Will this work or am I dreaming? Annuity to increase cashflow and debt recycle?

[wobbycarly]

Hypothetical situation (that is still somewhat close to home ):

$200k accessible equity in IP (based on 80% LVR)
$200k owing on PPOR

Is it possible to purchase an annuity (cashbond) with the $200k equity, and then repay it over time into the PPOR?

I don't have some definite numbers on the annuity, but from what I have read, I understand it to repay the principle, with interest, over a fixed period. I also haven't done a full analysis on a spreadsheet, so I have made a number of assumptions.

So let's say one opens a LOC against the IP - $200k available. Use this to purchase, say, a 5 year annuity returning 5% (??). Interest cost is 6.5%.

So over each of 5 years, receive ~$29k in (return of $42k less $13k of interest) additional income, which goes into the PPOR loan. After 5 years, the PPOR loan is down to $55k. The LOC remains at $200k, and continues to cost $13k pa, but assume this would continue to be tax-deductible. The savings in interest on the PPOR would well counteract this tax-deductible $13k from a cashflow POV.

This whole scenario also assumes that the LOC would be granted.

Or should it be a case of KISS? Just sell the IP (assume net profit of $200k, and CGT of $55k) to get the same result, and then re-borrow against the now nearly-fully paid off PPOR to purchase new IPs.

Please pick my numbers apart and feel free to point out my errors!

 

[tess85]

Rixter did a post on this a while back if it helps? http://www.somersoft.com/forums/showthread.php?t=26842 (wasn't sure if you've read it yet)

 

[Terryw]

Sounds like a scheme with a dominant purpose of a tax benefit to me.

You would also have a problem claiming the tax on the LOC anyway because the return from the ivnestment is not being used to pay down the loan. So at the end of the period you would have no annuity but a large loan still.

 

[Shaneelastic]

nice idea, dont think it will be legit though

 

[wobbycarly]

Rixter did a post on this a while back if it helps? http://www.somersoft.com/forums/showthread.php?t=26842 (wasn't sure if you've read it yet)

I do recall reading this a while ago... Was trying to apply the generalities in that thread to a specific example.

Edit: actually looking closer into this older thread, Rixter already answered the question (as answered also by Terryw below.)

Sounds like a scheme with a dominant purpose of a tax benefit to me.

You would also have a problem claiming the tax on the LOC anyway because the return from the ivnestment is not being used to pay down the loan. So at the end of the period you would have no annuity but a large loan still.

Ah yes! I guess using this strategy for IPs, and not PPOR would eliminate (or at least minimise) the risk of getting caught with a Part IVA.

 

[BMan]

nice trying wobbycarly

as i see it a cash bond is a way to increase your servicing at a cost
but after all your deductions etc are put in place would you benefit out of it in a cashflow way?
obviously your going to be benefiting out of it for a servicing point
the way i read it from what Rixter has said is you basically use it to pay off your LOC or if you choose to fund another IP which you then have to somehow pay off your 100k LOC still?

if its to increase your servicing meaning you cant afford to pay for another loan how do you afford to pay for a loss and another loan?

 

[Terryw]

I forget the details, but you couldn't use a LOC and buy some shares and then sell the shares and apply the money to your PPOR loan while keeping on claiming the interest. There are only limited circumstances where interest can be claimed once the thing it was borrowed for is gone - I think one eg would be where you borrowed to buy shares and then the shares disappeared because the company went down.