Personal Finance
Newcastle Herald
Thursday June 12, 2008
Q I'm 25, single, earn $70,000 a year, and have no debt. I have $50,000 in a savings account and $120,000 in shares ($60,000 as a margin loan). For my next investment step, I am unsure as to whether I should invest more money into shares or should I diversify and buy an investment property? If buying an investment property, what is the minimum recommended deposit and what type of loan is the most suitable and why?
A You have done very well to date but your next step depends on your short- to medium-term goals. For example, if you are considering buying a home in the next three to four years, you should be building on your savings so you will have a substantial deposit when the time comes to buy. However, if you intend to rent for a long period, you could certainly get experience by diversifying into residential property. Just make sure you research the market so you will know a bargain when you see one, and favour a rundown property in a good location. Ideally you should put down at least 20 per cent deposit to eliminate mortgage insurance and also use an interest-only loan to maximise your tax benefits.Q My son is in the process of building a new house and will have a mortgage of about $200,000. I remember reading an article of yours in which you spoke about an insurance bond versus a traditional mortgage. Could you explain it again?A In that article I mentioned that insurance bonds were good vehicles for creating a sinking fund for borrowers who had interest-only loans for investment purposes. However, they are not suitable for a non-deductible loan because the after-tax cost of the interest on such a loan could be expected to exceed the long-term return on the insurance bond.Q I am 46 years old and have a managed fund worth approximately $140,000 ($50,000 margin lending). I began receiving distributions from September 2007 and it was going well. The money is allocated as 52 per cent Australian equities, 37 per cent international, including international property, and the rest is cash. I have decided to invest a further $40,000 using a line of credit. I am thinking of investing this amount this month so I can claim the pre-paid interest in my 2008 return. Should I be doing this at this stage given the current volatility in the sharemarket, and what will be a good time to start investing in the market? My goal is to start earning an income of around $40,000 in three years from my managed funds. How much capital would I need to do this?A Nobody knows when the market will bottom but if you take a long-term view, you are certainly better off to be investing when the market is 20 per cent off its peak than when it is going through a boom period. Unfortunately, if you use a line-of-credit loan, you cannot pre-pay the interest as those sorts of loans don't work like that. To pre-pay interest you will need a fixed loan and then negotiate 12 months' interest in advance with your bank. If we assume a yield from shares of 4 per cent, it is apparent that you will need $1 million to generate an income of $40,000 a year. It may be difficult for you to accumulate this much money in just three or four years.
© 2008 Newcastle Herald