“Charging interest through equity to make property investment cash flow positive.”

PFG Cash Flow Manager Loans

Cyclical Market or Conveyor Belt?

Australian Established House Price Index (Source: ABS)

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The ideal investment property finance package would:

Match your mortgage payment monthly with your rent .

Capitalise any excess owing to your mortgage balance.

Allow you to keep your earned income for yourself/your family.

Effectively, share the risks of property investment with you - without sharing the rewards.

The 5 year hibernation strategy.

FOR SALE

$500K

YOUR CASH

YOUR LOAN

YR 1

FOR SALE

$735K

$253K

$482K

YR 5

$100K

$400K

FOR SALE

$500K

$100K

$400K+

Assumes 8% per annum growth

Capitalising interest to build a portfolio faster

The interest rate of 9.70% is higher than the banks’ SVR. However the client’s cash flow position is improved by capitalising a portion of this rate. A 0.50% rate reduction applies after 4 years.

Add 0.45% to the applicable interest rate for Lo Doc loans, with the capitalised portion remaining the same.

Year

Interest Paid by Client Variable

Interest Capitalised

Fixed Schedule

Total Applicable

Interest Rate

LVR after Capitalised

Interest

Settlement       80.00%

End Yr 1 5.70% 4.00% 9.70% 83.90%

End Yr 2 6.70% 3.00% 9.70% 86.50%

End Yr 3 7.70% 2.00% 9.70% 88.25%

End Yr 4 8.70% 1.00% 9.70% 89.30%

End Yr 5 9.20% 0.00% 9.20% 89.30%

Comparison With Pro Pack

  Cash Flow Manager Pro Pack Loan  Monthly

Difference

YearInterest

paidMortgage Balance

CFMInterest

Mortgage Balance

Interest @ 8.67%

LVR Cash Flow Loan  

Settlement   $406,300   $ 400,000   81.21%  

End Yr 1 5.70% $422,853 $23,588 $ 400,000 $34,680 83.90% $ 924

End Yr 2 6.70% $435,715 $28.724 $ 400,000 $34,680 86.50% $ 496

End Yr 3 7.70% $444,509 $33,859 $ 400,000 $34,680 88.25% $ 68

End Yr 4 8.70% $448,975 $38,850 $ 400,000 $34,680 89.30% -$ 347

End Yr 5 9.20% $448,975 $41,306 $ 400,000 $34,680 89.30% -$ 552

Property value $500,000 @ 80% LVR. Initial loan $400,000.

1.57% of establishment costs capitalised onto Cash Flow Loan.

Rollover to stay positive longer

  Cash Flow Manager Loan Pro Pack Loan  Monthly

Difference

YearInterest

RateMortgage Balance

CFM Interest

Mortgage Balance

Interest @ 8.67%

LVR Cash Flow Loan  

Settlement   $406,300   $400,000   81.57%  

End Yr 1 5.70% $422,853 $21,933 $400,000 $34,680 78.31% $924

End Yr 2 6.70% $435,715 $27,009 $400,000 $34,680 74.71% $496

Rollover     $400,000   80.00%  

End Yr 3 5.70% $488,200 $25,323 $400,000 $ 34,680 77.51% $620

End Yr 4 6.70% $503,049 $31,183 $400,000 $ 34,680 73.95% $126

End Yr 5 7.20% $513,203 $34,207 $400,000 $ 34,680 69.86% -$156

Example assumes a property increase of 5.0% p.a. At the end of the second year the borrower exercises the right to rollover within the loan. The Interest capitalisation restarts and the period with cashflow advantage over the traditional loan extends until the beginning of year 5, when the rate reduction kicks in.

What Actually Happens? Assuming 8% pa capital growth; 4% pa rental income and tax deductions on interest at 40%

Yearly valuation

LVR Interest rate paid

Interest

paid

Rent received

Negative gearing

Monthly cash flow

$500,000 81.24%

$540,000 78.45% 5.70% $23,588 $20,000 $8,057 $371

$583,200 74.85% 6.70% $28,724 $21,600 $7,994 $72

$629,856 70.71% 7.70% $33,859 $23,328 $7,730 ($233)

$680,244 66.13% 8.70% $38,850 $25,194 $7,249 ($604)

$734,668 66.13% 9.20% $41,306 $27,210 $9,611 ($800)

Note: Positive cash flow yr. 1 and 2 totals $6,048 – available for wealth creation or home loan reduction.

What actually happens when you rollover? (again assuming 5% pa capital growth; 4% pa rental income and tax deductions on interest at 40%)

End of Year

Valuation LVR Interest Rate Paid

Interest

Paid

Rent Received

Negative Gearing

Monthly Cash Flow

1 $540,000 78.45% 5.70% $23,588 $20,000 $7,395 $372

2 $583,200 74.85% 6.70% $28,724 $21,600 $7,994 $72

Rollover

3 $629,856 77.70% 5.70% $27,234 $23,328 $9,207 $441

4 $680,244 74.14% 6.70% $33,163 $25,194 $9,127 $96

5 $734,664 70.03% 7.20% $36,553 $27,210 $7,799 $128

6 $793,437 65.02% 8.20% $40,130 $29,387 $6,126 $385

7 $856,912 59.14% 9.20% $45,399 $31,737 $5,346 $693

Result: Cash flow positive for 4 years to the total tune of $11,772PLUS $30,845 in Cash Out at rollover.

Summary of AAR Tax Opinion

The interest which is paid and the interest which is capitalized are both tax deductible. [Reference: FC of T v Australian Guarantee Corporation Limited 84 ATC 8642 (Full Federal Court); Coles Myer Finance Limited v FC of T 93 ATC 4214 (High Court); and Taxation Ruling TR94/26].

The interest on interest is also tax deductible. [Reference: In the full Federal Court decision in Hart & Anor v FC of T 2002 ATC 4608)].

If the borrower’s purpose of choosing the Cash Flow Mortgage is to deferring cash outlays for a period rather than creating tax deductions, then it’s not considered tax avoidance. [Reference: Anti-avoidance provisions known as Part IVA].

It is unlikely that the ATO would issue a Product Ruling to this product, just like any other residential mortgage products in the market. This is because the borrowers may use the loan funds differently for their own purpose, without the knowledge of exactly what each borrower does with the loan funds, it is almost impossible for the ATO to give a ruling. However, each individual borrower can seek a private binding ruling in relation to their own particular circumstances should they have any concern themselves.

Residential CFM – Summary of Terms

Maximum Loan Amount: $1,000,000 per security; $7,500,000 per borrower group.

Any metro, major regional centre or coastal location.

LVR: 80% of valuation or purchase price (whichever is the lesser).

Est. costs – Up to 2% of the property value can be capitalised on top of LVR.

Interest Rate to borrower: 9.70%p.a. (full doc)

Add 0.45% for Lo Doc (self certification) loans – available to 1 day ABN’s.

Rate Discount: 0.50% pa after 4 years, subject to satisfactory conduct

Rollover: At borrowers request after 24 months, subject to valuation and 0.50% rollover fee. DEF schedule does not restart.

Term: 30 years, 5 years interest only.

Redraw: Minimum: $500; 2 free per month; $175/redraw thereafter.

Residential CFM Fees

Valuation Fee: Loans < $750,000: $375 Loans > $750,000 to <$1,250,000: $500

Risk Fee: Full Doc: 1.25% of the loan amount Lo Doc: 1.75% of the loan amount

Legal Fee/Settlement Fee: $1100 plus disbursements, payable at settlement.

Title Insurance: 0.05% of the loan amount, payable at settlement.

All fees can be capitalised to the loan to a maximum of 2.00% of the security value. So starting LVR can be as high as 82%.

Deferred Establishment Fees: Payable if more than 50% of the loan amount is repaid within any year during the first 5 years:

Yr 1 –3.50%; Yr 2 –2.50%; Yr 3 –2.00%; Yr 4 –1.00%; Yr 5 – 0.50%

CFM loans are now available at 84% (plus fees) with a capitalisation period of 2 years.

You bought 2 investment properties.You turned $100k into $253k equity.

You took out $30k cash to reduce your home loan or invest.

All without sacrificing your income or your family’s lifestyle.

Sum Up: What your client can achieve in 5 years with PFG’s CFM - while hibernating.