Cashbonds for Dummies

[thedude]

Damon,

I personally cant see the ATO allowing deductions on interest from borrowings to purchase a CB as an investment by itself.

Fair enough.

Why would you do that from a investment viewpoint when the investor would be making a cashflow loss due to the differences between your borrowing costs & CB returns rate. Theres no point to it as a "cash" investment.

Initially I thought it might be a cost effective way to pay off non-deductable debt and increase deductable. But yea, even if i could claim the borrowings for 5 years whilst the cashbond pays out, once the 5 years is up the borrwings wouldnt be deductable as the investment would have ended.

A CB's main purpose is to provide you a guarranteed income over a set term period which you bought using a lump sum deposits via a superannuation roll over or some other "cash" deposit etc etc. Its not designed to be geared.

I would sugggest you ask the ATO direct and get straight from the horses mouth so to speak.

I obtained a copy of a written ATO private ruling prior to my CB purchase that states deductability is allowable for my intent.

Hope this helps better.

Thanks Rixter, all clear now.

Cheers,

Damon

 

[geoffw]

But yea, even if i could claim the borrowings for 5 years whilst the cashbond pays out, once the 5 years is up the borrwings wouldnt be deductable as the investment would have ended.

I'm not sure if I agree- though the experts can tell you.

You borrowed, your borrowings were to produce income. At the end, You have a debt which was used to provide income. I'd be suspecting that you could continute to claim the interest on the initial loan.

 

[Rixter]

I'm not sure if I agree- though the experts can tell you.

You borrowed, your borrowings were to produce income. At the end, You have a debt which was used to provide income. I'd be suspecting that you could continute to claim the interest on the initial loan.

Thats correct. The residual balance outstanding on your LOC at the end of the CB term is still deductable

 

[TommyR]

Hi Rixter,
Just a question, with the hypothetical 5% earnt on the cashbond wouldn't that form part of your taxable income, so the effective rate of return is say, 5% less your marginal rate. The differential between the ROI on the LOC and the CB could realistically be closer to 5% than 2%.

Tom

 

[Rixter]

Hi Rixter,
Just a question, with the hypothetical 5% earnt on the cashbond wouldn't that form part of your taxable income, so the effective rate of return is say, 5% less your marginal rate.
Tom

Tom, the income return earnt from the CB would form part of your assessable gross income however any tax payable on this portion would be more than offset by your tax deductions from cashflow loss brought about by the difference between LOC interest payable & CB income return.

Hope this explains it well enough & makes sense?

 

[redwing]

Thanks for all your input on this thread Rixter; It's certainly informative !

A spreadsheet would be interesting if anyone has compiled one in any capacity

RedWing

 

[kaf]

I agree with Dt a lo doc is a cheaper alternative however a lo doc cant be used to service expenses, where as your equity coming back to you via the CB can, as well as increase your borrowing capacity.

A Lo doc is definatively a cheaper tool to use providing you have sufficient existing cashflow to cover IP expenses.

Hi Rixter and everybody

Really enjoyed this thread and learned so much!

I'm just wondering if low-doc is really cheaper if you need to improve your servicability.

Say 150k "buys" you another 600k loan from a conventional lender because of increased servicability.

600k x 7% = 42,000 interest/year (conventional lender)
600k x 8% = 48,000 interest/year (no doc)

cost of cashbond 150k x 2% = 3000 interest / year. So thats 45,000 per year with conventional loan/cashbond as opposed to 48,000 with no doc.

So in this calculation you'd be better of going with the cashbond, right? Especially if you don't actually need the yearly annuity to service debt but stick it (or even just some of it) back into an offset or the LOC. I guess it depends on the sum borrowed / products used etc. The other advantage of the cashbond would be that you could increase your leverage with a conventional loan say to 80% while no doc might only loan you up to 70% of the IP you want to buy.

Cheers

kaf

 

[ffc1883_1996]

Hey Rixter,

Can you see the cashbond strategy being dusted off and brought back to prominence again?

I've never been down this path but I think I can see cashbonds in my future due to shattered lodoc/nodoc funding market.

Regards - BJ

 

[Rixter]

Can you see the cashbond strategy being dusted off and brought back to prominence again?

Yes possibly BJ, providing you have a sufficient size loan facility already in place (before hitting DSR wall) that you can draw upon to purchase a CB/Annuity, and your chosen lender recognises it as income.

 

[Rixter]

Just an update on Cashbonds, as Im currently looking to restructure another one. Thought Id post my findings.

Just off the phone to Challenger Financial Services in relation to their Guaranteed Income Plan.

Im looking to purchase a $200,000 CB. Challenger is currently quoting me 3.01% on 5 year CB terms, and 4.22% on 10year terms.

This equates to the following payment options -

$200,000 - $43,133.58 p/a or $3,994.46 per month income payments back for 5 years.

$200,000 - $24,547.70 p/a or $2,045.64 per month income payments back for 10 years.

You can also elect to have that paid quarterly, half yearly or annually.. Just depends on your preference. I elect the monthly option for better cash flow management.

Anyway like I said, just thought Id provide an update on current rates, now Lo/No doc criteria has tightened. A CB may be a viable alternative depending upon financial circumstances.

Hope this helps.

 

[GIDDO]

I am glad you posted this Rixter. I remember the earlier thresd but tis is a good update.

I am one of those who needs a bit more servicability, in order to keep expanding the portfolio.

I was thinking about cashing my smallish 100k superfund when i get to 55 (soonish) and using that to buy a cashbond.
What do you think?

 

[Rixter]

What do you think?

I'm not sure of tax angles from rolling over your super into an allocated pension / cashing in your super so I strongly suggest you consult your chosen tax professional to make sure you dont miss anything from a taxation perspective.

If viable, in relation to cashbonds, work out what that CB income would equate to in terms of Increasing your DSR by and borrowing capacity. Then work out what you could purchase and the CG exposure you would gain from that purchase along with the holding costs.

Looking at $100k and using figures quoted to me Id say a CB would pay you between $21-22k p/a over the 5 year term.

I also suggest you consult a IP savvy MB and run your situation past them using that example CB income in conjunction with all your other financial details.

Hope this helps.

 

[BayView]

Just an update on Cashbonds, as Im currently looking to restructure another one. Thought Id post my findings.

Just off the phone to Challenger Financial Services in relation to their Guaranteed Income Plan.

Im looking to purchase a $200,000 CB. Challenger is currently quoting me 3.01% on 5 year CB terms, and 4.22% on 10year terms.

This equates to the following payment options -

$200,000 - $43,133.58 p/a or $3,994.46 per month income payments back for 5 years.

$200,000 - $24,547.70 p/a or $2,045.64 per month income payments back for 10 years.

You can also elect to have that paid quarterly, half yearly or annually.. Just depends on your preference. I elect the monthly option for better cash flow management.

Anyway like I said, just thought Id provide an update on current rates, now Lo/No doc criteria has tightened. A CB may be a viable alternative depending upon financial circumstances.

Hope this helps.

Rix, I don't understand this.

Does this mean you are paying them $3,994.46 per month, or are they paying you that per month?

If they are, then doesn't this equate to a return of 23.96% per year? If so; where do I sign up?

If it is you paying them, then how is the interest rate of either 3.01% or 4.22% considered good?

Sorry; I know it must seem dumb that I can't work out what it says. What am I missing?

 

[Rixter]

Rix, I don't understand this.

Does this mean you are paying them $3,994.46 per month, or are they paying you that per month?

If they are, then doesn't this equate to a return of 23.96% per year? If so; where do I sign up?

If it is you paying them, then how is the interest rate of either 3.01% or 4.22% considered good?

Sorry; I know it must seem dumb that I can't work out what it says. What am I missing?

Marc,

Thats is what the CB pays me per month for 5 years.

That figure is your CB purchase price divided by 5 years times the 3.01% interest rate divided by 12 months.

You get 20% of your initial purchase price back each year plus interest.

The bank recognises all of that annual payment as income - not just the interest component.

The ATO only recognises the interest component as income.

Hope this helps.

 

[BayView]

Marc,

Thats is what the CB pays me per month for 5 years.

That figure is your CB purchase price divided by 5 years times the 3.01% interest rate divided by 12 months.

You get 20% of your initial purchase price back each year plus interest.

The bank recognises all of that annual payment as income - not just the interest component.

The ATO only recognises the interest component as income.

Hope this helps.

Thanks for that.

So, as I understand it, this instrument would not work if you were borrowing the whole amount ($200 in your example) - it is actual cash?

Otherwise, if it was borrowed funds, you would be receiving your 20% of the $200k, plus interest paid, but would still be up for the interest on the borrowed $200k?

How would this work?

 

[steveadl]

The CB is not designed to make you money Marc, in fact you'll likely lose money on the difference between the rate your borrowing the $200k at and the rate you receive on the bond.

The CB is purely to increase your servicability to the bank so you can take out further loans for more property.

 

[Rixter]

Thanks for that.

So, as I understand it, this instrument would not work if you were borrowing the whole amount ($200 in your example) - it is actual cash?

Otherwise, if it was borrowed funds, you would be receiving your 20% of the $200k, plus interest paid, but would still be up for the interest on the borrowed $200k?

How would this work?

Marc, you purchase the CB all with borrowed funds from LOC/s.

The monthly CB income more than offsets the monthly LOC interest payable on the $200k example.

If you start reading from the start of this thread I have explained the structure in finer detail.

Hope this helps

 

[BayView]

Thanks Rix; read the whole lot now.

One last question;

If you are "cash poor", hence the need for the CB, then you would also be wanting to use borrowed funds for the deposit and purchase costs out of the LOC, I assume.

So, in using this CB strategy, you would want to keep some of the available equity in the LOC, or from the propertie's useable equity for this purpose?

If you use all the funds for the CB, you've got nothing left for the deposit, correct?

 

[Rixter]

If you use all the funds for the CB, you've got nothing left for the deposit, correct?

Correct Marc. You need to have the foresight to have sufficient undrawn funds available in LOC/s to cover CB purchase, plus IP deposit including purchasing costs.

Does this make sense?

 

[morg]

Hi Rix,
Just a quick question.
The 3% return you were quoted, is that fixed for the life of the annuity ?
If so, do you know of any that are variable ?
I would think over the course of a 5 or 10 year term, the likelyhood of IR rates heading up is almost certain, so a fixed return of capital with a variable investment return would be nice, or am I asking too much from our friendly financial institutions ?