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 –
- Go through shares as genuine savings in application process and deposit at time of loan
- Go through negative rates and offset accounts – thought experiment on this and hasn’t been seen
Application time – Assessment and Genuine savings
- Just to clarify – shares as collateral – if meaning “Genuine savings” yes – the funds that a home loan applicant has saved themselves gradually over time
- During the home loan application process, lenders will assess your income, debt and assets, and how they affect your ability to service the loan.
- What is classified as genuine savings? – each lender has their own genuine savings policies!
- Savings/Term Deposits held or accumulated over 3 months.
- Shares or managed funds held for 3 months – Equity in real estate (varies depending on the lender).
- 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.
- There are still some banks that do not consider this as genuine savings, unless you have actually saved money on your own.
- 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.
- 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)
- There are actually many exceptions to the above, particularly if you’re renting.
- 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
- Because shares fluctuate in value – most lenders will only accept part of investment incomes
- Some banks up to 80% while others will go much lower
- Can’t leverage shares as part of a deposit – Why won’t shares be accepted as part of my deposit?
- The deposit for a home loan needs to be in cash – limit lenders exposure to risk
- 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
- 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
- Strategy to leverage using shares –
- 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).
- 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.
- Benefit to strategy is lowered with lower interest rates – risks also go up with share overvaluation
Offset accounts in a negative interest rate environment
- 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
- Example – Current positive rates at 3% = Repayment of $1,688 p.m. = $206k interest paid over 30 years
- Example – Negative rates at -1% = Repayment of $954 p.m. = -$57k of less interest
- Now with an offset account – $60k in an offset on the $400k loan – $340k effective loan
- Current positive rates = $73k lower interest payable over 30 years
- Negative rates = -$42k – so punishment of banks paying $14.5k less off of interest
- While you might not pay more interest, the bank will pay less on your behalf if you reduce your principal amount.
- Keeping payments the same will reduce the life of the loan though
- The issue with taking cash to put into shares if rates become negative is that this creates a further bubble in shares.
- 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
- 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/