Welcome to Finance and Fury, The Say What Wednesday Edition

I would like to start by saying a big thank you for the knowledge you have passed onto myself and the community.

My question lies around equity, if you have a considerable amount of money in shares, say 200k, and you are wanting to buy a house at 400k are you able to use this as leverage?

Also, with negative interest rates possibly coming, keeping money in an offset account and lowering the interest for the mortgage of a property is not going to be the best, so placing them into shares is possibly a safer place to keep capital?

 

Thanks for getting in touch and great question! You are more than welcome, glad to hear you are getting value out of the podcast!

Two parts –

  1. Go through shares as genuine savings in application process and deposit at time of loan
  2. Go through negative rates and offset accounts – thought experiment on this and hasn’t been seen

 

Application time – Assessment and Genuine savings

  1. Just to clarify – shares as collateral – if meaning “Genuine savings” yes – the funds that a home loan applicant has saved themselves gradually over time
    1. During the home loan application process, lenders will assess your income, debt and assets, and how they affect your ability to service the loan.
  2. What is classified as genuine savings? – each lender has their own genuine savings policies!
    1. Savings/Term Deposits held or accumulated over 3 months.
    2. Shares or managed funds held for 3 months – Equity in real estate (varies depending on the lender).
  3. Many people receive a gift or have a deposit that would normally be considered as “non genuine savings”. However, if it is held in a bank account for more than three months, it may be considered as genuine savings.
    1. There are still some banks that do not consider this as genuine savings, unless you have actually saved money on your own.
  4. What isn’t genuine savings? The banks want to see that you’ve planned and saved a deposit yourself because this shows to them that you’re likely to be a good borrower.
    1. Gifts, Inheritance, Tax refund, Lump sum deposits (proceeds from sale of property is an exception to this), Bonuses, Selling your car or other assets, First Home Owners Grant (FHOG)
    2. There are actually many exceptions to the above, particularly if you’re renting.
  5. Share portfolios as a source of income – Lenders won’t look at the total value of your share portfolio when assessing your serviceability -Part of assessing your ability to repay your home loan
    1. Because shares fluctuate in value – most lenders will only accept part of investment incomes
    2. Some banks up to 80% while others will go much lower
  6. Can’t leverage shares as part of a deposit – Why won’t shares be accepted as part of my deposit?
    1. The deposit for a home loan needs to be in cash – limit lenders exposure to risk
    2. Example – say you need $120,000 for a home loan deposit – have $20k in cash and $100k in shares – bank won’t accept the shares you own as a deposit – would need to sell them to fund the deposit in cash
    3. Shares are volatile and can lose values – something banks don’t like – if you defaulted on your loan repayments, the lender would need to not only sell the property in question but also go after your shares in order to recoup its losses
  7. Strategy to leverage using shares –
    1. There is the strategy of selling the shares and using that to pay down the loan, then reborrowing those funds to repurchase the shares (hence turning interest repayments into deductible expenses).
    2. The issue with this is if there are capital gains on the shares in the sale along with the low-interest rate environment reducing the benefit of this strategy.
    3. Benefit to strategy is lowered with lower interest rates – risks also go up with share overvaluation

 

Offset accounts in a negative interest rate environment

  1. Current offset accounts – they don’t pay you interest but just reduce it – so if rates go negative then likely just reduce the effective interest reductions – Look at a $400k 30 year loan
    1. Example – Current positive rates at 3% = Repayment of $1,688 p.m. = $206k interest paid over 30 years
    2. Example – Negative rates at -1% = Repayment of $954 p.m. = -$57k of less interest
  2. Now with an offset account – $60k in an offset on the $400k loan – $340k effective loan
    1. Current positive rates = $73k lower interest payable over 30 years
    2. Negative rates = -$42k – so punishment of banks paying $14.5k less off of interest
    3. While you might not pay more interest, the bank will pay less on your behalf if you reduce your principal amount.
    4. Keeping payments the same will reduce the life of the loan though
  3. The issue with taking cash to put into shares if rates become negative is that this creates a further bubble in shares.
  4. So while investing funds at that point is meant to provide additional returns, it statistically means that you may suffer large losses for the funds invested in shares
  5. But keeping funds in offset would be a negative in negative rates

 

Thanks again for the question. If you want to get in contact you can here https://financeandfury.com.au/contact/

Rethinking the value of investment strategies for the future.

Welcome to Finance and Fury, the Say What Wednesday edition.  Last part of a 3 part series from Ryan’s questions – looking at alternative future investment strategies Episode two weeks ago – went through debt jubilees – Last week went through policies and how these...

The economics of Hollywood and investing in entertainment

Welcome to Finance and Fury. Todays episode will be a little different than normal – as we will be looking at the Economics of Hollywood and the potential of investing in entertainment Companies like Disney, Paramount, Netflix, even in Australia you have companies...

Commercial v Residential Property; the pros and cons if you’re considering investing

Episode 23 Commercial v Residential Property; the pros and cons if you're considering investing Welcome to Finance and Fury In today’s episode we’re talking about property - Commercial vs Residential. It’s often a question people ask when they’re looking to start...

The crash and depression of 1873 – When good infrastructure goes bad!

Welcome to Finance and Fury, the Furious Friday edition. Last Friday, we went through theory versus practical reality of public infrastructure spending  – roads and railroads are needed. In this episode - Look back at an economic crash – in relation to infrastructure...

One of the best places to invest in 2019, is to invest in yourself

Welcome to Finance and Fury! Today’s episode we continue our miniseries which looks at the best places to invest in 2019… Turns out, one of the best places to invest in 2019 might actually be in, Yourself. Today’s episode is the first building block for the next two...

Say What Wednesday: The ups and downs of Bitcoin – currency, investment opportunity, both… or neither?

Say What Wednesday The ups and downs of Bitcoin - currency, investment opportunity, both... or neither? Today’s question comes from Richie, who asks, “Have you been following the Bitcoin ETF at all? If so, are you able to do an episode on this and if it is worth...

Sunk costs and the Commonwealth Games

Welcome to Finance and Fury. Many of you would have seen the news over the last few weeks about Victoria cancelling the commonwealth games plans due to financial constraints. Is this the right decision when viewed through an economic lens – looking at the concept of a...

Pay more in taxes, electricity prices and costs of goods, or the climate will change!

Welcome to Finance and Fury, The Furious Friday edition Today – cover Resource control over an economy/society – Energy, food, water – Many SDGs – 7, 13, 15, 16 – Mainly focus on 7 and 13 – this is the core of most SDGs – justifications for them anyway Goal 13:...

Furious Fridays: What should the government be involved in?

Hi Guys and welcome to Finance and Fury the Furious Friday edition. This is part 7, the last episode of the miniseries about all things politics. Sorry it took a while to cover, I wanted to do this topic justice and explain all the steps and outcomes instead of...

How to minimise market timing risk for your investment strategy.

Welcome to Finance and Fury. There are concerns at the moment when it comes to investing – and that is that markets are at their all-time highs – concerns aren’t that markets continue to go to new all-time highs, but that the market falls through in the short term –...

Pin It on Pinterest

Share This