" whose risk is it anyway"
Thanks Rolf,
The risk is Barry2104's - no doubt. So too is the cost.
This is why I am curious to understand Richards advice which seems quite instructional, yet light on justification or balance. I have found it very hard to come up with a cost-benefit analysis where Richard's advice provides the compelling 'must do now' case in his post.
Whilst Barry2104 hasn't queried this, I thought someone should before he spends his nickel at the risk of discovering the downside through real life experience.
If I roll in your suggestion of CBA (accepting the lowest rate in your range and Barry2104's two year view - higher rate = worse outcome), the numbers, albeit roughly, pan out like this:
LMI
- Premium (including Stamps): $5,787
- FV of LMI (assume 4.25% inflation): $ 502
- 2 Years interest (at 5.14%): $ 586
- Total Non-deductible cost: $6,875
For that Barry2104 money, Barry2104 gets:
- A potential tax deduction on the interest on $50,000 at some time in the future
- plus the other stuff I originally mentioned
That’s the main part of the benefit assuming I follow the strategy properly (and of course there's a number of risks as well).
What is Barry2104's cost recovery view?
Looking at the tax deduction side, assume a normalised rate of 7.24% Interest Only (I assume) so:
$50,000 x 7.24% = $3,620
If Barry2104 has the worst possible tax structure and his marginal rate (albeit current rates) is 45%, his nett annual benefit is:
$3,620 x 45% = $1,629 p.a. (so cost neutral in around 7 years)
If his tax structure is okay, then he's looking more like:
$3620 x 30% = $1,086 p.a. (so cost neutral in say 8.3 years)
So it's reasonable to surmise that it will be at least 7 years before any benefit becomes realised. Of course the 7 year view is way up the end of a best case scenario (i.e. using lower rate for interest costs during PPoR phase, accepting no tax planning, conversion deifinately taking place at 2years etc).
Barrie2104 should properly consider a range of scenarios including the ugly worst case.
It seems more a case of spending the better part of $7,000 in the hope that it will produce a return after a decade or so, during which, Barry2104 is likely to see quite a bit of change that may not be in his plan just yet.
What have I missed in the analysis? Richard - any thoughts or is your thinking the same as Rolf's?
Thanks again Rolf, I've really enjoyed reading your posts.
Protect your interest!
Michael Lee