Finance

[WebBoard]

From: Mike .


New house: IO? P/I?
From: Carlo
Date: 18 Feb 2001
Time: 09:15:21

Hi,

I've just bought a house with my 2 cousins in North Carlton, now I have to decide what type of loan i want.

My preferred strategy was:

- Get IO loan of $100,000 (std var)
- Use the money that would have been needed to pay off $100,000 over 10 yrs and invest it in managed fund. (approx 190 per week)
- After 10 yrs, withdraw the inital $100,000 invested in mgd funds and pay off the loan, leaving what capital gain was earned in the managed funds. OR Given good appreciation, pay off loan as soon as balance in mgd fund hits 100,000, i'm assuming about 7-8 yrs.


The benefits I saw here were:

- Maximised negative gearing
- Paying $100,000 in 10 years time is not as much as paying $100,000 NOW due to rising standard of living costs
- Could achieve returns on managed funds superior to the rental rate I am paying anyhow (I've assumed 10% cap appreciation avg per yr over 10 yrs)
- Also income from managed funds
- Could use line of credit to reduce interest payments as well.


The one disadvantage I have perceived is that I will not build equity in the home so that i can use it as security to purchase another. Having said that, I have 1/3 equity in a house in Elwood whose value has soared so this disadvantage doesn't apply to me.

An accountant told me that IO is really for short-term property investment, so although i was ready to go along with my strategy, I have decided to research it more b4 committing, unfortunately I dont have much time. I just feel i'm missing something, the strategy seems so obvious.

Does anyone have any thoughts on the strategy?

Thanks for any help - Carlo

PS: My email is [email protected] if anyone wants to correspond regarding the above or property in general.

 

[WebBoard]

Alston

Reply: 1
From: Mike .


Re: New house: IO? P/I?
From: Alston
Date: 19 Feb 2001
Time: 06:49:02

This question has been asked and answered a number of times on this forum. Check previous posts.

In essence, you have chosen the correct stategy of IO and invest the difference between the IO payment and P&I payments. Ignore your accountant. Ask him how many IP's does he own and why he is still working? (you may like to skip the last question)

3 points though.

1. If you have had such good success with property, why put this difference into a managed fund? If you think managed funds are so good, why buy property.

2. Why do you want to ever pay the loan off (unless you are selling it)? There are very few circumstances where there is a benefit to paying the loan out (except perhaps retirement and even this is questionable).

Paying down the principle DOES NOT GIVE YOU EXTRA EQUITY. The money that you paid was yours to start with. Let me put it this way. If you applied for another loan, would the banks look differently at you having a property worth, say $200k with a loan of $100k or a property worth $200k with a loan of $150k and $50k in cash. Either way your equity is $100k.

Alston

 

[WebBoard]

Carlo

Reply: 1.1
From: Mike .


Re: New house: IO? P/I?
From: Carlo
Date: 19 Feb 2001
Time: 21:37:56

Thanks for the comments. A few clarifications:

The managed fund will be used to save up for another property. Plus I am assuming the managed fund will beat the interest rate, not the return on property, unfortunately the bank will not allow me to borrow more at the moment under favourable terms.

Secondly, as far as i know, unless ur super wealthy and/or own equity in a property, i wont be able to borrow extra to buy more IPs. However I see ur point and would probably reconsider this after the period is over.

Again thanks heaps for your help, i have read the previous posts, but u always get a slightly different answer to a slightly different question, and ur answer helped immensely.

PS and no i wont ask my accountat that hehe

Cheers Carlo

 

[WebBoard]

Terry A

Reply: 1.1.1
From: Mike .


Re: New house: IO? P/I?
From: Terry A
Date: 25 Feb 2001
Time: 19:20:06

You need to think carefully about using managed funds as most, if not all, financial planners will tell you that managed funds or any funds in the stockmarket should have a minimum time horizon of five years. If you are not intending to take the money out for five years then fine.

The main issue is risk, because the stock market is volatile there is a real risk of losing value in a mutual fund in a short time period. Can you afford to jeapordise your wealth building plan if the stockmarket has a decline just before you need the money to buy property? A low risk strategy, even if it may offer a lower return, is to put it into interest bearing accounts.

Also remember that 80% of mutual fund managers are unable to beat an index fund (after you take their fees into account). If you intend buying property in less than five years then look at term deposits or cash management accounts.

But that is only my opinion.

 

[WebBoard]

Sim

Reply: 1.1.1.1
From: Mike .


Re: New house: IO? P/I?
From: Sim'
Date: 26 Feb 2001
Time: 16:15:42

I certainly agree with you Terry A... we have had a string of great years with shares and managed funds... but if you dare assume that this will continue for the next 1, 2, 3 years (or however long until your next purchase), then I'll have to join the lineup of people waiting to publicly flog you ;-)

Personally... long term is 10 years plus, 5 years is only medium term !! I prefer to invest in shares and managed funds for the long term according to my own definition !

Term deposits or cash management accounts are definately the way to go if you want the money back within 1-2 years. Shop around though, there is a HUGE difference in returns on these products.

Also think about something like ING Direct (http://www.ingdirect.com.au)... online bank currently paying 5.6% pa, no minimum investment, no fixed term, no bank fees, at call access to your money. If only they were still paying the bait-rates of 6.5%

5.6% is still better than most term deposits on the market though !

Sim'