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/

What will be the next market interventions from Central Banks to achieve inflation targets?

Welcome to Finance and Fury Talked about the inflation targets, interest rates and monetary policy over the past few weeks – Today – go further into looking at a completely controlled economy by Central Banks – To start – look back to an RBA paper from 1975 – this was...

Financial Reset – Investments to avoid in a negative interest rate world

Welcome to Finance and Fury -  This Episode – Look at Where to not invest in negative rates world – if it comes to that – other options First – what does the world in negative rates look like? – dive further into this to start – look at other countries, Japan, Denmark...

Are we in a property bubble and if so, why?

Welcome to Finance and Fury,  Are we in a property bubble? There is no question that the Australian property market has become significantly overpriced – but is it a bubble and due for a significant downturn? – For this – only talking about capital cities – most of...

The number of homes being put up for auction across Australia has plummeted as falling property prices and fewer cashed-up buyers shake the confidence of owners looking for the right time to sell

Episode 25 The number of homes being put up for auction across Australia has plummeted as falling property prices and fewer cashed-up buyers shake the confidence of owners looking for the right time to sell The decline of auction rates and confidence in the market...

What factors will make property prices rise in Australia?

Welcome to Finance and Fury On the last episode – looked at signs property prices will be high Today – continue and look at based on these factors - Will property prices keep going up? First – recap of the Tell-tale characteristic to be able to tell if property prices...

Tax and Estonian e-Residency; Anyone can become an e-resident, create a company and operate it in the EU

Episode 15 Tax and Estonian e-Residency; Anyone can become an e-resident, create a company and operate it in the EU Welcome! This week we will be talking about Estonia, which sits right on the Russian border, just below Finland. Anyone can become an e-resident in...

Why do banks seem to have the ability to lend never ending amounts of money?

Welcome to Finance and Fury, the Furious Friday edition. Today – discuss the topic of banking policy changes and how this opened the gates for the potential of never-ending money supply in the modern banking system To start with – look at How does money get lent out...

The Economics of War – conducted for the benefit for the very few, at the expense of millions

Welcome to Finance and Fury, The Furious Friday Edition. War is a racket – Something that always catches my attention is when politicians get on What is one thing they seem to get on about? Police enforcement, regulations on industries On a more global scale - Going...

Furious Fridays: When $1 could buy you a pair of patent leather shoes – Is it true that all fiat currencies eventually become worthless?

Furious Fridays When $1 could buy you a pair of patent leather shoes: Is it true that all fiat currencies eventually become worthless? In today’s Furious Friday episode, we’ll be running through the historical life cycle of fiat currencies. This episode is thanks to...

Say What Wednesdays: Petrol Prices are going up – why this is and what to do about it!

Say What Wednesdays Petrol Prices are going up – why this is and what to do about it! Australian motorists are suffering the biggest annual increase in petrol prices in 9.5 years as global factors combine to slug drivers at the bowser. ACCC - 2017-2018 financial year...

Pin It on Pinterest

Share This