Creative Finance/Finding a Broker

Hi Guys,

I don't think I've posted since I last bought a property in 2009! But since you're all good company and give great advice, I thought I'd step up the game and throw more challenging questions at you.

It's a very long story, but I'll try to boil it down as much as possible. Basically, in 2009 we bought a unit first as an investment property for 1 year, then since then as a PPoR. Late last year, junior decided the womb was too small and decided to take over our spare room, and most of the rest of our unit. For someone who is only 60cm tall and weighing only 7kg, he sure does take up a lot of room!

Anyway, we're now thinking that one day, Junior might like a backyard as well, so we're planning in advance for that. Basically the strategy is to buy soon, negatively gear it until we need it, then move into it. It would be nice for the unit to then become an IP, but if it can't be done, we're not that attached to it.

I can't see any way around being frank with my figures here, so excuse me if I commit faux pas by disclosing the numbers.

I current have a base salary of 140k. My OTE is 180k, but I am on target this year to hit 200k. I have a pre-negotiated payrise to 150k to take effect at the end of this year.

My wife is currently on mat leave on full pay. Her employer has agreed to a three day return to work plan starting July 1, and we have secured child care to enable that. Our child is a very happy easy going person, and has never had any problems being left with relatives, so we don't foresee any difficulties. We calculate that three days a week is approximately $57k per year before tax.

Our unit is valued at between $440k and $480k - No gain since we bought it in 2009, not even inflation adjusted. This is based on three sales in the past year in our unit block. I don't think we overpaid, since sales before and after also were between these values. We simply didn't get a bargain and the market hasn't moved. Our remaining mortgage is approximately 220k. We have another ~55k in other investments.

We are looking at houses in the 800k-1m range, returning $650-$800/week. Our calculations that with a modest depreciation schedule, out of pocket per week will be $150-250 after tax.

Ideally, our mortgage would look like this:

1. In my name only for taxation purposes
2. Cross collateralised or otherwise secured with the PPoR (in my wife's name) to eliminate the need for a deposit as well as eliminate LMI. Redrawing equity unfortunately, would mean we are taking money out of a non-deductible loan, to decrease the balance of a deductible loan, so that is out of the question.
3. Interest only
4. Fixed interest for up to five years.
5. Not having to pay a significant penalty for creative financing would also be good. (Within 50bp of what I can get as my discounted variable rate from CBA vaguely fits that description)

Does any broker here think they can land a deal like that? It seems like I'm asking the earth, though I'm sure that many deals have been done that have been more complex and risky. Reading through these forums, it would seem I am massively under leveraged for our household income. (But we knew Junior was coming, so we played conservatively.)

Also, how does one choose a good broker? There is only so much free advice you can expect from a forum, so I would feel better going to a good broker, and knowing they are likely to get a commission out of it if they are good enough to get enough of the features I need at a reasonable rate.

Thanks in advance for your advice.
 
Well I wouldn't suggest the cross collateralisation as getting money out for the new house is easy. Keeping it in your name is fine, your wife can be added on if you need servicing help but given she is on maternity leave it is a bit iffy.

As it is a PPOR - maybe fixing the entire thing for 5 years isn't really a good idea as it causes inflexibility. You wouldn't need to pay any extra for 'creative' financing - there isn't much creativity here it is pretty standard in my view but I don't know enough about your situation to make any recommendations.
 
1. In my name only for taxation purposes
2. Cross collateralised or otherwise secured with the PPoR (in my wife's name) to eliminate the need for a deposit as well as eliminate LMI. Redrawing equity unfortunately, would mean we are taking money out of a non-deductible loan, to decrease the balance of a deductible loan, so that is out of the question.
3. Interest only
4. Fixed interest for up to five years.
5. Not having to pay a significant penalty for creative financing would also be good. (Within 50bp of what I can get as my discounted variable rate from CBA vaguely fits that description)

Generally no problem at all, in fact I'm wondering what part of this requires something creative?

I agree with Aaron that the cross-collateralisation is a bad idea however. It's a very straight forward process to use the equity in your existing home (in fact I'd recommend it because it's likely to be more tax effective), but you don't need to cross-collateralise to do this; it's just something the banks will tell you because they like to structure lending in their interests, not yours.
 
2. Cross collateralised or otherwise secured with the PPoR (in my wife's name) to eliminate the need for a deposit as well as eliminate LMI. Redrawing equity unfortunately, would mean we are taking money out of a non-deductible loan, to decrease the balance of a deductible loan, so that is out of the question.


xcoll, hehehe, I guess you have already talked to your fiendly banker.

Why not ? here are some reasons

http://somersoft.com/forums/showpost.php?p=120656&postcount=6

Cross coll isnt some magic pixie dust way toCREATE equity, it can actually sterilise effective equity

You can draw from your equity without xcoll, and still maintain 100 % deductabiility by putting in a separate loan slit across your PPOR only.

Creative? Nah, just simple garden variety stuff AND doesnt usually cost any more in rates

ta
rolf
 
Step 1. Do not cross securitise your properties

Step 2. Order a couple of upfront valuations. They are free and in a few days will tell you exactly how much equity you have to draw upon for the new purchase. You are likely to be surprised by the valuations.

Step 3: Change the existing loan to IO (if not already) and have a linked offset.

Step 4: Draw upon the existing equity. If the property is worth say $480k then you will have about $165k in equity available.

Step 5: Set this up as a separate loan. So your loans will look something like this:

Existing Property - worth $480k

Loan A/C 1 - $220k (purpose for current property)

Loan A/C 2 - $164k (purpose for new purchase)

New Property - Worth $x

Loan A/C 1 - $x (purpose for new purchase).

I would get cracking on step 2. Re rate you will have high borrowings so most lenders will come to the party re pricing hence I wouldn't be overly concerned about this. Did I mention don't cross securitise your properties?

Regards

Shahin
 
Sunder, I agree with the others, step 2 needs reconsidering

It seems you may not understand how this actually works.
 
Thanks for the response guys. It's fairly clear I do not understand how this works....


So, I want to avoid pulling out any money from the PPoR loan as interest on this money is not tax deductible. So how do I tap "equity" from it without allowing the bank to secure the investment loan against it? They're obviously not going to lend 100% or close to it without severe LMI just on my good word that we have a lot of equity in our first home.
 
So, I want to avoid pulling out any money from the PPoR loan as interest on this money is not tax deductible.

This is not correct.

Money borrowed for investment purposes is generally deductible. Even if it comes from a PPOR loan.

However, for other tax reasons it is best not to use redraw but to set up a new split loan which can be secured by the PPOR (or IP). The deposit for the next purchase can then come from this loan and the remainder borrowed from the same or different bank.

This will allow you to borrow 105%, claim all interest, and avoid cross collateralising the loans.
 
Money borrowed for investment purposes is generally deductible. Even if it comes from a PPOR loan.

And for dumbos like me, this translates to what I call the "purpose" test.


Security for the loan doesnt matter re tax deductability, purpose of the borrowed funds does.

This is an area where many get confused, so you arent alone.

ta
rolf
 
Thanks for the response guys. It's fairly clear I do not understand how this works....


So, I want to avoid pulling out any money from the PPoR loan as interest on this money is not tax deductible. So how do I tap "equity" from it without allowing the bank to secure the investment loan against it? They're obviously not going to lend 100% or close to it without severe LMI just on my good word that we have a lot of equity in our first home.

This really is a very simple deal and if you access the equity in your PPOR properly, the interest certainly is tax deductable. You then then take that equity (now cash) and use it for a deposit on the new purchase. To ensure tax deductability of the loan it is critical that it is structured correctly however.

By your own admission you're not very clear on how this works, it might be best if you sit down with one of the forums brokers (there's bound to be one of us near you) and get some good advice.
 
this looks like a very straight forward deal on the surface. is there something we are missing that makes you think that creativity is required?

Hi Guys,

I don't think I've posted since I last bought a property in 2009! But since you're all good company and give great advice, I thought I'd step up the game and throw more challenging questions at you.

It's a very long story, but I'll try to boil it down as much as possible. Basically, in 2009 we bought a unit first as an investment property for 1 year, then since then as a PPoR. Late last year, junior decided the womb was too small and decided to take over our spare room, and most of the rest of our unit. For someone who is only 60cm tall and weighing only 7kg, he sure does take up a lot of room!

Anyway, we're now thinking that one day, Junior might like a backyard as well, so we're planning in advance for that. Basically the strategy is to buy soon, negatively gear it until we need it, then move into it. It would be nice for the unit to then become an IP, but if it can't be done, we're not that attached to it.

I can't see any way around being frank with my figures here, so excuse me if I commit faux pas by disclosing the numbers.

I current have a base salary of 140k. My OTE is 180k, but I am on target this year to hit 200k. I have a pre-negotiated payrise to 150k to take effect at the end of this year.

My wife is currently on mat leave on full pay. Her employer has agreed to a three day return to work plan starting July 1, and we have secured child care to enable that. Our child is a very happy easy going person, and has never had any problems being left with relatives, so we don't foresee any difficulties. We calculate that three days a week is approximately $57k per year before tax.

Our unit is valued at between $440k and $480k - No gain since we bought it in 2009, not even inflation adjusted. This is based on three sales in the past year in our unit block. I don't think we overpaid, since sales before and after also were between these values. We simply didn't get a bargain and the market hasn't moved. Our remaining mortgage is approximately 220k. We have another ~55k in other investments.

We are looking at houses in the 800k-1m range, returning $650-$800/week. Our calculations that with a modest depreciation schedule, out of pocket per week will be $150-250 after tax.

Ideally, our mortgage would look like this:

1. In my name only for taxation purposes
2. Cross collateralised or otherwise secured with the PPoR (in my wife's name) to eliminate the need for a deposit as well as eliminate LMI. Redrawing equity unfortunately, would mean we are taking money out of a non-deductible loan, to decrease the balance of a deductible loan, so that is out of the question.
3. Interest only
4. Fixed interest for up to five years.
5. Not having to pay a significant penalty for creative financing would also be good. (Within 50bp of what I can get as my discounted variable rate from CBA vaguely fits that description)

Does any broker here think they can land a deal like that? It seems like I'm asking the earth, though I'm sure that many deals have been done that have been more complex and risky. Reading through these forums, it would seem I am massively under leveraged for our household income. (But we knew Junior was coming, so we played conservatively.)

Also, how does one choose a good broker? There is only so much free advice you can expect from a forum, so I would feel better going to a good broker, and knowing they are likely to get a commission out of it if they are good enough to get enough of the features I need at a reasonable rate.

Thanks in advance for your advice.
 
Thanks for the response guys. It's fairly clear I do not understand how this works....


So, I want to avoid pulling out any money from the PPoR loan as interest on this money is not tax deductible. So how do I tap "equity" from it without allowing the bank to secure the investment loan against it? They're obviously not going to lend 100% or close to it without severe LMI just on my good word that we have a lot of equity in our first home.

You just need to submit 2 separate applications if you do not want the properties cross securitised. Its pretty simple. The loan set up is as the previous post.

Regards

Shahin
 
this looks like a very straight forward deal on the surface. is there something we are missing that makes you think that creativity is required?

Thanks Jon,

Yes, you are missing something - my ignorance. ;) I thought having read property forums for a couple years, that this was possible, but difficult. Clearly, I had no idea that this was pretty straight forward for most brokers.

I will look around this forum for a broker who works somewhere near where I live, and probably contact them in the next two weeks.

Thanks for all your help guys.
 
I haven't run your numbers but as an aside I recently did a deal very similar to what your proposing where we needed the wife's income. She was returning to work 1 week before the purchase settled and the lender allowed us to take her income into account. We had letters and estimations of child care costs etc.

Good luck with it all..
 
I haven't run your numbers but as an aside I recently did a deal very similar to what your proposing where we needed the wife's income. She was returning to work 1 week before the purchase settled and the lender allowed us to take her income into account. We had letters and estimations of child care costs etc.

Good luck with it all..

Hi Marty,

Thanks for that. It's good to know. We saw a property today that the agent said already had offers on it. It's the first property in the 3 months of hunting we've seen that's at least a 9/10, and we want to make an offer very soon - before my wife goes back to work. She met with her boss yesterday to confirm that she is going back 3 days a week, so I might get her to get that on company letterhead.
 
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