help to reduce tax / debt

[lollypops32]

we live in a large house but it has a large mortgage and large bills (rates / running costs), the house is worth $1.4m, mortgage just under $900,000, repayments $6,000 per month.
income per month $13,000, we have two cars on finance, school fees, all the usual insurances etc. it's a great income (single source) but we just don't seem to have any spare cash to enjoy life. we bought when interest rates were a lot lower but we probably didn't expect to be so squeezed financially.
we also made a ridiculous 'investment' in a friend's company that admittedly seemed too good to be true and for a short time it was, we stupidly borrowed $100,000 to buy shares, they doubled in value at one stage but because we had only held them for a short time we didn't want to sell and pay all that tax. if only we had. the shares currently stand at a value less than $5,000. i actually cover my eyes when i bring myself to see what they're worth. of course, we are having to pay off the money we borrowed to buy these damn things.
we are worse off financially than we were when we were reckless teenagers, eating beans out of a tin in order to pay our rent! yet i would be embarassed to share with any of our friends what our monthly income is as it seems such a large amount. even a takeaway has become a luxury we literally can't afford due to our overcommitment.
my question is....how much would we be better off if we sold this one house, bought two houses for approx the same value as the one we sell, live in one, rent out the other on a negatively geared basis?
secondly, with the taxman waiting in the wings rubbing his hands to have some of your profit, does he also sympathise when you make a massive loss (as we have with these shares). in other words, when the shares were worth just under $200,000 we would have paid almost 50% of the $100,000 profit but do we have any 'benefit' from having lost money, or do we just have to suck it up?
also, if anyone has any reasonable suggestions where we can start make savings, i'd really appreciate it.

 

[Jake D]

www.mrmoneymustache.com

 

[wylie]

Firstly, welcome to the forum.

Interest @7% on the shares borrowing of $100K is less than $600 per month. My first thought is to hold onto them because if they are only worth $5K you might as well hold them. Maybe one day they will be worth more but even if not, one day you might make a loss and you could sell them at that stage to offset the loss.

With an income of $13K per month and mortgage plus shares loan of $6.6K that leaves $6.4K per month for everything else. My maths is not the best, but I work that to be $76K which is more than many people earn.

I would take a really hard look at what you actually spend. If your cars are expensive, you could sell them and buy cheaper cars. If I really loved my house, I would do anything to keep it, including selling those cars.

If you don't really love your house, or the stress is too much, then your idea of selling it and buying one to live in and one to rent sounds a good idea to me.

It all comes down to whether you can stomach the lifestyle change? Do you care what others (friends) might think?

 

[Rolf Latham]

we live in a large house but it has a large mortgage and large bills (rates / running costs), the house is worth $1.4m, mortgage just under $900,000, repayments $6,000 per month.
income per month $13,000, we have two cars on finance, school fees, all the usual insurances etc. it's a great income (single source) but we just don't seem to have any spare cash to enjoy life. we bought when interest rates were a lot lower but we probably didn't expect to be so squeezed financially.
we also made a ridiculous 'investment' in a friend's company that admittedly seemed too good to be true and for a short time it was, we stupidly borrowed $100,000 to buy shares, they doubled in value at one stage but because we had only held them for a short time we didn't want to sell and pay all that tax. if only we had. the shares currently stand at a value less than $5,000. i actually cover my eyes when i bring myself to see what they're worth. of course, we are having to pay off the money we borrowed to buy these damn things.
we are worse off financially than we were when we were reckless teenagers, eating beans out of a tin in order to pay our rent! yet i would be embarassed to share with any of our friends what our monthly income is as it seems such a large amount. even a takeaway has become a luxury we literally can't afford due to our overcommitment.
my question is....how much would we be better off if we sold this one house, bought two houses for approx the same value as the one we sell, live in one, rent out the other on a negatively geared basis?
secondly, with the taxman waiting in the wings rubbing his hands to have some of your profit, does he also sympathise when you make a massive loss (as we have with these shares). in other words, when the shares were worth just under $200,000 we would have paid almost 50% of the $100,000 profit but do we have any 'benefit' from having lost money, or do we just have to suck it up?
also, if anyone has any reasonable suggestions where we can start make savings, i'd really appreciate it.

Hiya

If you can get out from under your home at 1.4 mill then I would look at that for a start

ta
rolf

 

[Aaron_C]

wylie - it's obviously the school fees which will be the killer here. Imagine paying $15,000 pa AFTER TAX for each child to a private school. There goes half your net income each year, boom. Not to mention uniforms, school excursions etc.

 

[The Y-man]

we live in a large house but it has a large mortgage and large bills (rates / running costs), the house is worth $1.4m, mortgage just under $900,000, repayments $6,000 per month.
income per month $13,000, we have two cars on finance

How much is the car repayment?

it's a great income (single source)

Is that after tax?

we also made a ridiculous 'investment' in a friend's company that admittedly seemed too good to be true and for a short time it was, we stupidly borrowed $100,000 to buy shares, ... we are having to pay off the money we borrowed to buy these damn things.

Been there done that - move on, don't make same mistake. Is there interest on the repayemnts?

...even a takeaway has become a luxury we literally can't afford due to our overcommitment.

my question is....how much would we be better off if we sold this one house, bought two houses for approx the same value as the one we sell, live in one, rent out the other on a negatively geared basis?
secondly, with the taxman waiting in the wings rubbing his hands to have some of your profit..

My view without knowign some of the figures above:

• Sell house. It is your PPOR, the profit is TAX FREE
• Pay off cars
• Pay off debt on share purchase
• Buy a small place to live in until you reconsolidate you position.

Any friend who laughs at you ain't a friend.

The Y-man

 

[lollypops32]

thank you all for your input, i guess i kind of already know/knew what to do but you never know, there might be some loophole or generous government handout that i didn't know about ha!
school feels are a luxury we now can't really afford, we have four children, only one is at private school (yr 11) one is due to join her next year. i don't believe one size fits all regarding schooling and if i believed the local public schools could cater for them adequately i would be signing up but that is a different problem!!
$13,000 is net of tax. i know it sounds like an enormous amount. the cars are on novated lease and embarrassingly cost $3,000 per month that is already taken care of before we get the $13,000. how the hell we manage to spend all this money i don't know but basically our bills add up to $11,000 per month, it gives us $500 per week to spend on everything else.......it's not much for a family of 6.
regarding the house and whether i can happily downgrade....it took us 3 years to find our dream house and we thought this was it, we got it at a knock down price and all seemed well...but then the interest rate goes up and the electricity and rates bills arrive round that off with our dumb investment and all of a sudden the house we both love becomes a millstone round our neck and how can we enjoy living here when are unhappy. moving doesn't really bother me in terms of 'keeping up appearances' until you live with enormous debt and the stress it causes i don't think you know how much it takes over your life, even my daughter needing new shoes has been put off for months! i think the thing that keeps us here is that it costs such a lot to move - just dead money and more to the tax man in stamp duty haha
if i sold everything of any worth that we own we'd barely scrape together $50,000 which is hardly worth cashing in, it wouldn't change our life significantly.
regarding the shares i bought....not knowing any different, i withdrew on a sort of open line of credit that was attached to our mortgage, in other words, it wasn't specifically noted anywhere that this was to be spent on shares and i think this would cause problems if i tried to offset any loss on the shares.
i guess we are a couple of naive mid-life nincompoops when it comes to investing but i'm hoping to get us back on track soon by having a fail safe plan.
interestingly a friend has a husband with lawn mowing round, he works 2 out of 4 wks in the summer as he likes to surf!! the kids are in private school, shiny new car, lovely house, holidays twice a year. i would love to do an audit on their household accounts because something just doesn't add up!! hohum

 

[wobbycarly]

*snip*
regarding the shares i bought....not knowing any different, i withdrew on a sort of open line of credit that was attached to our mortgage, in other words, it wasn't specifically noted anywhere that this was to be spent on shares and i think this would cause problems if i tried to offset any loss on the shares.
*snip*

OK, so the interest on the borrowed funds to purchase may not be deductible, but if you take a capital loss by selling the shares now, you can continue to roll that loss over until you make a capital gain and then offset that gain against the historical loss.

 

[Ace in the Hole]

You say that you bought your house when interest rates were a lot lower, exactly how much lower is alot lower than current rates?

2 ways to improve your position - earn more, spend less.
Can the single income be expanded to dual incomes?
You really need a budged to see where all the cash is leaking.
You should be able to knock 2k/month off your home repayments if interest only, at current rates.
I can only imagine 4 kids would be expensive though, but 13k net/month after cars paid is a fair bit of disposable income.

 

[The Y-man]

$13,000 is net of tax. i know it sounds like an enormous amount. the cars are on novated lease and embarrassingly cost $3,000 per month that is already taken care of before we get the $13,000. how the hell we manage to spend all this money i don't know but basically our bills add up to $11,000 per month, it gives us $500 per week to spend on everything else.......it's not much for a family of 6.

Ok, well you're much better off than others in this respect.

I repayments are 6k, then you effectively have "only" 7k per month. Sound a lot, but when you have a family of 6, I can imagine....

Anyway, let us know how much your:

• rates
• water bill
• power bill
• gas bill
• grocery bill
• telephone bill
• internet connection (if separate to phone)
• foxtel etc
• fuel bill

Also:

• Do you have a swimming pool

The Y-man

 

[The Y-man]

interestingly a friend has a husband with lawn mowing round, he works 2 out of 4 wks in the summer as he likes to surf!! the kids are in private school, shiny new car, lovely house, holidays twice a year. i would love to do an audit on their household accounts because something just doesn't add up!! hohum

Who knows - they may have 20 investment properties fully paid off. Don't be distracted.

Your absolutely biggest risk at present is actually loss of employment (including from injury etc)

I'd hate to tell you this, but you could end up owing a heck of a lot of money e.g. do you know the implications of jobb loss with the novated leases? You could end up owing a lot more than the car is worth.


You say selling up everything would get you $50k and not change your life. With all due respect, I disagree. Sell up, down size (again, massive change I get that) to a house half the value.

Your mortgage repayment halves. How would you feel with an extra $3,000 to spare EACH month?

Let's say you get rid of the novated lease and drive a bomb that your friends will sneer at - that could save you another $3,000 per month

How would you feel with $6,000 a month extra coming in?
That's $72,000 a year - is that a trivial amount?

The Y-man

 

[lollypops32]

i drove a 'bomb' for 10 years, same car little honda civic best car i ever had, i don't have friends who would sneer at any car i drive, we would all think it hilarous! anyway, whilst driving my 'bomb' i had a frightening experience with the kids on board, i skidded behind a removal van when braking and got so close i was praying to stop i could just see how easy it would have been to go under the truck and been decapitated, i suddenly felt very vulnerable on the freeway doing a lot of miles with the kids in that and we decided i needed a safer car, friends were selling a 3 year old 7 seater volvo we bought it....the rest is history.
we bought the house 3 yrs ago, can't remember interest rate at the time, actually i think we had interest only for a certain period and had to move to variable repayment but either way, we've probably just gone further and further downhill.
ok here are our monthly outgoings....health insurance $180
mortgage $6000
school fees $956 (private)
school fees $120 (public - yes really!!)
elec $400
mobile phones $180
house insurance $115
rates $300
pet insurance $45
foxtel $142
internet / phone $80
water $150 (guessing) and yes we have a pool
food $1400 (if i'm lucky)
gym membership $140

life incidentals such as dentist, bday and xmas pressies, pool chemicals, vet bills, clothes, school uniform, sports clubs, haircuts....none of which are considered luxury items in this day and age are included.

it's all quite depressing really and thanks everyone for your help!

i know what you say about halving the mortgage, i have been looking for a house to move 'down' (in value) to for some time but you've got to at least like it before you move into it right? i'm not averse to the idea, just haven't found anything yet and we also need a bit of an action plan to put into place immediately.

i don't know how i could make a single income into a dual income....

is that all? i hope i've covered all the points raised.

 

[monty python]

Foxtel can go. Can you save on your mobile plan? Do you cook meals from scratch and buy groceries cheaper in bulk? Can you cancel your gym membership and take up running in the fresh air instead?
It does seem strange to be suggesting these things to a family on such a high income!
I suggest you sign up for simplesavings.com.au, costs about $50 and you get access to thousands of money-saving ideas and a very understanding and active forum, some of the ideas may not suit you but I found it helped me change my mindset and get my spending under control.
Talk to your accountant about crystallizing your capital loss on the shares.
The simple answer is to sell your house and buy one you can afford, but I can fully understand how that would be painful. In order to keep it and reduce your financial stress you need to take an objective look at you outgoings and eliminate the "wants" not "needs".

 

[womble66]

7 seater volvo we bought it

That's one car which surely does not equate to the majority that is being paid out each month on your novated lease?

i don't know how i could make a single income into a dual income.

Thats easy, the one thats not earning an income gets a job.

To me its all about accessing your actual "needs" vs "wants" to bring your budget under control.

 

[Terry_w]

I would suggest you look at selling the house now. If you are struggling now then things may only get worse. You can reduce your income a bit (what is pet insurance!) but this isn't really going to get you out of trouble.

I have seen people struggle for years only to lose their house or have the bank take possession. All of them said they should have sold out years earlier and avoided the stress. The problems with disrupting family by moving will be less than getting kicked out of your home.

Once you sell you will have no debt, restructure your affairs and get back into investing with what you have left with.

And, do a proper budget so you know where your money is going and then you can plan things better.

 

[Dazz]

This reminds me, almost down to the tee, of one of Jan Somers stories in her 101 Stories book. Look it up....and go from there.

 

[lollypops32]

mmmhmm i hear ya about the foxtel and so i cancel them.....i'm still in a big hole.
we have 4 mobile phone plans, we're locked in on those.
a job for me is hard - i have a young family 4 kids 3 different schools where do i put them for before school/after school care. my husband leaves 5am in the morning, home at 7pm. basically life is s.h.i.t. we never see each other, when we do, we can't enjoy life cos we have enormous debt...i know what i need to do!!
if you don't know what pet insurance is you've never been presented with a multiple thousand dollar bill from the vets. it's insuring againstthe possibility of something happening ie being hit by a car like my cat was.
the novated lease amount covers 2 cars, not just one and having said that the amount we were originally quoted by the lease company has increased twice since we took it out, we now pay $700 more than we were originally quoted and last time i looked there was a deficit of $3,000 on the account so no doubt they'll be asking for more money soon. the car has to go, i know that, a total duff move.
need to get my husband on board, he doesn't think we have a problem yet this debt keeps me awake at night and even has me seeking advice from strangers on the internet!!

anyway, i really appreciate your advice, like i said i think i know what we need to do.... i was just thinking there might be a giant financial benefit that you guys all knew about that i hadn't discovered yet ....are you sure there isn't something???!!!!

 

[Aaron_C]

lollypops - have you tried budgeting your weekly expenses, breaking it down item by item and taking a hard look at it? We tend to forget how much we spend if we don't take notice of it.

 

[handyandy]

You have a house worth $1.4mil mortgage close to 900k - equity 500k.

So if you move to a cheaper house then you mortgage will not just halve but reduce dramatically. You could have a $700k house with a $200k mortgage. Mortgage would cost about $1000 per month.

The problem with moving down market is that you will be eroding and future gain as this is the only 'investment' you have.

Maybe move down market and then park the difference in mortgage payments into an offset account. $5000 per month give you no mortgage in just over 2 years.

Conversely the mortgage would be manageable on a much smaller salary should it ever be necessary.

I added up you expenses and they came to $10,208 so that actually leaves you $2792 pm. It's really the question where this money going and getting that under control which should be your immediate focus. I suspect most of this is just leaking away.

In the end it is a mind set and I feel that currently the family mindset is in the wrong frame. You need to shift the mind set as even selling the family home and moving down market will not fix your problems if you stay in the same mind set. You will just spend all the saving on 'things' and still end up over committed.

Set your goal to save and not touch those savings ie offset, and reduce debt where possible like that novated lease. That lease is costing $36000 per year with a value at the end of the lease of ?????? maybe $36k all up both cars.

The private school - maybe a cheaper private school like a catholic school or even the public school in the area (it can't be all bad).

As far as sell house and buy 2 properties renting one out. You initially don't make money on the IP and it may actually cost you money so really not something to follow up as yet. But certainly to keep in the back of your mind as this will build real wealth over time.

Regarding the shares - they are now a capital loss and can only be offset against a capital gain. You will need to at some point make that capital gain to even make up lost ground.

Just some thoughts

Cheers

 

[devank]

mortgage just under $900,000, repayments $6,000 per month.

That is about 8%. I hope that is P&I.
If you pay interest only @5.8% then you will have about 20K per year.

Interest @7% on the shares borrowing of $100K is less than $600 per month.

How much interest are you really paying? If it is more than the home loan then you may want to get a LOC so that you will end up paying lower interest.

[*]Sell house. It is your PPOR, the profit is TAX FREE
[*]Pay off cars
[*]Pay off debt on share purchase
[*]Buy a small place to live in until you reconsolidate you position.
[/LIST]

1. Household of six means you still need a large home which is going to cost a bit in a nice area where you want to be closer to your private schools.

2. Paying off novated leased car may not be cost effective. How long do you have left? novated lease should work in your favour if you are in the higher income bracket.

If anything my suggestions getting proper protection such as income protection and better health cover... but that would cost money!