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CASE STUDIES
Case Studies – First Time Investor
Fraser and Alicia were referred to me late last year by a long term investor client. Fraser is a construction foreman earning around $108,000 PA (sometimes a bit higher with bonuses). He is married to Alicia and they have 2 young children, aged 3 and 4. They agreed Alicia would be a stay at home mum, but it is unlikely they will have further children and Alicia was planning a return to work in 2012. Alicia is a primary school teacher and is confident work is available.
The family home was worth $500,000 and the current loan was $330,000.
We prepared the following Reports:
The family home was worth $500,000 and the current loan was $330,000.
We prepared the following Reports:
- Maximum loan based on Fraser’s income alone (just a guide of max loan possible without tax benefit)
- Maximum loan (assuming investment purchase $250,000, Tax deductible loan $255,000, rent $265PW.
- Funds to Complete Report, showing all costs of proposed purchase and total dollars required
- Cash flow report – shows likely cash required PW to support the investment before tax and the lesser amount after the tax benefit is considered.
We arranged to borrow the deposit and other costs of purchase by increasing debt on the home loan (equity out). With that money, and an 80% loan on the new investment property, Fraser and Alicia needed to put in no cash of their own.
There can be costs in refinancing – these must be weighed up against the benefits.
Fraser and Alicia were very comfortable they could afford the additional weekly commitment on Fraser’s income alone. Of course, it will be so much easier when Alicia returns to work.
There can be costs in refinancing – these must be weighed up against the benefits.
Fraser and Alicia were very comfortable they could afford the additional weekly commitment on Fraser’s income alone. Of course, it will be so much easier when Alicia returns to work.
Two key lessons from this example :
- Property investment is a long term wealth creation strategy – not a get rich quick scheme In the short term cash flow is usually negative so continuity of core income is vital.
- It is worth noting that, over time, as rental returns increase, the cash flow drain becomes less and less.
Should I Fix my Rate?
The following is not a case study. It is an article addressing the pros and cons of fixing your rate. The time is March 2011 – the important thing is the rationale used, not the market situation at that time. This is the sort of advice we seek to deliver.
The following article is by Peter Switzer and appeared in Switzer Broker March 21 2011
The following is not a case study. It is an article addressing the pros and cons of fixing your rate. The time is March 2011 – the important thing is the rationale used, not the market situation at that time. This is the sort of advice we seek to deliver.
The following article is by Peter Switzer and appeared in Switzer Broker March 21 2011
The Experts
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Should I fix my home loan?
by Peter Switzer I am considering switching my variable home loan to a fixed rate loan but I hear that switchers often lose out. What do you think about the current situation and what do I have to know about switching? |
What we find is that switching from variable to fixed home loans often happens at the top of the interest rate cycle when a lot of people just cannot bear any more interest rate rises. This often comes at a time when the work of the rising interest rates to bite into people’s ability to spend is at a maximum, meaning that the next move by the central bank could be down. The central bank uses rate rises to lower demand to control inflation but if they go too far they can create a recession and so the question is are we in that position now? Currently interest rates are a bit over the long run average and therefore you would expect some more rate rises over the next two or three years. However, if the world economy is hurt by the Japanese disaster and the Middle East and Libyan crises, the central bank could cut rates! I see this as a less likely scenario but it cannot be ruled out. So you’re in a gambling situation. To address the actual switch, I would argue three years would be the maximum period you should consider, but that’s only my best guess and I don’t know your personal circumstances, so it’s not advice. Right now RateCity says the gap between fixed and variable rates, if you shop around for the best deal, is 15 basis points and therefore only one 0.25 per cent rise would put fixers into the money. The experts say if you can’t cop another rise in interest rates and the gap is at current levels, it’s a better time to switch but remember rates still could fall and you will be locked in. Also the cost of escaping a fixed rate loan has to be understood, so find out the cost of breaking a loan. If you’re really worried but fear a rate fall as well, your lender will let you fix half your loan, which means any rate rise will only hurt by half the pain. Good luck with it. Published: Monday, March 21, 2011 |
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Case Studies - Investor
Ms Claire L was a Nurse working for Qld Health 23 YO and single. In May 2003 Claire approached Active Finance for help in purchasing her first home. We calculated the maximum she could borrow and established she had just enough deposit to meet the lender requirements. We calculated the total funds required to complete the purchase (solicitor, govt fees, building and pest inspections) and confirmed Claire had sufficient funds. Claire qualified for the First Home Owners Grant (in her case $7,000). Active Finance advised in completion of this paperwork and arranged for the lender to process her Grant.Two years later Claire was back, keen to purchase her first investment property. She was actually living back at home with her parents and, with the rent from her property and low board at home, she had managed to substantially reduce her loan. In addition, the capital gain had been very solid over the 2 years.
We showed Claire how to withdraw the equity from the first property and purchase the new investment property with no additional cash required from her. In fact, she even borrowed all of the "transaction costs" (solicitor/stamp duty/etc) so, in the end the gearing was 106% of the property cost. Very good for Claire’s Tax Deduction! Claire now has 5 investment properties.
Claire got married last year and I was very proud to be invited to the wedding. She credited me with setting her on the path to financial independence.
First Home Buyer – Bad Credit
Matthew was keen to buy his first home. He had some reasonably minor credit issues on his Veda Credit Report – 2 unpaid telcos and an electricity bill (now paid – but after listed as "clear out").
Matthew had been in the same job for only 3 months, but he had been in similar employment for many years. Matthew had managed to save $15,000 which was 5% of the purchase price of $300,000 for the studio apartment he was keen to buy.
We were able to put Matthew in touch with a “credit repair” consultant who was able to have all of the credit issues totally removed from his report. There was no up front cost. The credit repair agent is paid upon successful outcome.
Matthew is now living happily in his new apartment.
Matthew had been in the same job for only 3 months, but he had been in similar employment for many years. Matthew had managed to save $15,000 which was 5% of the purchase price of $300,000 for the studio apartment he was keen to buy.
We were able to put Matthew in touch with a “credit repair” consultant who was able to have all of the credit issues totally removed from his report. There was no up front cost. The credit repair agent is paid upon successful outcome.
Matthew is now living happily in his new apartment.
First Home Buyer – No Savings
Robert has a great income (over $100,000 PA).
Problem is, he loved “the good life”. At age 30 Robert was keen to finally settle down. He had found his life partner, Julie and was ready to start a family. Robert had no savings and indeed carried an ongoing credit card debt of over $30,000.
We advised Robert that a family pledge arrangement can assist some borrowers. Fortunately his parents were very supportive. They wanted to see Robert adopt some expenditure control and show the capability to service a mortgage. With a sound budgeting plan in place Robert and Julie managed to reduce the credit card limit by $22,000 in only 3 months. The parents were heartened by this and agreed to support the couple by offering their home as additional security for a home purchase.
With this support, Robert and Julie moved into their new home some 3 months later. They did not need a cash deposit and they avoided costly mortgage insurance (would have been over $10,000) on their loan as a result of the parents’ support.
Robert and Julie had the card down to zero before the purchase settled and now pay the card in full every month, avoiding interest and penalties.
Mum and Dad will be able to remove their property as support security when Robert and Julie achieve 20% equity in the new property. In other words, their loan must be no more than 80% of the property value. The way they are going with their repayments that shouldn’t be too far off. In addition, increases in property value will also improve their equity and get mum and dad "off the hook" sooner.
Problem is, he loved “the good life”. At age 30 Robert was keen to finally settle down. He had found his life partner, Julie and was ready to start a family. Robert had no savings and indeed carried an ongoing credit card debt of over $30,000.
We advised Robert that a family pledge arrangement can assist some borrowers. Fortunately his parents were very supportive. They wanted to see Robert adopt some expenditure control and show the capability to service a mortgage. With a sound budgeting plan in place Robert and Julie managed to reduce the credit card limit by $22,000 in only 3 months. The parents were heartened by this and agreed to support the couple by offering their home as additional security for a home purchase.
With this support, Robert and Julie moved into their new home some 3 months later. They did not need a cash deposit and they avoided costly mortgage insurance (would have been over $10,000) on their loan as a result of the parents’ support.
Robert and Julie had the card down to zero before the purchase settled and now pay the card in full every month, avoiding interest and penalties.
Mum and Dad will be able to remove their property as support security when Robert and Julie achieve 20% equity in the new property. In other words, their loan must be no more than 80% of the property value. The way they are going with their repayments that shouldn’t be too far off. In addition, increases in property value will also improve their equity and get mum and dad "off the hook" sooner.
Consolidate Your Debts
Strangled by Debt?
We have a solution - save hundreds Per Month in repayments
Due to increases in general living expenses and rising rates on their credit cards and mortgage, James and Gabrielle were having trouble meeting all their financial commitments.
They had two children and, over time, the minimum repayments on their credit cards had got to the point that they were not making any progress.
They contacted Active Finance to find out if we could help them with their situation. We discussed their situation in detail, including their full current financial position and their future plans that could have an effect on it. We came to the conclusion that refinancing their home loan to a cheaper, more flexible lender and consolidating their credit cards and car loan was the best option.
Active Finance then did the research on who had the best product and rate for their new proposed home loan and produced a report for James and Gabrielle showing exactly how much it would cost to refinance, and what the new repayments would be.
In summary, the report showed that they would not only have a better rate loan with more flexibility; but they would also save $1,625.96 cash flow per month with the credit cards and car loan paid out. Needless to say, they proceeded with the refinance and were very happy with the outcome of their new loan.
With the extra $19,511.50 per year, James and Gabrielle now have the option to maybe take a family holiday in time to come OR they could choose to accelerate their home loan repayments. Even an extra $600 a month would pay off their home loan 10 years early!
By consolidating your loans, you can simplify your debt management to one simple repayment and save thousands in interest AND pay of your total debt sooner.
Before Debt Consolidation
After Debt Consolidation
Even if we had not achieved a better home loan interest rate James and Gabrielle would still have significantly reduced their cash flow by, simply by consolidating debts.
We have a solution - save hundreds Per Month in repayments
Due to increases in general living expenses and rising rates on their credit cards and mortgage, James and Gabrielle were having trouble meeting all their financial commitments.
They had two children and, over time, the minimum repayments on their credit cards had got to the point that they were not making any progress.
They contacted Active Finance to find out if we could help them with their situation. We discussed their situation in detail, including their full current financial position and their future plans that could have an effect on it. We came to the conclusion that refinancing their home loan to a cheaper, more flexible lender and consolidating their credit cards and car loan was the best option.
Active Finance then did the research on who had the best product and rate for their new proposed home loan and produced a report for James and Gabrielle showing exactly how much it would cost to refinance, and what the new repayments would be.
In summary, the report showed that they would not only have a better rate loan with more flexibility; but they would also save $1,625.96 cash flow per month with the credit cards and car loan paid out. Needless to say, they proceeded with the refinance and were very happy with the outcome of their new loan.
With the extra $19,511.50 per year, James and Gabrielle now have the option to maybe take a family holiday in time to come OR they could choose to accelerate their home loan repayments. Even an extra $600 a month would pay off their home loan 10 years early!
By consolidating your loans, you can simplify your debt management to one simple repayment and save thousands in interest AND pay of your total debt sooner.
Before Debt Consolidation
After Debt Consolidation
Even if we had not achieved a better home loan interest rate James and Gabrielle would still have significantly reduced their cash flow by, simply by consolidating debts.
