LOE - Fact or Fallacy

So I've been thinking about this LOE for sometime and I really struggle with the concept that in reality it would work.

Main reasons being servicability. Obviously if you have other income from shares, a job (therefore you're not LOE) etc then that is a different story.

It is all well and good to say; buy a property worth $100k then another and another - after so many years the property is now worth $200k, you go to the good banker and ask 'please sir, may I have some more'. The banker willing obliges and lends you another $100k which you then happily spend on boats, fast cars and groceries. (please don't worry about LVR's etc here - I'm just talking conceptually).

That extra $100k eventually runs out however don't worry, the value has gone up again to $400k (or another property you have has some equity) so you go back to the banker and again, ask for another $100k / $200k.

Therefore, your total debt just keeps increasing and increasing. My main issue is when you originally bought the property for $100k and repayments were, say, $600 pcm (assuming you financed 100% @ 6% - again, don't worry about the LVR etc) and you had a job to cover the payments, after the first new equity you borrow ie. $100k to buy a boat, your repayments are now $1,200 pcm.

Where is one going to fund this extra $600 from?? Then when the process is repeated - you take another $100k (again, no job because you are living off equity), repayments are now $1,800 pcm! Yes, rents will grow however would they grow at a rate to cover these extra repayments?

Please let me know if I am right or if I'm missing something / being naive about the whole thing!! It's been bothering me for a while now!
 
Yes, rents will grow however would they grow at a rate to cover these extra repayments?

Rents increase just like property values do. Its all relative to supply & demand ratios.

In years to come I reckon rental growth with outstrip home affordability placing even greater demand on the rental markets.

Australia as time passes will become like most the other European countries - more renters than owners.
 
you borrow ie. $100k to buy a boat, your repayments are now $1,200 pcm.

Where is one going to fund this extra $600 from??

From the $100k you just borrowed.

Since capital growth is generally exponential, not linear, it covers the exponential growth of the repayments.

Rather than borrowing a flat $100k each time, I think it'd be more realistic to borrow $100k, then $200k, then $400k, etc. as prices double.
 
From the $100k you just borrowed.

Since capital growth is generally exponential, not linear, it covers the exponential growth of the repayments.

Rather than borrowing a flat $100k each time, I think it'd be more realistic to borrow $100k, then $200k, then $400k, etc. as prices double.

Yeah agree that you could cover the extra repayments from the equity you borrow however is a financier, when they are assessing your ability to repay the loan, going to accept the fact that you are going to repay them the money you owe them from the money they just lent you???

Going to read Keithj's old post now and will come back once I understand.
 
(You go to the good banker and ask 'please sir, may I have some more'.)

Your are in charge of your own destiny.
Go to the lenders to enquier if they will come on board?

Game change

Gerd
 
is a financier, when they are assessing your ability to repay the loan, going to accept the fact that you are going to repay them the money you owe them from the money they just lent you???

Who ever decided to present that scenario to a lender like that is totally mad and would be committing financial suicide. You need to present to the lender "what they are looking for" in order to satisfy them of your ability to service a loan. There is more than one way to skin a cat.
 
Yeah agree that you could cover the extra repayments from the equity you borrow however is a financier, when they are assessing your ability to repay the loan, going to accept the fact that you are going to repay them the money you owe them from the money they just lent you???

Obviously the lower the LVR the easier this is. If you go for a 50% LVR loan, the bank isn't going to be as strict.

I've tried to work the figures for LOE, but the only way I can get it to last a lifetime is to have such a low LVR and high gross asset value that I can just as easily convert the equity into income via dividends and interest and live off income instead.

But then, I have to make it last 50 years.
 
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