Cash Bonds to Improve Serviceability

Cash Bonds to Improve Serviceability


The Editor is also the Founder of The Passive Investor website. He is a part-time practising General Practitioner (GP) with an interest in all financial and investment-related topics. He is particularly focused on the integrated use of residential property, commercial property and the sharemarket to develop effective financial strategies for wealth accumulation and distribution.

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A cash bond is a type of investment used by some investors when they approach their debt serviceability limit with banks, and is a way of increasing serviceability by “ticking the boxes” of a lenders debt serviceability criteria so that you can borrow more money to invest.

In order to do this you need to have at least some equity available to use, either through borrowings from a line of credit or excess cash savings.

You then use these funds to purchase a cash bond (offered by companies such as Westpac or Challenger Financial Services), eg. a $100,000 cash bond over 5 years, which will give you say $3000 p.a. in interest (ie. at a 3% p.a. interest rate) as well as $20,000 p.a. as a return of your principal – so an effective “income” of $23,000 p.a..

This extra income may be considered by some lenders as increasing your overall debt serviceability, thus allowing you to borrow more money to invest in other assets such as property.

One thing to note here is that if you are using borrowed funds from a line of credit (as opposed to cash savings) to purchase the cash bond, then you will have to pay interest on this amount, which may be higher eg. 5% p.a. (based on current residential loan variable interest rates), and the cash bond may only give you 3% p.a. of real interest income – so you will effectively be incurring a net loss (albeit a tax-deductible one) to help facilitate the approval of more borrowings.

That being said, once the extra borrowings have been approved and used, it may be possible to “commute” this income stream and get your initial $100,000 capital back (ie. after the cash bond has served its purpose).

At the end of the day though you need to remember that with this strategy the real interest income you receive is just $3000 p.a. (ie. the 3% p.a. interest rate on the cash bond, though it may be higher depending on what provider you use and what current market interest rates are) – and that the extra $20,000 p.a. that may be included as income in a new loan application is really just a return of your original capital rather than actual income.

It is very plausible then that lenders will see through this arrangement for what it really is, and as such this may not be a strategy that you can be certain of using indefinitely.

We think that relying on it to help improve your serviceability in the banks’ eyes is risky, and in general if you do need to use it to move forwards then maybe you shouldn’t be borrowing any more money at all.

Further you should note that as per this example, if you do use $100,000 for a cash bond, you need to have equity or cash available elsewhere on top of this to fund the actual deposit on another property purchase.

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