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Take the case of Tom and Joan. Tom is a plant operator on $41,000pa
whilst Joan earns $32,000pa as a training coordinator. Both are
in their mid 40's, their children have left home and over the years
they have reduced their home loan to $24,000.
The current loan of $24,000 had been set up as a Line Of Credit,
which receives both their salaries. They pay all their living and
personal expenses with their credit card, which has a sweep facility
to automatically clear the credit card every month from their home
loan.
However, in embarking on an investment property strategy they needed
to re-define their goals. The original aim was to repay the home
loan as fast as possible to achieve an unencumbered house and to
live on the pension. Tom and Joan now wanted to purchase an investment
property for $150,000. They still wanted to repay their home loan
as quickly as possible and keep their cash flow situation as it
was, but also wanted to be able to keep buying investment properties
to create wealth.
From a lending point of view, this represented a number of conflicting
requirements that required a variety of loan products.
We settled for a discount variable rate home loan with principal
and interest repayments, combined with an offset account. The investment
loan, also at a discount variable rate but on interest only for
five years was coupled with a line of credit.
This arrangement had the further advantage of clearly distinguishing
between personal and investment loans, making it easier for Tom
and Joan's accountant to identify and claim expenses.
How did this work?
Firstly their existing Line of Credit was converted
to a Principle and Interest housing loan of $24,000 taking advantage
of the bank's introductory discount rate. All income, including
rental payments and salaries were directed to the offset account.
Personal expenses continued to be met from the credit card and cleared
monthly from the offset account.
This now meant that not only was
the housing loan reducing, but the reductions were even greater.
This was due to the combination of a cheap introductory rate along
with the benefits of the offset account reducing the principal from
which interest was calculated by the amount of both Tom and Joan's
salaries together with the rental income, before funds were required
to clear the credit card each month.
We then established an investment
loan of $160,000 to purchase their investment property of $150,000
purchase price plus meet all the purchase costs. This had the advantage
of not requiring Tom and Joan to contribute any cash funds to complete
the purchase. It also meant that a larger portion of interest could
be claimed as a tax deduction and returned to them as less taxation
being deducted.
As there was still ample equity in the family home
we set up a Line of Credit of $80,000 to enable them to fund the
purchase of another investment property once they were ready. Now
they could look around for a second investment property secure in
the knowledge they could pay a deposit immediately. They could then
put forward a loan application based on the full purchase price
plus costs using the equity in the new investment property.
This
structure gave Tom and Joan peace of mind as it only marginally
changed their personal cash flow arrangements whilst maximising
their ability to repay the housing loan, purchase an investment
property with no cash outlay and provide for future investment property
purchases. In addition, due to the level of borrowing and income,
we were able to have most of the normal fees and charges waived.
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