Loan To Cut Property Debt, Save Money
Sydney Morning Herald
Wednesday November 29, 1995
A new MLC product will appeal to property investors, writes VITA PALESTRANT .
PROPERTY investors can no longer sit back and wait for inflation to lift their equity. Any investment loan that helps borrowers reduce their debt and save money is bound to get the green light.
Last week MLC Building Society launched an all-in-one investment product that can be used for any purpose over a term that suits the borrower. But the loan must be secured against residential property.
Although the new product is by no means unique, its aggressive rate and extra features will make it especially appealing to property investors. Its flexibility allows borrowers to keep their options open - to use the loan for its maximum tax deductibility when it suits them or to make accelerated repayments.
With one of the lowest rates on the market - a variable rate of 9.95 per cent, discounted by 1 per cent in the first year to 8.95 - it provides money to purchase or refinance any investment: property, shares, car, boat or business equipment. At 9.95 per cent, its rate is lower than the 10.5 offered by the major banks for owner occupied properties.
Borrowers can determine the term of the loan - from one to 25 years - but are free to pay it off sooner. However there is an early repayment penalty if the loan is discharged in the first two years. By depositing spare cash into the account, borrowers can save interest and shorten the term of the loan.
The extra money reduces the principal saving interest at a rate of 9.95 per cent, tax free.
The excess payments are not locked in. A fee of $5 applies on each minimum $500 withdrawal. This compares with $15 fee and $2,000 minimum withdrawal that applies elsewhere.
The loan establishment fee is $750 and there are no maintenance or account keeping fees payable. The loan is also portable - for a fee of $150 it can be transferred to a new security without any additional stamp duty or establishment fees.
One of the simple but useful benefits of the MLC Investment Loan is its detailed monthly statement. It shows all transactions, details the current interest rate, the amount of principal outstanding, the amount of additional principal paid and the amount available for withdrawal. At the end of the financial year, the statement gives the total interest and government duties and taxes paid in the preceding year. While the product can be used for any investment - managed funds, shares, a holiday home, car or boat - MLC's marketing manager, Ms Alison Teale, says landlords will find the product especially attractive.
"By putting extra into the account - like the tax refund or other spare cash - you can pay off the loan quicker. But it's extremely flexible, you can redraw the money for those big quarterly expenses like council rates, or to replace the hot water system or pay for maintenance costs. The extra payments can also give you a buffer for those times the property is empty and no rent is coming in."
The flexibility allows investors to keep all their options open, she says. "They can use the loan for its maximum tax deductibility when it suits them or to make accelerated repayments when the need is to pay it off quickly." Take the example of a couple planning on retiring to their investment property who take out a loan over 25 years. They make additional payments to repay the loan within 10 years. As it is an investment property they receive a tax deduction on interest payments above the rental they receive. They then move into the property, which is mortgage-free, and make it their principal residence. The proceeds from their original home provide retirement income.
But they have the flexibility to change the way they pay off the loan during its term. If they decide to keep it as an investment property or sell it and not live in it, they can maximise their tax advantage by reverting to minimum repayments so that their instalments have a higher proportion of interest than capital.
To get the best out of the investment, investors should consult their accountant.
Mr Andrew Willink, the managing director of Cannex, says there are many institutions offering similar products. "But the main feature here is the rate is very good, especially the 1 per cent discount in the first year. From a price point of view it's terrific. Then there are all the additional functionalities like the tax benefits and the opportunity to save money."
While he feels the product is appropriate for investment property, he is less enthusiastic about it being used to finance shares. "It's far better in my view to go for a facility where you can borrow against the shares as security rather than using your own home ... It's much cleaner that way and ensures you are not gambling away your house on the sharemarket."
© 1995 Sydney Morning Herald