years
which pays out the home loan and
probably half an investment property as
well. Tell me again why I should pay out
a home loan????

Also, if a young person has a 20%
deposit for a house, will the bank lend
them an interest only loan or would they
insist on a standard home loan?

Thanks for your help.
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Reply: 2
From: Keith J

This is the principle used in the UK - it's been around a long time - they call it an Endowment Loan. It works exactly as you describe, but uses a conservative managed fund.

I still pay around 25 pounds per month for one I started 15 years ago, as it is supposed to return 20000 pounds in 10 years. I sold the house ages ago and obviously stopped paying interest, but kept the endowment bit running.
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Reply: 2.1
From: Donna Larcos

Keith - I am interested to know ... would
the endowment loan have paid out your
house at the end of ten more years if you
still had it? In a conservative fund
returning perhaps 8% I could only get it to
break even which defeated the purpose.
Was it like an insurance policy for the
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Reply: 1.1
From: Rolf Latham

Hi Donna

While I know my way around the loans market very well, I am pretty green on shares and funds.

Seems like a reasonable idea.

I suppose it depends on what sort of income you have from gearing and tax point of view -the principal payment could go to running an investment property. What sort of figures would that produce for you.

Yes most lenders will go I/O on 20 down loan.

In fact some will do 90 i/o on your home and then 90/95 i/o on your ip dep on your income and other assets (with the usual mortgage insurance costs and associated conditions). Have not done one like this, but should be very possible !


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