Newbie needs help with number crunch, $ in offset or shares?

Discussion in 'Shares & Funds' started by Des, 20th Jan, 2020.

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  1. Des

    Des Well-Known Member

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    Hey everyone, would really appreciate some help with this please. I asked for advice on another post about keeping our current PPOR townhouse or selling and the Y-Man suggested looking into shares. We’d never considered doing that so I’m trying to figure out how our situation changes over the next 10 - 20 years if we don’t sell straight away and moved our offset account $ into shares.
    I’ve had a basic crack at it just using a mortgage calculator and I know there’s a lot wrong but not sure how to take into account inflation/growth etc. Happy for any feedback please. I’d like to model where we could be if things went well or things went really badly but not sure what numbers to use to crunch this.
    This is just based on 6% returns and 4% growth (which I thought might be average) & returns are used to pay PPOR mortgage. I haven’t factored conservative lending to buy more shares because I don’t know if this is something we can or should do, would you? Both also assume an interest rate of 3.75% and that an IP in Corio with a small 200k loan will eventually pay itself off.

    Scenario 1- Keep money in the offset (no shares)
    Loan =460000
    Offset= 300000
    Monthly payments = 2600
    Loan paid off by 2025-2026.
    Goal house as PPOR will be worth 1.3-1.5 million in 5-10 years.
    Deposit required will be 3-400k.
    Time to save new deposit = 8-10 years
    2034 (age mid to late 40s) Purchase goal house with 1 million dollar mortgage.
    Mid- late 50s to 60s retire with PPOR paid off, super and 2 income earning IPs, based on 4% growth over 20-30 years 1 will be worth 1.5-2.3m, the other 800k-1m.

    Scenario 2 - Buy Shares with Offset money.
    Keep current townhouse as PPOR. Buy shares etc and pay down debt. Sell investment property in Corio to leverage equity and buy dream house when timing is right for borrowing capacity.
    Loan = 460000
    Offset = 50000
    Reits/Lics/efts/shares portfolio = 250000
    Monthly payments 2600 + dividends from assets. (6% of 250000 =15000. 15000/12 =1250 monthly extra payments from assets.
    = Loan paid off in 11 years, 2031. Assuming capital growth of 4% over 11 years. Assets value = 384000
    2031 - Sell Corio IP for deposit in 5 -11 years (age by this stage is late 30s to mid 40s) Purchase goal house with 1 million dollar mortgage.
    Early 50s to early 60s retire with PPOR paid off and 1 income earning investment property paid off (worth 1.5m-2.3m if 4% growth average) and 500-800K of assets plus super.

    Option 3
    Sell townhouse and buy PPOR we want now using equity & offset money as deposit. Spend next 20-30 years paying off 600k mortgage, Retire with PPOR paid off and 1 IP worth 800-1m.

    From my calculations the end game doesn’t end up significantly better one way or another. I’m curious to know whether it swings more one way or another once some of my mistakes are fixed.

    From this though I think we’re probably better with option 2 because investments are more diversified.
    Thanks in advance for any help!
     
  2. gerege

    gerege Well-Known Member

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    If your put cash into offset you’ll save about 3.2% on interest, if you believe you can make more out of that money put it into shares or where ever you think. My interest rate is 2.84% for my ppor and I can easily buy lics starting at a yeild of 4.5% from day one and my home loan being so low I’m paying less than the renters in my area for a better house.
     
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  3. Travelbug

    Travelbug Well-Known Member

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    Don't forget that you will be paying tax on the share dividends (unless franked). You need to factor that in when comparing scenarios.
     
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  4. willair

    willair Well-Known Member Premium Member

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    Des ,a good place to start is just read a post that makes me shiver at the thought what happened ,as i'm not good with numbers above 1-10 ...

    There would be 1000's of years of experience and interesting intellectual extensions within that post if you read that post a few times..

    Not having a go at you Frank as i hope you come back ---or the people you employ or the barrel of reality .it is what it is..

    My portfolio. Does this look ok?
     
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  5. PandS

    PandS Well-Known Member

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    I think you need to adjust for risk as well, money in offset you don't face the possibility of losing capital also dividend is not guarantee, it is at discretion of the board, dividend can be cut or stop all together for some business.

    Not saying that will happen just need to point out some risk for people who has no shares experience
     
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  6. RogTheBear

    RogTheBear Well-Known Member

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    I might be tempted to go half and half if that I thought that now was a particularly good time to buy shares, given I had no particular experience. As it happens, I don't think that's the case currently. From whom would you take advice as to what shares to buy?

    As @PandS notes above, there are real risks involved.
     
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  7. Fargo

    Fargo Well-Known Member

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    Depends on your psychology. . I think you have your sights set too low. I would buy growth shares and try to pay the loan off in 2 or 4 years. If you are risk averse only put about 100-150k into growth shares which will probably return much more than a shed load just for yield . Often with dividend shares you pay tax on the dividend and the price drops by the amount of dividend when it is paid, resulting in little real gain. Growth shares you can keep your capital growing and get a 50% tax discount on any realized gains and realize them at discretion such as a time when in a low tax bracket. You may be able to take out an equity loan so you can get a tax deduction so say 150k gets you 200 or 220k of shares and leave money in your offset offsetting nondeductable debt. Don't underestimate the power of compounding growth. I will give you the same advice I gave Frank if your not confident in your own ability, give 100- 150k to Joe Magyer for his Lakehouse Capital fund . 250k invested there 2 years ago would have paid of the loan by now. I think it would be wise to keep 100k available to hedge your bets and to take advantage of any sell of and be in a win win situation no matter what happens It doesn't need to be all or nothing . Even a few thousand in the share market can grow to 100's of thousands,
     
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  8. MWI

    MWI Well-Known Member

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    Just a general note about the sell in your scenarios, there's no need to sell, you could pull out the equity out instead of selling, or use the offset amount for deposit into PPOR as that would be nondeductible debt so you wish to have that as low as possible, allowing the IP loans to increase and be tax deductible.
    I think you should run the figures by someone to assist you either good accountant or strategists as I think you need to be clear on your end goal, what is it that you wish to achieve in $ terms???
     
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  9. Des

    Des Well-Known Member

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    That’s crazy isn’t it, nice work. Thanks
     
  10. Des

    Des Well-Known Member

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    Ok good advice, @gerege says he can get lics with 4.5% yield. Would that be franked or pre-tax?
     
  11. Des

    Des Well-Known Member

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    Ok wow, stayed up way too late skim reading this. Heaps to learn on here thanks for the suggestion.
     
  12. Des

    Des Well-Known Member

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    Appreciated, I didn’t realise they could stop paying dividends just like that.
    Yes I think the risk is important to consider. Definitely need to learn more about what the risks are for what kind of rewards so we can figure out if it’s worth it.
     
  13. Des

    Des Well-Known Member

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    This sounds like great advice thank you. Thanks also for the equity loan info, something I’ll look into for sure.
     
  14. Des

    Des Well-Known Member

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    50/50 is probably what we were thinking too :). I’ve heard it’s not a good time to buy shares, although we are also in it for the long game and especially after reading the Frank thread, don’t plan to stress too much on trying to buy low.
    From who? Not sure... yet. I’m wondering whether a good Financial Planner would be able to help us see if there’s an option that is going to help us get ahead financially significantly more than the others or not. From what I read here though a lot of them are not to worth it. I’ll use a search to see if anyone is highly recommended in Melbourne
    Seems like I need to read this money motivation book if it’s something we want to do, also seems like I should look into the Lakehouse Fund. After reading barefoot investor and hearing about the low cost index funds Warren Buffet also recommends they sounded like a good option to me. I’m a busy young mum and do not have time to be actively managing a complicated portfolio.
     
  15. Des

    Des Well-Known Member

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    I’ve been wondering the same thing about the accountant or strategist. I feel like paying a relatively small amount would be worth it to have a well thought out and professionally analysed plan set up, which is hopefully going to help us become financially independent in the long term.
    The goal is to have a proper house as our PPOR paid off, and a passive income of around 60k net to live off so that we could retire or semi-retire. Is this possible in our situation? I don’t know. Time frame is obviously the main thing because anything is possible with enough time. We’re mid 30s now, how long do you see that taking from where we’re at now if it’s possible at all?