Noel Whittaker's newsletter today

From: Dale Gatherum-Goss


Hi!

The following arrived in my email box today from Noel Whittaker. I believed it was worth copying . . .


PAYING OFF YOUR HOUSE

My last newsletter on paying off your house quickly created much interest. I hope the following will help you understand the way it works.

We live in a world characterised by education and impatience. Today's investor knows the importance of investing for retirement, is aware of the wide range of products available, but also knows that paying off that huge non-deductible home loan should be a major priority. Consequently, they are dying to get started on the investment plan, but are torn between doing that and paying off their home loan.

Understanding numbers can lessen the confusion. Because of the way compound interest works, the large earnings come in the later years of any program. Invest $1000 a month at 10% for five years and you get $77,000 - increase the term to 15 years and it becomes $415,000. If you can make it 30 years the finishing sum leaps to $2.3 million.

It's the same with loans.

CASE STUDY You owe $150,000 at 6.5%. If you choose a 30 year term the monthly payments will be $948 and you will pay a total of $191 000 in interest. To cut the term back to 20 years needs just $170 a month more, in which case the interest will drop by $73,000 to $118,000. Now it's not too difficult to increase your payments by $170 a month, but of you wanted to cut the term from 30 years to 10 years you would need to pay $1703 a month - an increase of $755 a month. . In short, small extra payments can make a big difference when the term is long but the effect dwindles away as the term shortens.

But once the term is down to around 10 years extra payments don't help you much. In the example above there is just $54,000 still to be paid once the term is down to 10 years. Paying an impossibly high $13,000 a month would cut it back to one year but you would save only $49 000 interest.

Once you appreciate how small monthly amounts can be valuable in shortening a long-term loan, and that starting early makes a massive difference to an investment program, it is clear that it is possible to have your cake and eat it too. Just reduce your home loan to a reasonably short term and then borrow for investment.

CASE STUDY The Browns, aged 40, owe $100,000 on their home loan and are paying it back at $1135 a month which will have it paid off in 10 years. They decide to pay it off as their major priority and raise their payments by $822 a month to $1957 a month which will have it paid off in five years. This strategy saves $19,000 interest. Their friends, the Whites, are in a similar situation but are content to leave their loan at 10 years, At that rate there is only $36,000 interest left. Using a second mortgage against their home they use their $882 a month to borrow $200,000 to invest in blue chip share trusts. The interest is tax deductible which effectively halves the cost of it. If we assume the managed funds earn a 10% per annum (income and growth combined) their value will be $2.4 million when they retire at age 65.

At age 45, the Browns congratulate themselves on achieving their goal of being debt free but suddenly realise time is running out to save for retirement. Unfortunately they discover how compound interest works. Because their time frame is 20 years, they have to borrow $340,000 to end up with $2.4 million at age 65. This causes some soul searching - they can afford the interest only payments on a loan of $340,000 as there are no more home loan repayments to make, but $340,000 seems a huge amount to borrow for investment when all they have ever had is a modest home loan.

And what about the Whites? Five years later, when they are 50, they make their last home payment and find themselves with a spare $1135 a month. Investing this into managed funds that return 10% will give them an additional $470,000 at age 65. They cash this in, which nets them $405,000 after paying $65,000 capital gains tax. They use $200,000 to pay off their debt, and add the $205,000 to the other $2.4 million in their portfolio. The Browns are still trying to figure out to pay back their $340,000 loan.
 
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Reply: 1
From: Dirk Diggler


Is this old dud still giving investment advice!
 
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Reply: 2
From: Les .



G'day Dale,

Thanks for posting that one - it is half-a-gem - it would have been a real gem, except I believe Noel dropped the ball !!!

He makes some really good points about 30 year loans vs 10 year loans. It is pretty well-known that it will take the first 22 years of a 30 year loan to repay HALF of what you owe. So, his point of paying off as much as possible EARLY is really valuable ......

But then, (IMHO), he drops the ball and suggests that the Whites will put their extra cash into a Managed Fund..... (yawn)

What is it with him, and Paul C, and a bunch of others - they seem to forget that PROPERTY has the BEST leverage out there - so, if the White's spent their extra (what was it?) $882 per month into property, then their returns would sky-rocket.

The Whites at age 40 (according to Noel Whittaker)>>> "Using a second mortgage against their home they use their $882 a month to borrow $200,000 to invest in blue chip share trusts. The interest is tax deductible which effectively halves the cost of it. If we assume the managed funds earn a 10% per annum (income and growth combined) their value will be $2.4 million when they retire at age 65."

Oh, yeah? He's talking here of 5% interest here - and for a SECOND mortgage (I'd like to know where HE shops for his mortgages...) I've heard of that for "honeymoon rates for Home Loans" but I think he might be stretching things to suggest you can get a second mortgage at this rate. He did say that Tax deductions halve the cost, though, so maybe he's borrowing at 10% - OK!!


Anyway, Jan, on p92 of "More Wealth" states the GROSS return of virtually any property is 15% - OK, it's gross, but what was Noel's example? Gross, or nett? But, OK, let's be fair and say HIS figure was Nett - which makes Managed Funds seem pretty ....... average.... (yawn again)...

The LEVERAGE of IP's makes such a huge difference - and he seems to ignore, or just forget, it.


People, run your own numbers using $882 / month as YOUR input to Home Loans, (remembering that you are also bringing in a Rent) - and see how IP's will BLOW AWAY Managed Funds.... (I did start to post a bunch of numbers, but my post would then have been harder to understand than Noel's newsletter ;^)

How can Noel W and Paul C be so blind??? Happy investing.

Regards,


Les


- "Eschew Obfuscation" - ;^)
 
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Reply: 2.1
From: Dirk Diggler


Youve got to remember Les that Whittaker bought a brand new unit in the gold coast for 400k in the early 90's and got burnt. So now he advices people to not invest in property because of his own incompetences. So all I can say, read his columns, have a laugh, then put them at the bottom of the bird cage, so that the budgies can crap on it.
 
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Reply: 2.1.1
From: Les .



G'day Dirk,

I remember that time - I heard of $150k units settling four times on the one day. First buyer bought for $150k, on-sold for $220k, 2nd buyer onsold for $300k to buyer #3, and buyer #4 bought for $450k. 6 months later, prices were back down to $160k

It was the worst of times, it was the best of times .... ;^)

Regards,

Les


- "Eschew Obfuscation" - ;^)
 
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Reply: 2.1.1.1
From: Dale Gatherum-Goss


Hi

Noel W, Paul C, and any other investment advisor have to be very careful what they say in a public area. This is because people with no financial knowledge, training or nouse run off and do stupid things after over hearing a tenth of a conversation.

The managed fund allows people who are lazy, or ignorant, to feel like they're doing something and investing. We all know that they just saving.

As I have said before, the law is there to protect the ignorant from themselves . . .

I agree with your sentiments Les and whilst I did not agree with the entire article, I thought it interesting and bound to create discussion and thought.

Have fun

Dale
 
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Reply: 2.1.1.2
From: Gail H


It never ceases to amaze me how people forget the leverage power of property. If one more person tells me that shares have always "outperformed" property I'll scream. It only takes about one millisecond to point out why this is wrong, but how people like Paul C keep propagating it (I could barely get through the latest edition of Money - we should have a prize for who spots the most pieces of crap advice). Its really inexcusable.

G
 
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Reply: 2.1.1.2.1
From: Alan Hill


Gail,

Shhhhhh.....

Don't go telling everyone what a great investment Property(and Shares combined!) are....you'll ruin our profit margins!!

Now repeat this mantra after me(to be used around your associates)......

Hummmmm......."Managed Funds are wonderful".....Hummm...."Only Shares-NO Property make the best investment"....Hummmm....."Superannuation is my key to financial security"......Hummmm...."Shares have always out performed Property".....Hummmmm

Note: You may feel physically sick afterwards by doing this, BUT by doing the exact opposite you'll be a lot better off!

:)
 
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Reply: 2.1.1.2.1.1
From: Eric Snow


What about index funds? No-one has mentioned those.
 
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Reply: 2.2
From: Nigel W


You tell em Les!

The reality is that for the majority of people who'd rather:

* read crappy gossip magazines,
* watch the footy or
* the latest episode of "Friends", "Big Brother" or dare I mention it "Temptation Island" (you get the picture)

putting their money into managed funds is BETTER than just letting it lie slack and lazy in their bank accounts or worse spending it on consumer items or even worse using credit (excluding those who use cards for convenience only) to buy consumer items.

Whilst it's not the BEST investment, it's better than nowt! You have to realise that most people don't want to worry about money. The sad irony is that they fail to realise that doing something positive to take CONTROL of your money is the only sure-fire way of making sure you don't have to "worry" about money any more...

N.
 
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Noel Whittaker's Real Estate

Reply: 2.2.1
From: Gee Cee Clay


Actually folks Noel did in the early 80's own a number of S/E QLD real Estate Agencies.

He sprooked real estate investing through
ERA Noel Whittaker Estate Agents.

I bought a couple of properties from him.
 
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