The TARDIS Is An Investor's Best Friend!
G'Day there Jus and Welcome to the Forum
When considering a purchase and loan structuring it is important to stand back and to look at the transaction in space and time.
Put yourself in the TARDIS and look back at this transaction.
Did you strucure it well? Did you set it up so that it provided the most benefit at time of purchase - as an owner occupier, and has that benefit been transferable to the later purpose of investment?
Hindsight is a wonderful thing and as a would-be investor, you can view the transaction with hindsight before you set it up.
The primary question is:
Will this be your first, last and only property?
If yes, then establish your loan in the conventional way – borrow the least you can with a Principal & Interest loan, and pay the loan off as soon as you can.
If no, and if you intend to buy other property and to convert this first purchase into an investment, then consider using the least amount of funds with the most flexible loan available to you.
You are looking at buying a property for about $185,000 (in Victoria). With Stamp Duty, legal and finance costs and adjustment for rates this will require about $193,500 to settle.
You have said that ANZ have pre-approved you for a loan of up to $159,000. ANZ approve loans based on a 30 year Principal & Interest loan, so that would imply that you earn about $31,000, not taking into account any credit cards etc
If you want to have an Interest Only period, ANZ calculate the remainder of the Term as Principal & Interest, so you would be able to borrow less if you want an Interest Only period with an ANZ loan.
Other lenders do not consider Interest Only periods to be ‘credit critical’ and do not necessarily apply this inhibitor to the calculation of borrowing capacity.
So let us assume that you buy the property with a loan of $159,000 and contribute $34,500 (FHOG $16,000, Savings $18,500). You have a bit left over to help with mortgage payments during your six months of occupation. Fair enough.
But what about if you borrow a bit more? Without knowing your actual income, but based on $31,000 gross per annum, you could probably borrow up to about $165,000, about 89%LVR.
This would incur some mortgage insurance, let’s say $2,759, so your total loan would be about 167,759. Funds to Complete would have increased to $196,259(approx) and you would contribute $28,541, leaving you about $8,500 in reserve.
Now, this is where it starts to get interesting.
You have now established a borrowing point for this property. This is the only opportunity you will ever have to do this for this particular property. Yes, you may increase borrowings against the security at a later time but you can only buy it once. The later borrowings will be for another purposes, and therefore belong to that purpose, or be used for eg renovations or improvements to this property, but you can not buy this property again.
Stamp duties and other costs associated with the purchase of the property are capitalized to the cost base.
Adjustments at settlement are expenses in the year they are incurred.
Finance costs can be amortised over 5 years or the life of the loan (1,826 days). So if you live in the property for six months, that means you still have 1,643 days of amortization remaining. This helps to put finance costs, and mortgage insurance, into perspective – and enables you to have some funds in reserve and for those funds to form the nucleus of further savings to get you the second property, sooner.
So as you can see, just one aspect of structuring your loan can have a major impact on the future benefit of the loan, particularly as your income will increase considerably once you start to receive rent income.
The other factors to consider, such as using the least amount of cash flow – Interest Only payments, not Principal & Interest, could make the difference of up to about $200 per month.
As you will be paying Rates, Insurance, Body Corporate, Repairs & Maintenance which will probably come to about $200 per month, is there any reason to pay Principal and to be committed to paying it?
Repaying Principal permanently reduces the balance of the loan for tax purposes, fine if you are going to be living there indefinitely as you could (depending on the loan) save interest and redraw the funds if needed, but with the benefit of the TARDIS would this hamper you with future investment plans or reduce the tax benefit of the loan set up?
While we can not know about next year or even next week, if you start as you mean to go on you will incur fewer costs, build in greater flexibility and have some financial breathing space for the coming six months of owner occupation.
Hope this helps
Kristine
