Cashbonds for Dummies

[jaycee]

Constructive as usual PB.

What is your strategy? Do you even have one?

locko,

We are questioning what we do not understand. , depstie the multiple pages of dsicussion on it.



Perhaps you can answer the questions for us and be one to provide som eof the constructive input ??

I am getting the impression that thi sis good for people hwho ahve builit up lots ande lots of $$$$ worth of assets, and want to keep accumulating more , not for people like me who are trying to build them BUT, reading the posts on the subject, I think this part is not very well explained / discussed.

Not that there is nanythgin wrong with that ! But I think it important for me to understand that befor I go thkning I have a plan based oon somethinn I read on a fourm which I didn't udnerstand/.

Asking piston if sacastically if i he has a strategy could be seen as "non constructive" as you told him his post was.

 

[locko24]

locko,

We are questioning what we do not understand. , depstie the multiple pages of dsicussion on it.



Perhaps you can answer the questions for us and be one to provide som eof the constructive input ??

I am getting the impression that thi sis good for people hwho ahve builit up lots ande lots of $$$$ worth of assets, and want to keep accumulating more , not for people like me who are trying to build them BUT, reading the posts on the subject, I think this part is not very well explained / discussed.

Not that there is nanythgin wrong with that ! But I think it important for me to understand that befor I go thkning I have a plan based oon somethinn I read on a fourm which I didn't udnerstand/.

Asking piston if sacastically if i he has a strategy could be seen as "non constructive" as you told him his post was.

Perhaps you are right Jaycee.

This is my understanding:

The cashbond does not increase your income obviously, as it costs you money for a cashbond. The bank probably paid for the cashbond.
The cashbond increases your servicability to 'tick all their boxes'. The bank sees you earning a regular income.
If the bank new exactly what you were doing, i'd guess you'd be even more unlikely to be approved for finance.
You need to be able to afford the repayments with/without a cashbond, as the cashbond actually lowers your income in real terms, but increases your income through the bank's eyes. That's a good reason to cash-in the cashbond once you've been approved!

 

[Rixter]

But by equity hass dropped..... $100k and my expense haave gone up $7000 odd per annum - so my nexcw GROSS income after expenses, but b efore tax = $18,000

Using your figures...The bank now see's $25k income.... the actual cost to you per annum is the interest rate difference between your borrowing cost from LOC and the Interest being paid you from your annuity provider.

Does this mean this is for more advanced incesteors

Yes correct.

Who / when is this type of strategy suitable for ?

Its for asset rich cash flow poor investors with substantial equity behind them who want to keep building their portfolio but are about to hit the DSR wall.

 

[Melbear]

Hi Rixter
Have you used the cashbond recently? Trying to help my folks out to make their banking easier to manage for their 5 props. They've been told that age is a huge factor now, and they're in their 60s which is obviously making it a higher income requirement for them.

 

[Rixter]

SO it will work well if you have a shedload of equity but not enough income in the bank's eyse

If I wnated to buy asay a $500k property
And I had say a $600k LOC available... but m,y income was too low and the bank said nah, we wont lednd you more money as amotgage...

Instead of buying a cashband with some or all of my $600k LOC .. couldn't buy the blooody proerty with my $600k LOC and be done with it ?

A CB will allow you to increase your asset holdings to approx 4 times the CB purchase price over and above your current capacity. ie so if you used your LOC to purchase a $150k annuity it would allow you to increase your asset base another $600k approximately.

So instead of using your $600k LOC for a $500k IP , you could use $150k for a annuity and still have $450k left for more IP deposits and safety buffers and purchase multiple IP's instead

 

[Rixter]

Of course you pay many fees for the honor of giving them your money so they give it back.

You are effectively purchasing an income so therefore it comes at a price. You should examine your own personal sitution and decide whether its for you only after you have explored and/or exausted all other less inpacting options available.

Always sounded dumb to me, and now looking back sounds even dumber.

The extra CG achieved by increasing your portfolio aset base (providing you have done your homework & bought well) more than offsets your CB purchasing cost over the five year term.

If that's dumb, then I guess there's no pleasing some people.

 

[Rixter]

Hi Rixter
Have you used the cashbond recently? Trying to help my folks out to make their banking easier to manage for their 5 props. They've been told that age is a huge factor now, and they're in their 60s which is obviously making it a higher income requirement for them.

Yes still being done today...I strongly suggest you contact Steve Navra (who taught me about this strategy) to run your situation past him to get a clearer perspective on options available.

 

[jaycee]

Originally Posted by jaycee


But by equity hass dropped..... $100k and my expense haave gone up $7000 odd per annum - so my new GROSS income after expenses, but b efore tax = $18,000

Using your figures...The bank now see's $25k income.... the actual cost to you per annum is the interest rate difference between your borrowing cost from LOC and the Interest being paid you from your annuity provider.
[B}And the bank would also see your LOC has dropped by $100k cause you spent the moeny right ? So your LVR has gone up because you just increased your "LOAN" by $100k[/B]

Quote:
Originally Posted by jaycee
Does this mean this is for more advanced incesteors


Yes correct.



Its for asset rich cash flow poor investors with substantial equity behind them who want to keep building their portfolio but are about to hit the DSR wall.

Perhaps that wasn;t as clear to some of us as you intended to make it - jsut saying, you know....

which is probalby why people like me can;t see how / when it would be relevant

IF I had on ly $100k LOC approve dononly and at high as hell LVR, , it would not be the best thing to do./......

If I had $500k LOC approved , I could afford to buy the whole IP without bothering to go thorugh all this complication

I know this has apparently worked for you, I'm not going to argue that, I'm sure ity did work..... but for me to understand how it works, take me obviously a bit more than it you / some others......and I'm still not there yet based on what I've read & understood....

 

[Rixter]

If I had $500k LOC approved , I could afford to buy the whole IP without bothering to go thorugh all this complication

Yes you could use this already approved LOC to purchase the IP outright. It all comes down to your personal risk profile as to how aggressive you want to build your portfolio asset base.

but for me to understand how it works, take me obviously a bit more than it you / some others......and I'm still not there yet based on what I've read & understood....

No prob....feel free to post further queries that pop up. Dont get me wrong Im not telling you this is the be all and end all but its just another option to learn about should you wish.

 

[jaycee]

Yes you could use this already approved LOC to purchase the IP outright. It all comes down to your personal risk profile as to how aggressive you want to build your portfolio asset base.


No prob....feel free to post further queries that pop up. Dont get me wrong Im not telling you this is the be all and end all but its just another option to learn about should you wish.

Cheers, Rick, I didn't want it to sound like I was "quwstioning" what you "weren't telling us"....

So is there a benefit of cashbonds over the LOC method ?

I can really only think of the security etc over the proerty & Loans...

The new mortgage would be against the new property..the LOC would be against the older propoerty/properties in the portfolio...

 

[Rixter]

So is there a benefit of cashbonds over the LOC method ?

The cashbond structure is a last resort option tool at your disposal when you have exhausted other lower cost options to obtaining further loan funds.

You have to have the foresight to keep sufficient funds available in your LOC/s to purchase a CB if thats the route you choose to pursue for increasing DSR. If you dont leave sufficient funds in your LOC when you hit the DSR wall you will be caught in a catch 22 situation.

I hope this helps

 

[Piston Broke]

So instead of using your $600k LOC for a $500k IP , you could use $150k for a annuity and still have $450k left for more IP deposits and safety buffers and purchase multiple IP's instead

Or you could just use a 600k LOC as deposits to buy IPs without any cashbond.
It comes down to cashflow, and CB is not real cashflow, plus all the fees.
Especially when banks were giving away money to anybody, which is when this was being pushed the most.
But lo docs still exist without "buying" or paying to get your own money back.
Infact they should be paying for the use of your capital.

 

[jaycee]

Or you could just use a 600k LOC as deposits to buy IPs without any cashbond.
It comes down to cashflow, and CB is not real cashflow, plus all the fees.
Especially when banks were giving away money to anybody, which is when this was being pushed the most.
But lo docs still exist without "buying" or paying to get your own money back.
Infact they should be paying for the use of your capital.

the fact that the cashbond returns less than the interest on the loan it was founded from still makes it sound to me as if you'd ony use it if you don't need to, for reasons I can't really work out.

or if you has nearly enough equity to buy it outright but not quite and not enough income to svce a loan for it...

so you have $300k loc.. you use $100k for a cash bond, $100k for 20% deposit.. and the cahsbond gets you over the line income wise

But your loan has increased by $100k-your available LOC has decreased by 1/3!

Why wouldn't this affect your LVR and eligibility for loan via one of those measures ?

Perhaps , it is a 5 yr cashbond, it is a 5yr Interest Only loan.. and the numbers stack up.... you wear the 2% interst cost as part of your expenses knowing it's also tax deductable etc.. still that's nearly the amount of say water rates & insurance combined per year...

 

[Piston Broke]

My experience is that if I have 100k in my hand, there are plenty banks out there that would lend me 300k to buy property.
This was before the banks started giving money away to anybody, and after.
This whole concept was promoted here by those taking fees on it when banks where giving money to everybody. With 100K you could get 4-500k easily in those days.
And in their own words they were proud of taking your fees 6 times on the same money, if i recall.
The cost of a broker to shop around was much cheaper, but fortunately for them there was plenty ignorant and incompetent bank staff telling prospect "yu don't have enuff income"

 

[Rixter]

Or you could just use a 600k LOC as deposits to buy IPs without any cashbond.

Yes of course you could use the $600k as further IP deposits but where are you going to obtain the balance of funds needed to complete settlement if you have hit the DSR wall with your bank/lenders?

It comes down to cashflow, and CB is not real cashflow, plus all the fees.

That's your paradigm..What is 'real' cash flow? Isnt cash flow derived from income? If you sell an IP and realise a profit isnt that classed as income? The ATO recognises it as being so and hits you with CGT. Why not access that profit without the need for selling and use it to show as income for DSR purposes? It all comes down to ones paradigm.


I'm charged no fees to create a CB. The only cost I have is as I have previously mentioned, that being the interest rate difference between Annuity & LOC. What are all these fees you mention ?

But lo docs still exist without "buying" or paying to get your own money back.

What does a lo doc have to do with increasing DSR? You can still hit DSR walls attempting to obtain a lo doc loan.

Infact they should be paying for the use of your capital.

They do. Its called interest and your annuity provider pays it to you monthly, quarterly, 6 monthly or annually - however you choose.

 

[Rixter]

But your loan has increased by $100k-your available LOC has decreased by 1/3!

Why wouldn't this affect your LVR and eligibility for loan via one of those measures ?

Because your LOC/s are already accounted for as being fully drawn by your bank/lender irrespective of whether you still have $100k still available in it or not. You drawing funds from your LOC does not increase your LVR any further. For loan eligibility, in the banks eyes its already fully drawn anyway.

 

[Rixter]

My experience is that if I have 100k in my hand, there are plenty banks out there that would lend me 300k to buy property.

Yes providing you meet their DSR and you havent hit the wall.

And in their own words they were proud of taking your fees 6 times on the same money, if i recall.

You appear to be fixated on fees. What are these '6 times' on the same money fees you are talking about?

As mentioned early I'm charged no fees, so I'm at a loss to understand your point of view. Can you elaborate?

 

[jaycee]

Because your LOC/s are already accounted for as being fully drawn by your bank/lender irrespective of whether you still have $100k still available in it or not. You drawing funds from your LOC does not increase your LVR any further. For loan eligibility, in the banks eyes its already fully drawn anyway.

OK, I can understand that part now....

 

[Melbear]

the fact that the cashbond returns less than the interest on the loan it was founded from still makes it sound to me as if you'd ony use it if you don't need to, for reasons I can't really work out.

or if you has nearly enough equity to buy it outright but not quite and not enough income to svce a loan for it...

so you have $300k loc.. you use $100k for a cash bond, $100k for 20% deposit.. and the cahsbond gets you over the line income wise

jaycee, perhaps if I elaborate on why I'm looking at this option for my parents might help. They are in their 60's, with an LVR of 53% over 6 properties. The banks will not lend them anymore money as their incomes are too low. But they have stacks of equity. If they didn't have equity this wouldn't be possible or useful.

If I can buy them an annuity that provides $1500 per month in income, the bank will give them the loan that they have just asked for. If they wanted to borrow extra money on top of that, equity is not a problem. I would then just have to get them an annuity that provided, say $2000 per month in income.

Noting that we all know that it is not 'income', as we are merely having our own money returned to us, with a little bit of interest as the annuity provider has been using our money to make money for themselves (just like the banks do). The banks, however, don't know that it is our money being returned to us. They see the whole amount purely as income.

As has been pointed out, once your loan has been approved, you could cash the annuity in, and repay the LOC if you had borrowed the funds. Perhaps it will cost you a couple of thousand dollars, but is this not better than not getting the loan in the first place?

 

[Token Funder]

*snip*
Noting that we all know that it is not 'income', as we are merely having our own money returned to us, with a little bit of interest as the annuity provider has been using our money to make money for themselves (just like the banks do). The banks, however, don't know that it is our money being returned to us. They see the whole amount purely as income.

As has been pointed out, once your loan has been approved, you could cash the annuity in, and repay the LOC if you had borrowed the funds. Perhaps it will cost you a couple of thousand dollars, but is this not better than not getting the loan in the first place?

if you have to play silly games to get a loan, you are getting one you can't afford.

Encouraging a couple in their sixties to do this is irresponsible.