Join our investing community

Cash bonds & Servicability

Discussion in 'Finance & Banking' started by rambada, 14th Sep, 2005.

  1. rambada

    rambada Well-Known Member

    Joined:
    5th Sep, 2005
    Posts:
    58
    Just spoken to Westpac and they have changed their policy on the use of Cash bonds for servicability in that they know allow a P&I loan over the term of the cashbond. Not good for mortgages.
    Are people now using lo doc loans to get arround the servicability issue or are their full doc providers who are still accepting cb's?
     
  2. Rolf Latham

    Rolf Latham Well-Known Member

    Joined:
    15th Aug, 2005
    Posts:
    45
    Location:
    Gold Coast and Sydney
    Hiya Rambada

    Funders will still generally allow annuities case by case if the annuity has a remaining term of over 5 years.

    In general, but not always with the easy availability of no doc product now to 70 %, it is still easy to tap into unused equity at reasonable but not prime rates.


    Ta

    rolf
     
  3. MrDarcy

    MrDarcy Well-Known Member

    Joined:
    13th Sep, 2005
    Posts:
    283
    Location:
    Sydney
    Hiya Rolf,

    Just wondering, those 70% no doc, lots of LMI and the insurer's limits per person that go with it? Cashbonds, and I have never gone there, may get around those problems.

    Ta,
    Mr Darcy
     
  4. Rolf Latham

    Rolf Latham Well-Known Member

    Joined:
    15th Aug, 2005
    Posts:
    45
    Location:
    Gold Coast and Sydney
    Hiya

    Annuities do and they dont. if you dont use an annuity in the right way there is some burnt income due to the rate differential between buy/borrow and return, AND more importantly unless set up like Uncle Steve does, there may be an issue with deductability of the interest to purchase the Annuity.

    Yes, there are issue with no doc product, all I was saying is that they are but one of several options.

    Taking a bit more latitude, in terms of lo doc product, there is now in excess of 5 mills worth of exposure per enitity, ya aint gonna run out in a hurry. Having said that lo doc product doesnt suit some people.

    ta
    rolf
     
  5. Dave

    Dave Well-Known Member

    Joined:
    17th Aug, 2005
    Posts:
    57
    Hiya,

    Then simply get another entity. If a particular institution has a limit of say 2mil, spend the thou or 2 to get another trust and start towards the limit again from scratch.

    The costs associated with setting up another structure surely pale in comparison to the returns that could be earnt on lending another few bob ;)

    Cheers

    Dave
     
  6. Rolf Latham

    Rolf Latham Well-Known Member

    Joined:
    15th Aug, 2005
    Posts:
    45
    Location:
    Gold Coast and Sydney
    Hiya Dave

    Not so squeezy :)

    Entity means any personal guarantees that you hold.

    Since very few trusts can get non recourse no/lo doc loans, the limits may bite, but depends on how much equity you eat and your structure. In the last couple of years, limits have effectively gone up > 100 k per year.

    ta

    rolf
     
  7. Steve Navra

    Steve Navra Well-Known Member

    Joined:
    7th Aug, 2005
    Posts:
    195
    Hi all,

    The cashbond is alive and well . . . no problems :)

    This is still very much in use for serviceability where appropriate . . . accept:

    You might recall that although the cashbond does create a much enhanced serviceability equation, it is expensive for two reasons.

    1) Cost of borrowing Vs return:

    Borrowing costs at approximately 7% and return on the annuity at 4.5%. The compounded difference over the 5 years (or whatever term) can amount to $$$$$$$. This cost is of course offset by the CG on the much greater asset base acquired.

    2) No CG on the cashbond:

    As an annuity is a cash vehicle, then like cash there is no capital growth element. Once again this in-efficiency is offset by the extended asset base acquired for CG.

    The share fund distributions have started to supercede the need for the cashbond!

    Example:
    $100,000 cashbond over 5 years = $20,000 extra income for serviceability.

    and

    $100,000 into the MF with a 50% margin at 10% return = $20,000 income for serviceability. (Interest on the margin loan is capitalised)

    The extra bonus with the share fund is outperformance, so for example last years returns at 16% income return = $32,000 for serviceability; and 6% Capital Growth.

    Far more palatable and the capital is NOT being wound down :)

    Now which method would you prefer? ;)

    Regards,

    Steve
     
  8. Alan

    Alan Well-Known Member

    Joined:
    15th Aug, 2005
    Posts:
    603
    Location:
    Sydney
    Hi Steve.

    I guess this will vary a bit, but on average, how many Quarterly Distributions would you need to show a lender that this is 'acceptable income'. I've heard as low as a couple and up to two year's full Tax Returns?

    Would this Distribution Income more often be used as part of a Lo-Doc type situation or for normal bank loans too?



    :)
     
  9. Steve Navra

    Steve Navra Well-Known Member

    Joined:
    7th Aug, 2005
    Posts:
    195
    Hi Alan,

    No mortgage!! (onya :) )

    Distribution income can be used for normal banking and for lo docs.

    Depends on the bank as to number of distributions:

    Normally 2 quarters of personal distributions will suffice for serviceability.
    The two year requirement is the distribution history of the fund . . . which of course you can download and submit to the bank as proof of the regularity of the funds distribution.

    Regards,
    Steve
     
  10. Alan

    Alan Well-Known Member

    Joined:
    15th Aug, 2005
    Posts:
    603
    Location:
    Sydney
    Thanks Steve. :)

    Hmmmm........I wonder if it's too late to open a celebratory bottle of something?

    :D :D
     
  11. Steve Navra

    Steve Navra Well-Known Member

    Joined:
    7th Aug, 2005
    Posts:
    195
    It's only too late. . . if you're NOT sharing :)
     
  12. jenpalex

    jenpalex Active Member

    Joined:
    16th Aug, 2005
    Posts:
    37
    Hi Steve,

    I remember you saying at your March presentation that getting serviceability via Navrainvest Fund earnings was superior to the cashbond route.
    I find it difficult to get my head around. A useful contribution would be a spreadsheet comparing the two alternatives after a few years, say at the end of the annuity's term.

    Paul
     
  13. Steve Navra

    Steve Navra Well-Known Member

    Joined:
    7th Aug, 2005
    Posts:
    195
    Hi Paul,

    Don't think a SS is necessary . . . :)

    Example:

    5 year Cashbond of $100,000
    Return of $20,000 per year for 5 years.

    $100,000 in share fund with 50% margin
    Return at 10% = $20,000 each year.

    Serviceability is the same, but:
    1) Share fund has potential to be more/less currently averaging 15% income since inception; so $30,000 per year.
    2) Capital growth on the share fund is 5%+ per year; whereas there is no CG with the cashbond.

    Regards,
    Steve
     
  14. Dave

    Dave Well-Known Member

    Joined:
    17th Aug, 2005
    Posts:
    57
    Hi,

    Maybe a question for Rolf or Steve ... What about the margin loan? In the examples above, 200k is thrown at the fund at 50% gearing. Banks would (im assuming) view this as 8000 a year in repayments, in your experiences, as this negated most / all of the distributed income for servicability purposes?

    I guess it depends on what % of it they're willing to use, and how they factor in the margin repayments.

    Any information to share here?

    Cheers,

    Dave
     
  15. Rolf Latham

    Rolf Latham Well-Known Member

    Joined:
    15th Aug, 2005
    Posts:
    45
    Location:
    Gold Coast and Sydney
    Hiya

    I will let Steve answer his bit, all experiences are different, and his crowd has more than mine.

    At one end of the extreme, many lenders assess margin lends as 25 year PI loans, and wont look at any dist of income until YOU have 2 years worth tax records to show.

    However, most things are negotiable, especially in times of tight business. Recent interesting result that show that these things are guidelines and not tram tracks.

    Failed serviceability by $ 9000 due to a Big BT margin lend. Bought another place, passed at an 80 % lend no problem due to the wholistic picture.

    300 k ANZ margin loan, new loan with ANZ, they ignored the margin lend, due to the volume of overall business with the client - almost unheard of.

    On of the best ways to stucture large margin lends to isolate the service issue if it suits, is to have a separate company entity, and thence convince them to not have to provide a directors guarantee. Id bet you can convince a lender to allow the income after a time, without the margin being considered.

    One thing you have to rememeber is that the vast majority of lenders have NO idea how a margin works in reality.

    The Classic boo boo is the middle income earning exec, with a good income but no assets. A million $ margin facility limit, with no equity to use is still assessed by most lenders as a one mill facility unless you work real hard.

    ta

    rolf
     
  16. Alan

    Alan Well-Known Member

    Joined:
    15th Aug, 2005
    Posts:
    603
    Location:
    Sydney
    Hi Steve.

    1. So under what circumstances would one now need to use a Cashbond to show improved serviceability over a Managed Fund income?

    Isn't what you are saying that given you have $X available to structure in such a way to show improved serviceability, the Income Fund path is always the preferable path over the annuity now? :confused:

    2. Being able to use two Quarters of distributions compared to two years of tax returns is obviously a large difference and has the potential to really 'turbo charge' your investment situation.

    Based on Rolf's comments, is the use of a couple of Quarters of Distributions something that is more likely to be available through Navra Financial negotiated arrangements with certain lenders or is this generally available to all and sundry?

    3. If we accept the point(and I don't know why we wouldn't?) that leaving 'lazy dollars' of equity laying around isn't good practice, it makes sense that we should be taking advantage of property equity growth regularly and locking this in through LOC's in case it drops again.

    This just got me thinking.......should times of record income distributions be taken advantage of in a similar manner?

    By this I mean, let's assume that the Fund distributes on average 10% or about 2.5% per quarter.........BUT........due to the current market we are coming off a couple of record distributions with the latest being in excess of 5%.

    Who knows, the next couple may be 2.5% each again....... :confused:

    If the most recent two quarters are accepted by lenders, wouldn't it be wise and maybe actually encouraged for clients to use what in all probability(but not a given) will be a couple of very favourable back to back distributions to increase their serviceability NOW?

    I don't know about you guys but I'm starting to think the answers to some recent threads could quite easily make the annual subscription to InvestEd good value in investment savings alone.......... :D



    :)
     
    Last edited by a moderator: 9th Oct, 2005
  17. artgul

    artgul Well-Known Member

    Joined:
    16th Aug, 2005
    Posts:
    77
    Location:
    Sydney
    Hi Steve,

    My question is in regard the capitalisation of interest on the margin loan. How does it work?

    Thanks.