Assumable loans

[Sunstone]

Dear guys,

Assumable loans are used everywhere in the US. They are an important backbone of the creation of "No-money down" deals over there.

As assumable loans are not used in Australia why do people think this is the case?

What would be required to change this situation in Australia?

Cheers,

Sunstone.

 

[beech]

hi Sunstone,
maybe abolish negative gearing and allowing you to rollover your profits into new investment as they do over there.
Of course capital gains would still stand if not rolling over but i think its only 20% there.
I love their system with appartment etc where you can in effect turn blocks of units/appartments around from mismanaged/rundown into well run property and turn your dollars into something bigger (within 6 months)and you have givin none of your profits to the government,COMPOUNDING GROWTH got to love it.

Read an old post recently where some people of the forum would also love to see the end of negative gearing.what are your thoughts?

Darren:

 

[Les]

G'day Sunstone,

What a question? Seriously - I'd always just accepted "the norm" so thinking outside "the norm" is a bit new.......

But, I would think that one of the major reasons would be that Banks would "miss out" on all of those lovely "exit fees" as people finish their "7 year stint" and want to move on....

Assumable loans would likely have some fee to change names, but with Banks getting "exit fees" from the seller, AND application fees etc. from the buyer, why would they want to make it EASIER (cheaper) for us minions??

What would be required to change this in Australia? Well, again, guessing .... Lobbying, selling Banks on the benefit of introducing such a deal - more investors would FLOCK to THEM if they were doing it, etc. Huge volume with minimal cost, rather than low volume with maximum cost....


Thinking of current reality, though, how useful is it to have a loan (assumable) of $200k on a $500k property? If sellers want $500k, then any other loan would be a second mortgage..... not likely to work so well..... But, on new-ish property, where the buyer is willing to exit for pretty much what they paid, it could work.


Thinking further, I suspect that the USA system of allowing PPOR to be Tax exempt would have people "upgrading PPOR" far more often, thus not allowing too much "paying down" of mortgages - thus the gap between "what its worth" and "what they owe" would not be too big...

So, is it likely that assumable mortgages would only work under a different Tax system????

Mate, I don't know - just some ramblings - but you never know just what might come from them.... Let's see what others come up with


Regards,

 

[Kevmeister]

Well...

I see tax implications from an assumable loan, such as the triggering of a CGT event when the loan is assumed?

I'm curious, however, as to how "assumable" the loan is. What credit criteria covers the new purchaser? My first thought was that assumable loans would not be liked here simply because the bank loses control over who they might be lending money to (could that also be why banks don't like wrappers?)

 

[Sim]

I think it is more of a banking market maturity function.

Note the huge changes in the banking landscape in recent years with non-bank lenders pushing the market into new directions to the point that traditional banks are now being forced to offer innovative products (no-doc/lo-doc/hybrid/split/long term IO etc) that they never would have considered before.

I think your best bet to get this type of product introduced into Australia would be to lobby some of the non-traditional lenders who are driving the market into new arenas - sell them on the concept and get them to help you lobby for any legislative changes that may stand in your way.

With so much competition out there, a market differentiator such as this may catch someone's eye.

That said, I haven't thought about the logistics, legal or taxation implications of such a scheme and I don't know if it is something that could work in our current system.

 

[Ajax]

Dear Sunstone,

I understand that the way banks hold security for property loans is different in the US.

I have seen Californain property where the bank holds the property as proprietor subject to the requirement that the ownership passes to the borrower once the loan is paid out.

In Australia the borrower (usually) owns the land as proprietor subject to a mortgage to the bank that secures the loan.

The US way of doing it probably enables loan obligations to be more easily assumed by a new borrower as propietorship of the underlying property does not change.

Ajax

 

[Kevmeister]

Having read everyone's comments so far, it would seem we need co-operation from several fronts to make this happen:

1. The ability for banks to hold property as the proprietor until the loan is paid out. They would need to pass on the stamp duty to the purchaser. OR some type of similar "control of title" whereby they could essentially transfer title to a new person.

2. More importantly, once the mortgage is cleared, the bank would need a way to transfer the title without incurring stamp duty, otherwise the purchaser is effectively paying double stamp duty.

3. Point (2) suggests taxation exemptions somehow need to be incorporated for this type of transaction. But would this create a loophole that a "bank" (note the quotes) be able to exploit?

4. Tax law would probably need to have special provisions to allow the bank to transfer the title to the owner without triggering a CGT event.

But, ignoring all this, the assumable loan itself is the most bizarre aspect. I can understand an assumable loan for say a car - you drive the car, the car depreciates, the loan reduces - you take over the car (in its current condition, which is prob. less than its original condition), with an accordingly reduced loan term (cause the original owner has made some of the payments). You assume the loan and pay less because you're getting less.

But why would you want to do that with an appreciating asset like a property? Even if you were simply paying the interest on the property, the value of the property itself should be increasing, so why would you want anyone else to assume the loan - unless the transaction also consists of a cash component (on the side?) to reflect the higher value of the property relative to the current loan.

Some questions:

1. Does the USA have stamp duty on transfer of property title?
2. Does the USA have capital gains tax on sale of property?
3. Are assumable loans more common in some areas of USA than others (eg. low socio-economic areas, poor growth areas, etc)?