Sounds logical Aaron. I'm being particularly cautious with this decision, so I appreciate the input.
Your input on my situation.
- Thread starter Richard Feynman
- Start date
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I've been considering a lot of options but currently on my mind: when I can obtain finance, pull equity from my PPOR for a deposit to purchase an NRAS property ~$400,000 in an area that is likely to experience reasonable CG. Use the positive cashflow from this property to offset its investment loan, direct all surplus funds into this offset account, then, when I have enough equity again in PPOR and NRAS investment, use it + savings in the offest for a deposit to purchase a property purely to generate CG. Then continue to use equity to fund the purchase of additional investments CG-oriented investments in the future. Repeat.
I believe that this strategy will allow me to enter the market a lot sooner than I could with a negatively geared investment, whilst providing some growth and effectively costing me nothing. My income will likely increase annually, meaning I'll also be able to look at chipping in more from my own pocket towards negatively geared investments in the future.
So…your thoughts/suggestions/ideas/questions etc.[/QUOTE]
Firstly - you don't need to buy at 400K to get what you want. I understand that's what you believe will deliver the best return in growth, but your issue at the moment is much more about getting rid of a high fixed rate PPOR loan ASAP without having to pay 40K in break costs, and cash flow is going to be the best way to do that over the next few years- not growth.
Growth is over for the medium term. The end of the credit era has all but assured that. It simply cant be relied upon as it has been for the past 15 years. It's extremely hard to de-program the brain from the idea of growth, given how successful it has been for so many for so long, but it is dead. It has been for a couple of years already. Those who continue to believe in doubling prices in this next 7-10 years will be sorely disappointed unless there is a return to credit growth- and that isn't happening anytime soon. For the next few years at least, cash flow will be king.
With 80K of available redraw you could purchase an NRAS property for around 290-300K and have enough funds to provide a 20% deposit plus stamp duty. An NRAS property at or below 300K should generate at least 7-8K CF+ per year, which can then be redeployed onto your CBA fixed rate to reduce it quite aggressively over the next few years.
An NRAS property such as you are interested in at 400K will generate about 1.5-2K less per year ie 5.5 -6K CF+ That's just how NRAS works. The $9981 incentive is fixed no matter the purchase price, so the "sweet spot" for max cash flow tends to be in the high 200's-mid 300's. And while a 5-6K result is still excellent, 400K isnt where your budget is. And you need to make as big a dent as possible in the 260K fixed rate, as quickly as possible. That loan represents your single biggest obstacle to creating some wealth, at the moment.
Ideally you should probably purchase house and land to save on stamp duty, but 300K for house and land is not realistic. Instead, you should be considering a completed 1 or 2 bedroom unit within that budget.
And by keeping the loan at 80% or below you avoid LMI costs and you can utilise one of the loan products where the NRAS tax entitlements are used as income. This provides a HUGE boost to borrowing capacity, which will prove helpful to you. Adelaide bank offers this for construction deals only - which wont be any use to you unless you can find a house and land NRAS for under 300K. Firstmac offers it for everything but construction deals, so you could use it for a 290-300K unit. It cannot be used at either lender if the LVR exceeds 80%
On the matter of loan structure - I dont agree with your idea of putting the surplus NRAS cash flow into an Offset attached to the NRAS loan. This only serves to reduce the deductibility and doesnt assist in solving your biggest impediment to creating some wealth for yourself- your 15 year fixed rate! You are better off using the surplus funds towards aggressive reduction of the non deductible CBA mortgage, and retaining maximum deductibility with the tax man. You are allowed to pay 10K extra per year onto the CBA loan. It will establish equity quicker, Reduce non deductible debt quicker, and both those things will help you get into additional CF+properties, sooner.
I've been considering a lot of options but currently on my mind: when I can obtain finance, pull equity from my PPOR for a deposit to purchase an NRAS property ~$400,000 in an area that is likely to experience reasonable CG. Use the positive cashflow from this property to offset its investment loan, direct all surplus funds into this offset account, then, when I have enough equity again in PPOR and NRAS investment, use it + savings in the offest for a deposit to purchase a property purely to generate CG. Then continue to use equity to fund the purchase of additional investments CG-oriented investments in the future. Repeat.
I believe that this strategy will allow me to enter the market a lot sooner than I could with a negatively geared investment, whilst providing some growth and effectively costing me nothing. My income will likely increase annually, meaning I'll also be able to look at chipping in more from my own pocket towards negatively geared investments in the future.
So…your thoughts/suggestions/ideas/questions etc.[/QUOTE]
Firstly - you don't need to buy at 400K to get what you want. I understand that's what you believe will deliver the best return in growth, but your issue at the moment is much more about getting rid of a high fixed rate PPOR loan ASAP without having to pay 40K in break costs, and cash flow is going to be the best way to do that over the next few years- not growth.
Growth is over for the medium term. The end of the credit era has all but assured that. It simply cant be relied upon as it has been for the past 15 years. It's extremely hard to de-program the brain from the idea of growth, given how successful it has been for so many for so long, but it is dead. It has been for a couple of years already. Those who continue to believe in doubling prices in this next 7-10 years will be sorely disappointed unless there is a return to credit growth- and that isn't happening anytime soon. For the next few years at least, cash flow will be king.
With 80K of available redraw you could purchase an NRAS property for around 290-300K and have enough funds to provide a 20% deposit plus stamp duty. An NRAS property at or below 300K should generate at least 7-8K CF+ per year, which can then be redeployed onto your CBA fixed rate to reduce it quite aggressively over the next few years.
An NRAS property such as you are interested in at 400K will generate about 1.5-2K less per year ie 5.5 -6K CF+ That's just how NRAS works. The $9981 incentive is fixed no matter the purchase price, so the "sweet spot" for max cash flow tends to be in the high 200's-mid 300's. And while a 5-6K result is still excellent, 400K isnt where your budget is. And you need to make as big a dent as possible in the 260K fixed rate, as quickly as possible. That loan represents your single biggest obstacle to creating some wealth, at the moment.
Ideally you should probably purchase house and land to save on stamp duty, but 300K for house and land is not realistic. Instead, you should be considering a completed 1 or 2 bedroom unit within that budget.
And by keeping the loan at 80% or below you avoid LMI costs and you can utilise one of the loan products where the NRAS tax entitlements are used as income. This provides a HUGE boost to borrowing capacity, which will prove helpful to you. Adelaide bank offers this for construction deals only - which wont be any use to you unless you can find a house and land NRAS for under 300K. Firstmac offers it for everything but construction deals, so you could use it for a 290-300K unit. It cannot be used at either lender if the LVR exceeds 80%
On the matter of loan structure - I dont agree with your idea of putting the surplus NRAS cash flow into an Offset attached to the NRAS loan. This only serves to reduce the deductibility and doesnt assist in solving your biggest impediment to creating some wealth for yourself- your 15 year fixed rate! You are better off using the surplus funds towards aggressive reduction of the non deductible CBA mortgage, and retaining maximum deductibility with the tax man. You are allowed to pay 10K extra per year onto the CBA loan. It will establish equity quicker, Reduce non deductible debt quicker, and both those things will help you get into additional CF+properties, sooner.
Graemsay ...If you know any safe investments that can consistently deliver that sort of yield, then I'm sure everyone on the forum would be interested.
4 letters. Stars with an N. ends with RAS.
Here's a really simple example . 320K property with market rent of 350 p/wk. Put up 20% and stamps using equity. lets call it 80K all up. Borrow the rest against the NRAS. You have used none of your own money, but the 80K of equity has been used. You can get a 3 year fixed rate for NRAS with STG at the moment for 5.59%, but lets assume the 80K equity isnt quite that low, so we'll work on 5.80% as the average across the debt. 350K I/O @ 5.8%- repayments will be $20,300. Miscellaneous costs for Management, NRAS fee, strata, insurances, rates etc- allow 5K. Total costs to own the property $25,300. Under NRAS you get 280 p/wk rent. That equates to 14,560. That equates to a deductible loss of $10,740. Add depreciation of 10K. That's a total deduction of $20,470. At a Marginal tax Rate of 34% (32.5 plus Medicare) thats a refund of $7051.60 plus $9981 from NRAS. Thats a total of $17032.60. Your holding costs were $10,740 so you're $6292.60 CF+ That's an after tax yield of 7.87% on the 80K equity outlay. But redeploy that $6292.60 onto your PPOR mortgage as extra repayments and that "yield" is further compounded. And dont forget, all the extra profit you make when you sell your PPOR (you'll owe the bank much less , having paid it down in double quick time using the NRAS Cash flow) is CGT free!
On a Tax Rate of 38.5% (37 plus medicare) you are $7121.95 CF+ That's an after tax yield of 8.90% on the 80K equity outlay. As above , redeploy that $7121.95 onto your PPOR mortgage as extra repayments and that "yield" is further compounded.
I'd say its easy to generate a total tax free yield well above double digits when you understand how NRAS cash flow works, wouldnt you?
All with the outlay of as little as 80K of equity.
4 letters. Stars with an N. ends with RAS.
Here's a really simple example . 320K property with market rent of 350 p/wk. Put up 20% and stamps using equity. lets call it 80K all up. Borrow the rest against the NRAS. You have used none of your own money, but the 80K of equity has been used. You can get a 3 year fixed rate for NRAS with STG at the moment for 5.59%, but lets assume the 80K equity isnt quite that low, so we'll work on 5.80% as the average across the debt. 350K I/O @ 5.8%- repayments will be $20,300. Miscellaneous costs for Management, NRAS fee, strata, insurances, rates etc- allow 5K. Total costs to own the property $25,300. Under NRAS you get 280 p/wk rent. That equates to 14,560. That equates to a deductible loss of $10,740. Add depreciation of 10K. That's a total deduction of $20,470. At a Marginal tax Rate of 34% (32.5 plus Medicare) thats a refund of $7051.60 plus $9981 from NRAS. Thats a total of $17032.60. Your holding costs were $10,740 so you're $6292.60 CF+ That's an after tax yield of 7.87% on the 80K equity outlay. But redeploy that $6292.60 onto your PPOR mortgage as extra repayments and that "yield" is further compounded. And dont forget, all the extra profit you make when you sell your PPOR (you'll owe the bank much less , having paid it down in double quick time using the NRAS Cash flow) is CGT free!
On a Tax Rate of 38.5% (37 plus medicare) you are $7121.95 CF+ That's an after tax yield of 8.90% on the 80K equity outlay. As above , redeploy that $7121.95 onto your PPOR mortgage as extra repayments and that "yield" is further compounded.
I'd say its easy to generate a total tax free yield well above double digits when you understand how NRAS cash flow works, wouldnt you?
All with the outlay of as little as 80K of equity.Thanks for the lengthly replies, especially the numbers, euro.
That's essentially why I am looking at NRAS first – to boost cashflow.
On the extra repayments, I'm managing to come up with my annual limit at present (admittedly, through working a LOT of extra hours), without NRAS and without renting out my current PPOR.
So I would assume that any spare money (once my extra PPOR repayments are sorted for each year) would best sit in an offset against the NRAS loan rather than anywhere else.
That's essentially why I am looking at NRAS first – to boost cashflow.
On the extra repayments, I'm managing to come up with my annual limit at present (admittedly, through working a LOT of extra hours), without NRAS and without renting out my current PPOR.
So I would assume that any spare money (once my extra PPOR repayments are sorted for each year) would best sit in an offset against the NRAS loan rather than anywhere else.
Unless you could get an offset on your non deductible debt (because of the fixed loan this may not be possible) then this would be the best bet - ie use an offset linked to the investment.
break cost $40k. As the property is now an investment property, this becomes a deduction, so a cash loss of say $25k? the extra $40k now borrowed becomes deductable, therefore the following year the interest is claimable. it would take 8 years to recoup the whole interest diferential, but as investment it is only 5 (on a 30% tax rate), and the law of compounding interest reduces the 5 further depending on how the variable rate moves in the future, and the effect of deducting what is now investment debt.
The main reason however to break the fixed rate is more big picture. Having a high fixed rate hanging over you is more emotionally depressing than having an extra $40k debt. Move on. getting another loan will be much easier without the fixed rate, and therefore your overall position will most likely be better if you do a clean break now and get on with investing rather than compensating for the next 8 years due to one (in hindsight) poor decision.
Just MHO.
Tobe may well be right... although that solution is assuming that you turn it into an INV property, which I dont know is even possible for you at the moment. Without knowing what your borrowing capacity its difficult to comment.
I'd be purchasing a 290-300K NRAS as a first step, to start to get that cash flow going, before making any changes to the CBA fixed rate. I definitely wouldnt be making changes before purchasing the first NRAS, because it will soak up 40K of your redraw to pay the break costs. That will put an end to your 80K deposit.
I guess you could make the break before purchasing NRAS if you have enough equity plus borrowing capacity available to capitalise the 40K break costs and retain the 80K deposit, but without knowing your capacity that's impossible for any of us to comment on
As far as the concept of paying the break costs goes - it is probably quite sound. Ultimately you could move 200K to a 2 or 3 year fixed rate in the mid 5's- that's at least 2.5% lower than your current rate and the other 60K to a variable rate with offset , which would be at least 2% lower than your current rate. This would be a far smarter structure and would save you @$6200 in interest per year. It would give you 60K of Variable extra repayments plus 10K per year during the fixed rate term of 2 or 3 years- more than enough to cover the extra reopayments you will be making. If you maintained your current level of repayments and then added the surplus NRAS cash flow onto the mortgage, you'd have the 260K P&I mortgage repaid in full within about 6-7 years. That would save you over 200K in interest, allow you to purchase several other properties far sooner etc. So you'd definitely be getting a return on your 40K "investment"
The question is...do you have enough equity to do it? How much is your property valued at, do you think?
Im not worried about borrowing capacity as much. If you qualified for an 8.09% fixed rate you arent likely to face any issues qualifiying for a far lower rate - even allowing for the 40K being capitalised. And on the NRAS side, if you use Adelaide or firstmac you get to use the NRAS incentives for servicing as I outlined previously - so your capacity there will not likely be an issue either.
if there isnt sufficient equity though, to do both things - ie break the loan AND buy NRAS... the costs to break will be excessive. Youd be better off leaving the fixed rate for the time being, purchasing the NRAS and running the 10K extra repayment strategy, with anything surplus going into the NRAS offset. As some time passes, the equity will slowly get created as you pay down the CBA loan. And if fixed rates starts to climb a little, the break costs may reduce a little also...
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Offset isn't available on my loan so offsetting the investment loan looks like the only option.
Thanks for pointing out that the $45k fee would only be a cash loss of around $25k. Obvious as it was, I hadn't considered that I'd be able to claim that were my PPOR to become an investment.
Tobe may well be right... although that solution is assuming that you turn it into an INV property, which I dont know is even possible for you at the moment. Without knowing what your borrowing capacity its difficult to comment.
I'd be purchasing a 290-300K NRAS as a first step, to start to get that cash flow going, before making any changes to the CBA fixed rate. I definitely wouldnt be making changes before purchasing the first NRAS, because it will soak up 40K of your redraw to pay the break costs. That will put an end to your 80K deposit.
I guess you could make the break before purchasing NRAS if you have enough equity plus borrowing capacity available to capitalise the 40K break costs and retain the 80K deposit, but without knowing your capacity that's impossible for any of us to comment on
As far as the concept of paying the break costs goes - it is probably quite sound. Ultimately you could move 200K to a 2 or 3 year fixed rate in the mid 5's- that's at least 2.5% lower than your current rate and the other 60K to a variable rate with offset , which would be at least 2% lower than your current rate. This would be a far smarter structure and would save you @$6200 in interest per year. It would give you 60K of Variable extra repayments plus 10K per year during the fixed rate term of 2 or 3 years- more than enough to cover the extra reopayments you will be making. If you maintained your current level of repayments and then added the surplus NRAS cash flow onto the mortgage, you'd have the 260K P&I mortgage repaid in full within about 6-7 years. That would save you over 200K in interest, allow you to purchase several other properties far sooner etc. So you'd definitely be getting a return on your 40K "investment"
The question is...do you have enough equity to do it? How much is your property valued at, do you think?
Im not worried about borrowing capacity as much. If you qualified for an 8.09% fixed rate you arent likely to face any issues qualifiying for a far lower rate - even allowing for the 40K being capitalised. And on the NRAS side, if you use Adelaide or firstmac you get to use the NRAS incentives for servicing as I outlined previously - so your capacity there will not likely be an issue either.
if there isnt sufficient equity though, to do both things - ie break the loan AND buy NRAS... the costs to break will be excessive. Youd be better off leaving the fixed rate for the time being, purchasing the NRAS and running the 10K extra repayment strategy, with anything surplus going into the NRAS offset. As some time passes, the equity will slowly get created as you pay down the CBA loan. And if fixed rates starts to climb a little, the break costs may reduce a little also...
Sounds like a solid strategy to secure an NRAS place before considering breaking my PPOR loan (which I'd do only when turning it into an investment).
If my PPOR value has not budged in 2 years, I've got $60k equity. Based on growth data over the last 2 years, I ought to have approx $80k equity.
Someone posted about firstmac a month or two ago and I ran a scenario of numbers but didn't get any clarification. It did seem to indicate I could borrow enough to service an NRAS property anywhere in the 200s (with a 20% deposit).
On fixed rates rising, I believe that'll make a huge difference. Just after I took out my fixed loan the RBA lifted rates by 25 basis points, CBA lifted rates by 0.45% and my break fee was $25k that week (I called to ask).
CBA's rate is now 0.95% lower than what I'm fixed at, and the break fee is $45k so a 1% change accounts for $20k difference.
Very approximately, I imagine a rate increase of even 0.25% would be likely to save $5-$10k in break fees.
Thanks again everyone for the input. It's invaluable.
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