Cashbond / Annunity

[magic]

Are Cashbonds / Annunity still being accepted as income for IP loans. Will most lenders accept it?

How many years term is required for it to be accepted, is it 5 year or 1 year cashbond?

If you purchased a $100,000, 5 year cashbond, you get an income of $20,000+interest per year. So why is it that the lender will lend you 4-5x the cashbond amount of $100,000 = $400,000 to $500,000, when you are only getting $20,000+interest as income each year. Shouldn't it be 4-5x the $20,000+interest

Approx how many times the cashbond purchase price amount or annual cashbond income amount will a lender lend you? Is it 4-5x?

If a lender would normally lend me $300,000 via employment income, if I get a cashbond like the above example, does that mean I can get a loan of $300,000+$400,000 = $700,000?

 

[D.T.]

5 years is generally better, and lender will normally want to see you as having earned that for 1-2 yrs already to 'verify' it.

To me, it seems like an awesome way to burn up all your equity. If you had a decent broker they'd be mapping out which lender each of the next 10 purchases will be with so as to not get into the situation where you'd require them to begin with.

 

[Bantam Roosta]

To me, it seems like an awesome way to burn up all your equity. If you had a decent broker they'd be mapping out which lender each of the next 10 purchases will be with so as to not get into the situation where you'd require them to begin with.

Not knowing the detailed ins and outs of cash bonds, if you are equity rich but serviceability poor they seem like a great idea. Even the 'loosest' lenders have a serviceability threshold, so these provide a mechanism to get you over the line.

BR

 

[Mick C]

Are Cashbonds / Annunity still being accepted as income for IP loans. Will most lenders accept it?

How many years term is required for it to be accepted, is it 5 year or 1 year cashbond?

If you purchased a $100,000, 5 year cashbond, you get an income of $20,000+interest per year. So why is it that the lender will lend you 4-5x the cashbond amount of $100,000 = $400,000 to $500,000, when you are only getting $20,000+interest as income each year. Shouldn't it be 4-5x the $20,000+interest

Approx how many times the cashbond purchase price amount or annual cashbond income amount will a lender lend you? Is it 4-5x?

If a lender would normally lend me $300,000 via employment income, if I get a cashbond like the above example, does that mean I can get a loan of $300,000+$400,000 = $700,000?

1. Banks will need to see this payment/interest on 2 of your most recent tax returns ( there's one lender that will be ok to accept 1 years- LVR under 80% + can't be unemployed)

2. No real min guidelines as it's case by case depending on your financial position...we have gotten loan approved with a 3 years Annuity period, while others required a min of 4-6 years. Generally the longer the better but not everyone wants to lock their cash into a long term Annuity.

3. $20,000 interest on a standard Annuity ( presuming it's not a superannuation Annuity) will increase your borrowing capacity around $135,000- $165,000 depending on the banks.

4. There's other ways to increase serviceability....so make sure you explore other options first.

5. Cash bond is not for everyone; but yes it will increase serviceability- but ob you should seek independent financial advice as it's still an form of "investment" and it's not generally bought for serviceability reasons

Regards

 

[Bantam Roosta]

3. $20,000 interest on a standard Annuity ( presuming it's not a superannuation Annuity) will increase your borrowing capacity around $135,000- $165,000 depending on the banks.

The desired effect doesn't seem as strong when put like that. You can lock away $100,000 in order to access an extra $150,000 in borrowings, so really you are only able to access an extra $50,000, but your equity is locked up for 5 years.

BR

 

[turk]

The desired effect doesn't seem as strong when put like that. You can lock away $100,000 in order to access an extra $150,000 in borrowings, so really you are only able to access an extra $50,000, but your equity is locked up for 5 years.

BR

Ahh,but can you cancel the Cash Bond after receiving the loan and if so at what cost?

 

[stumpie]

Rixter

where are you? time to chime in and let us know what your thoughts are.

 

[Rolf Latham]

Many lenders will accept annuity ( ie private pension) income as long as it canbe shown to be in existence 5 years or more from now.

for it to work you need a busload of fuel ( equity) and its rare that the same borrower doesnt have access to funding via more traditional means if they have been portfolio managed.

If their borrowing structure is "show up and throw up" due to various lenders and brokers with conflicting advice, an annuity can often be the only real solution to progress without selling down part of the portfolio and starting again.

ta
rolf

 

[stumpie]

Many lenders will accept annuity ( ie private pension) income as long as it canbe shown to be in existence 5 years or more from now.

for it to work you need a busload of fuel ( equity) and its rare that the same borrower doesnt have access to funding via more traditional means if they have been portfolio managed.

If their borrowing structure is "show up and throw up" due to various lenders and brokers with conflicting advice, an annuity can often be the only real solution to progress without selling down part of the portfolio and starting again.

ta
rolf

Rolf

what if a person is asset rich with lots of equity but fails in the DSR department. how can he convince the banks to release equity in an LOC assume he is no longer working?

 

[Vixs]

Rolf

what if a person is asset rich with lots of equity but fails in the DSR department. how can he convince the banks to release equity in an LOC assume he is no longer working?

You would need to already have an approved, undrawn LOC available sufficient to fund the deposit and costs on the purchase, plus enough to purchase the annuity.

If you're already at the borrowing threshold serviceability and equity wise, this is not the strategy for you.

Where this will come into play is where you have all the other means to get you across the line, but your sources of income are not recognised by the banks.

Capital Growth is not 'income' that can be used for servicing - however if you can establish an equity loan, in reality you can use those funds as 'income' as it's essentially a giant credit card. The purpose of the annuity is to turn this unrecognised 'income' into a stream of income the banks are happy to recognise. On paper you're losing money by doing so, but if it allows your accumulation phase to continue, the idea is you'll be better off with the larger portfolio.

Much of the confusion in the threads around this is from people that don't seem to have a full grasp of how serviceability works from the lender's perspective, or people who don't need to go down this path at all. For those living off equity it's an option.

 

[Rixter]

5 years is generally better, and lender will normally want to see you as having earned that for 1-2 yrs already to 'verify' it.

Not correct...a couple months earned verification.

To me, it seems like an awesome way to burn up all your equity. If you had a decent broker they'd be mapping out which lender each of the next 10 purchases will be with so as to not get into the situation where you'd require them to begin with.

All ones equity is not burned up.

If someone has got themselves into a situation where they'd required a CB its too late then to structure one anyway.. they've already painted themselves into a corner and the damage it done. They need to have the foresight to have placed them selves in position to already have a CB already structured prior to hitting DSR limits.

 

[Rixter]

How many years term is required for it to be accepted, is it 5 year or 1 year cashbond?

Five year term for us.

Approx how many times the cashbond purchase price amount or annual cashbond income amount will a lender lend you? Is it 4-5x?

We found it to increase our borrowing power 4 times our CB purchase price.

 

[greedy2000]

have you ever just stopped and had a thought that the bank is actually doing you a favour by refusing you a loan.

perhaps you can't afford that extra property and artifically trying to "trick" them into lending you more money isn't the best way to go....

I know when we enter into financial transaction we have the best intentions and hopes, but sometimes the S&*t just hits the fan and you'll be grateful that you weren't leveraged up to the eyeballs.

 

[Rixter]

but your equity is locked up for 5 years.

Once its used to get you across the DSR line, then commute it and put the funds back into the LOC where they came from to purchase the CB in the first instance..... once its served this purpose there is no need to keep the status quo by allowing it run to term maturity. The longer it runs the more it costs you in equity burn.

 

[Rixter]

Ahh,but can you cancel the Cash Bond after receiving the loan and if so at what cost?

Yes you can commute the annuity before term maturity. It basically costs nothing to do so. The only real costs to you is the slight equity whilst it still structured which brought about due the interest percentage rate difference between your LOC and your annuity return. The longer its runs the more burn. Once its commuted the burn is terminated also.

 

[Rixter]

have you ever just stopped and had a thought that the bank is actually doing you a favour by refusing you a loan.

perhaps you can't afford that extra property and artifically trying to "trick" them into lending you more money isn't the best way to go....

I know when we enter into financial transaction we have the best intentions and hopes, but sometimes the S&*t just hits the fan and you'll be grateful that you weren't leveraged up to the eyeballs.

It comes down to ones financial situation, knowledge level and personal risk profiles.. we are all different in this regard and as such our situations and risk profiles also differ.

Whats correct for one person does may not align with someone else.

There is no right or wrong ways. Just different ways and its up to the individual to decide which way is suited best to them based around their finances, knowledge & personal risk profile.

You can only pass judgment for yourself. So when you hear someone stating to someone else its best to this or that they are relating to themself as the benchmark for the statement.

I hope this helps.

 

[Peter_Tersteeg]

have you ever just stopped and had a thought that the bank is actually doing you a favour by refusing you a loan.

perhaps you can't afford that extra property and artifically trying to "trick" them into lending you more money isn't the best way to go....

Yes and no. Annuities are a fairly advanced strategy and they're definitely not suitable for most people.

If someone is sitting on 2-3 IPs with a modest amount of equity and they try to employ this strategy, I'd definitely agree with you. This isn't the profile of an experienced investor. There probably isn't enough equity to fund the annuity and have left over for deposits. Servicing for this person might be tight and their strategy and resources aren't really refined to the point where they can mitigate risks.

If someone has over a dozen IPs, is sitting on a couple of $M in equity and has an active investment strategy which they've spent years refining, it's a whole different story. As Rixter indicated, this person isn't likely to be coming for an annuity at the last minute, it's going to be a more considered element of a larger strategy. The equity eaten up by the annuity is probably only going to be a fraction of what they have.

In reality I've found that an annuity isn't a a strategy in itself; it's one element in a larger strategy. The people who use an annuity successfully might usually have multiple options. Sometimes they need the annuity due to a lack of pre-planning, sometimes it's the best option available.

 

[Rixter]

Rixter

where are you? time to chime in and let us know what your thoughts are.

Im chiming.. I have posted extensively on this subject under cashbonds for dummies.

 

[Rixter]

If someone has over a dozen IPs, is sitting on a couple of $M in equity and has an active investment strategy which they've spent years refining, it's a whole different story. As Rixter indicated, this person isn't likely to be coming for an annuity at the last minute, it's going to be a more considered element of a larger strategy. The equity eaten up by the annuity is probably only going to be a fraction of what they have.

In reality I've found that an annuity isn't a a strategy in itself; it's one element in a larger strategy.The people who use an annuity successfully might usually have multiple options.

Correct.......its a strategy, for someone further down the investment road, at their disposal that can be used as part of their bigger picture strategy.

A tool for the more experienced investors with substantial size portfolio / equity holdings available to utilise after less impacting options may have been exhausted.

 

[Vixs]

have you ever just stopped and had a thought that the bank is actually doing you a favour by refusing you a loan.

perhaps you can't afford that extra property and artifically trying to "trick" them into lending you more money isn't the best way to go....

I know when we enter into financial transaction we have the best intentions and hopes, but sometimes the S&*t just hits the fan and you'll be grateful that you weren't leveraged up to the eyeballs.

The banks aren't doing anyone a favour but themselves. Their policy is designed for every day people, it is not in any way equipped to handle the miniscule number of people in Australia this is the appropriate solution for.

When assessing if you can afford a loan the bank just wants to see do you have enough income of a type they choose to make the assessment monthly repayments they'll need. Some will want just 1 times that, some will want to see 1.1 or 1.25 times that amount.

At 7.5% p.a. over 30 years, it's going to cost $7/mth P&I per $1,000 borrowed. If you can get an income acceptable to the bank that boosts your income by say, $1,600/month (the current quote for a $100k 6 year annuity) you can borrow another $228,500 dollars. Interest only repayments on the actual current rate, not the assessment rate, might be $950/month. For a $200k annuity you could get $457k new lending. Rates for 5 year annuities elude me but that would boost the effectiveness of the strategy significantly.

You shouldn't need to do this, it's not something to 'aspire' to have to do, but it's a bloody clever way for those with the attitude towards debt to cope with it, to keep growing their assets and accumulating once their employment income dries up and they're living off equity.