Servicability issue

karmark · 2nd Feb, 2016

Thanks Rixter and Terry

at least we can do some investigation on this

jalen · 2nd Feb, 2016

Rixter said: ↑

@karmark, This is how I have used Cashbonds/Annuities to increase serviceability....

When you have a few IPs under your belt serviceability will eventually become an issue. The banks/lenders will not lend you money due to you not meeting their lending criteria. As you know banks/lenders work out serviceability under 2 modules - LVR & DSR.

Where the majority of investors start to reach their borrowing capacities is in relation to DSR. In other words not enough cash flow income to service their debt. Now this isnt really a problem if you can increase your income, so how can that be done....

There are many ways - the main ones most investors know is to increase your PAYG income and/or increase your rental income. As these methods are fairly reliant upon and restricted to market conditions a lot of investors get stuck on where to go to from there. Most overlook the store of equity they have available from low LVR's created over time due to past capital growth.

That's where a Cashbond or Annuity comes into play - which is method I have implemented to get around the lack of serviceability issues to allow me to keep accessing finance to build my portfolio.

A cashbond basically works by converting existing equity into cashflow for the purposes for increasing your income in the eyes of the banks/lenders.

The way it works is as follows - you purchase a Cashbond/Annuity or guaranteed income plan from an insurance company or bank. That income plan is then paid back to you, either monthly, quarterly, 6 monthly or annually over a nominated term. The minimum term is one year and maximum term is 50 years. Which term best suits depends upon the equity you have available and annual income increase required. I use 5 years with CB purchasing funds from offset accounts and LOC's

For example if one purchased a $100k cashbond over a term of 5 years, each year you would get around $20,000 plus interest paid back to you. Now when one goes to a bank/lender for a loan to purchase the next property, 100% of the extra annual income's shown on the INCOMES side of the loan application cumulatively to existing PAYG Income & rental incomes...You have effectively increased your borrowing capacity from the annuity income, in the eyes of the bank/lender.

If LOC funding is used one is effectively purchasing an income stream and therefore it comes at a price. That price is brought about by the interest rate differential between LOC & annuity rate earned. One should examine their own personal situation before deciding whether its viable for them only after having explored and/or exhausted all other less impacting options available.

This how I have been able to keep borrowing for income producing and lifestyle purposes. Now I know this method is not for everyone. It's an advanced strategy for experienced investors with substantial equity sized portfolio's based around one's circumstances, investment strategy, goals, time frames & individual investor risk profile.

Hope this has provided you & anyone else with some food for thought.
Click to expand...

Hi Rixter,

Great idea.
But as you are now making extra income from the cashbond wouldn't you also need to pay tax on it at your PAYG tax rate?
Cheers. (Love hearing these new creative ideas!)

Frazz · 2nd Feb, 2016

Rixter said: ↑

The way it works is as follows - you purchase a Cashbond/Annuity or guaranteed income plan from an insurance company or bank. That income plan is then paid back to you, either monthly, quarterly, 6 monthly or annually over a nominated term. The minimum term is one year and maximum term is 50 years. Which term best suits depends upon the equity you have available and annual income increase required. I use 5 years with CB purchasing funds from offset accounts and LOC's
Click to expand...

@Rixter Well that's a creative way of navigating serviceability limits/restrictions. Thanks for sharing!

Cactus · 2nd Feb, 2016

Can any other brokers comment on Rixters method, seems like a novel way of increasing your income in the eyes of the bank.

Terry_w · 2nd Feb, 2016

jalen said: ↑

Hi Rixter,

Great idea.
But as you are now making extra income from the cashbond wouldn't you also need to pay tax on it at your PAYG tax rate?
Cheers. (Love hearing these new creative ideas!)
Click to expand...

Only the interest is taxable income. The return of capital is tax free.

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Servicability issue

karmark Active Member

jalen New Member

Frazz Well-Known Member

Cactus Well-Known Member

Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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Servicability issue

karmark Active Member

jalen New Member

Frazz Well-Known Member

Cactus Well-Known Member

Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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