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interest trap and tricks

Discussion in 'Finance & Banking' started by grossrealisation, 20th Oct, 2006.

  1. grossrealisation

    grossrealisation Active Member

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    hi all
    I was interested in the discussion last night about the use of loc to leverage into investments primarily into real estate.
    and I did try to ask the question ??
    why would you not instead of using a loc use equity.
    take aside the cross colatt problems
    from my understanding the use of equity gets rid of the problems of the harts case.
    because if you have taken 300k out of your ppor (as in the example of 100k,100k,100k)not in a loan but in equity you don't need to pay this down into your ppor as its not a loan the loan component is on the ip you buy.
    yes the ip in real terms is a 100% loan
    but if the money (as in the hart case) was then put into the loan on the ip (as the ppor doesn't have the loan)
    even if this was the harts own money it would be a deductable and if required could be seen as a loan from hart to the ip (there are better ways of doing this but this is an example)and it not avoiding tax at all
    if anything its simplifying what you are doing and is alot more transperant.
    as the loan is to the ip identity and is not costing the ppor anything.
    on top of that by using equity its easier to follow the paper trail as no money goes to the ppor and its all thru the books of the ip.
    once the value of the ip increases to over the equity lend then the equity lend is cancelled at minimal cost.
    by using this system you only need a offset account to the ppor for cash unexpected expenses which again can be shown as loans.
    the cross collat is the largest problem but if you revalue the ip and cancell and then use the equity for another ip you are using the leveraging to the max at no cost.
    anyone have view.
     
  2. NickM

    NickM Co-founder Staff Member

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    Gr,
    i must admit i did find your explanation a little difficult to follow last night. After discussing it with you at the conclusion of the seminar, i was a little clearer on what you were trying to say.

    1. You would be in exactly the same debt position - either way
    2. how do you propose to service the $500k Ip debt ?

    Under my example the LOC would have sufficient capacity to service the debt.

    I believe that both methodologies achieve the same result.

    Mortgage ins would not be payable in either case.

    Harts case would not be an issue in my example.

    I will explore the Lein aspects further.

    Thanks for your input
    NIckM
     
  3. gazza

    gazza Well-Known Member

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    NickM and Grossreal

    I assume we are talking about the InvestEd seminar last night? If so, can someone provide a brief overview on what was discussed ?

    Gazza
     
  4. Nigel Ward

    Nigel Ward Team InvestEd

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    Ultimately though, the financier/s will lend only where there's sufficient collateral over which they have security.

    On an overally security value basis you'll get to 80% without LMI, higher with it.

    It really doesn't matter from a $ perspective whether it's:

    a) 100% loan against the IP with security over the IP plus over your home for that 100% IP loan OR
    b) an 80% loan secured solely against the IP plus a line of credit drawn for the 20% deposit plus costs secured solely against your home.

    The benefit of Nick's approach is that you can use different lenders and not let one lender have you by the proverbials :eek:

    If different lenders were to be secured via 2nd, 3rd etc mortgages over the one property (in gr's example the family home) then there'd need to be priority deeds in place involving all the secured lenders. I'd be very surprised if the pricing for a lender secured by 2nd mortgage wasn't higher than first lender. Also I suspect the first lender may get a bit nervy once you came back to them to ask for a 3rd or 4th mortgage to be secured over the house.

    To be fair, at the big end of town, sharing of security via security trust arrangements between different tiers of lenders is common as is subordination of those different tiers...but for a lend under $5m I reckon the legals would knock out a lot of the benefits ;) (which I'm still struggling to identify).

    Just my 2 bobs worth.

    Cheers
    N.
     
  5. grossrealisation

    grossrealisation Active Member

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    hi nigel
    you usually don't have more then one lien on the property at any time as you stagger your ip purchases you can if you wish ( once you become happy with the structure).the lending is the same but with regard to the hart case you cann't get into hot water as you can't pay the portion of your loan into the ppor as its only equity.

    and this type of lending or borrowing is better for under 1 mil borrowing/lending as the fees are less not more
    With a loc you have to do a mortgage for the loc
    with equity you only do the mortgage for the ip as the lein is part of that mortgage.
    this is not for the big end of town this is the small end that has that equity available.
    with regard to serviceability its the same in both cases and how you pay for it is your choice if you are using credit to pay interest as with a loc then you do need to make sure that the ip and the ppor do climb in value or you are going backwards very quickly.
     
  6. Jacque

    Jacque Team InvestEd

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    I recently came across a property (value under $1m at $820K) that had both a 2nd and 3rd mortgage over it. Interest rates on the loans ranged from a staggering 17-20%!!!! Not a situation that one would necessarily want to get themselves into unless they could avoid it, surely?

    Lawrence, I know I'm not a finance whiz (far from it) but I'm still struggling with the concepts that you're advocating. I do wish to expand my learning and understand, however! Perhaps you could provide us with some real life examples where you've used such techniques to your benefit. A spreadsheet would be useful, I would imagine :)
     
  7. Nigel Ward

    Nigel Ward Team InvestEd

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    GR

    What's the nature of the lien you're describing? You say it is part of the mortgage? But isn't the lender using bog standard resi property mortgage documentation for the IP mortgage and registering that on the IP title.

    Is there a mortgage of deposit? Or an unregistered i.e. equitable mortgage over the PPOR? Or it is just a contractual promise from you not to divest, deal with or encumber the PPOR? In which case that's not dealt with in the standard mortgage document which merely encumbers the title charged and contains a personal covenant to repay.

    Sorry. Like Jaq I'm still a bit confused about what you're proposing and the nature of interest you grant the bank when you talk about the "lien". (And yes I understand the legal concept of a lien :rolleyes: ).

    Cheers
    N.