Wraps- IO and P and I loans

From: Jacque Parker


OK, all you successful wrappers out there (whom I'm about to join any day now!)- who out there is using IO loans, as opposed to P and I ones? I like the idea of my future clients being able to be refinanced in a few to five years time, rather than sticking with me for 25 yrs, therefore I would prefer IO loans, as it frees up my cashflow.

I have read, however, that P and I loans need to be used, as I must put the repayment of my client directly into my mortgage account. I'm not a real financial whizz (wish I was!) so have trouble with this area. Any ideas? Cheers, Jacque :)
 
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Reply: 1
From: Michael G


Hi,

A big question on clients advisors minds is "what happens if you go bankrupt?".

Using a PI loan ensures you are budgeting safely with a margin and that your liabilities are being covered.

Using a IO while boosting return, presents a higher risk. What if you get into a negative equity situation? what safe guards do you have in place? If you say your putting something aside to cover the loan, why not just pay the loan. What happens if the funds you've invested (to boost your return) drop and you dont have the cash to repay the principal and the client wants to cash out?

Keep in simple, keep it safe :)

Michael G.
 
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Reply: 1.1
From: Jacque Parker


Thanks for that sound advice Michael. I actually never considered those points. Keep it coming! Cheers, Jacque :)
 
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Reply: 1.1.1
From: Michael G


Its NOT advice, just my views and ideas.

Michael G. :p
 
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Reply: 1.1.1.1
From: Jeremy Laws


thought I added this before - it didnt post!
it went a little like this

Cmon Micheal, you should never ever ever think of using P&I for ANYTHING! Even in a wrap you have 13 years before you need to worry about paying off capital. It is throwing money away!
 
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Reply: 1.1.1.1.1
From: Michael G


Jeremy,

As a newly formed entity, the wrap trust has very little in the way of a cash buffer. While what you say is true. I'm just playing this on the safe side.

The scenario maybe different 2-5yrs down the track when I've developed some expertise in executing and managing my deals and when the cashflow has increased.

I'm treating this like a new startup small business, and we know the statistics for such ventures failing in the first couple of years are very high.

First things first, get the system right. Get it stable and running (relatively) smoothly, then consider options for expansion.

Maybe I'm very risk adverse. Besides, no-one goes broke making a profit, even if its just a P&I spread :)

The only thing, I really, really do not want to do anything Fair Trading or consumer affairs would consider risky or hazadous to the clients. There's more money to be made with ethics than leverage in this business.

Michael G.
 
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Reply: 1.1.1.1.1.1
From: Jacque Parker


Michael, OK OK, thanks for your VIEWS and OPINIONS !! cheers, Jacque :) :) :)
 
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Reply: 1.1.1.1.1.2
From: Jeremy Laws


Micheal,
Don't most small businesses fail due to a lack of cashflow? BTW have you ever tried to convert P&I to I/O? Almost impossible. Far better to set repayments at the lowest level possible from the start in case something goes wrong. I/O is far more conservative. Get a clause in the contract to the effect that the Wrappers balance must always be less than the Wrappees. Much safer! You WILL, one day need the cashflow, meaningless equity does not a small business help, esp when the property is protected/encumbered by a Caveat.
 
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Reply: 1.1.1.1.1.2.1
From: Michael G


Jeremy,

Hmmm, now you've got me thinking again. Valid points too. I'll discuss this with my accountant and solicitor at some stage.

Hmmm, maybe a cash reserve of x% per property held in an account. I'm still very conservative by nature.

The question is what to do with the extra funds. The risk being that if the client decides to cash up - those funds need to be retrived quickly to payout the balance of the loan.

Michael G.
 
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