Finance for Self-employed expat

[IRR]

Hi everyone,

Thanks to everyone who has been posting on this excellent forum. I have been reading here for a while and now doing numbers to buy the next IP.

Background

Wife and I are self employed and run a small company overseas. Combined Australian source income was $55k in FY 08-09 and $70k in FY 09-10(directors fees from our Aussie co). We are non-resident (for ATO) citizens.

Have a 2BR unit in Sydney's inner west returning $380/wk gross rent. We have enough money in offset a/c to pay it off. Bought in 2004 for $350k, current value should be around $400-420k.

Also have a 1BR unit in Sydney's inner east with views+parking owned throuh HDT. Earns gross rent of $480/wk. Owe $350k fixed for 2 more years. Bought in 2006 for $450k, should be around $500k now.

Objectives

1. Buy an investment house ( 2/3 BR duplex/terrace/townhouse) in inner west/Sydney for capital growth. Budget $650-700k, buy in own names. We need to get preapproval to be able to seize any good deals that present themselves. Preferably borrow 80%LVR 3-5 yr fixed.
2. Use equity from inner west unit as deposit for new IP without cross collatoralizing (amount in offset is not enough for this)
3. When we need to buy PPOR on return to Sydney (no fixed date as yet, not next 2-3 yrs) use equity from IPs to raise a large deposit for PPOR.
4. Continue to add to portfolio

Questions

1. How much can we borrow against inner west unit and new IP?
2. Is 80% LVR possible against inner west unit and new IP? (will it need LMI?)
3. What best rates are available for our situation?
4. When we stop earning director's fees from Australian co (FY 10-11 onwards), what options will be available to continue to build portfolio? Will we have to use low doc?

Any suggestions/advise would be welcome.

 

[Mick C]

Before i answer your questions, i want to clarify how your income works.

1. I know your self-employed, but you mentioned you get directors pay and this is paid in Aus $$ and paid directly into a Aus account? am i right?

2. Which country? ( lenders will only lender to certain currency exchange/ income for ex-pats)

Regards
Michael

 

[Peter_Tersteeg]

Questions

1. How much can we borrow against inner west unit and new IP?
2. Is 80% LVR possible against inner west unit and new IP? (will it need LMI?)
3. What best rates are available for our situation?
4. When we stop earning director's fees from Australian co (FY 10-11 onwards), what options will be available to continue to build portfolio? Will we have to use low doc?

Any suggestions/advise would be welcome.

1. Yes, you can borrow against units in almost any location.
2. Up to 90% LVR is possible, but given you're an expat 80% gives you more options. You won't need LMI unless you exceed 80%.
3. Current rates are around 7% depending on the lender, product and specific needs.
4. Lo doc is not likely to work for you as you probably won't meet some of the criteria (BAS & trading statements). If you receive an income overseas which is verifyable via paperwork such as payslips, tax returns or banking statements, this would be used instead.

The objectives you've stated are no problem to acheive. The only caviet would be that your profolio continues to grow and you continue to receive a verifyable income to borrow.

 

[IRR]

Before i answer your questions, i want to clarify how your income works.

1. I know your self-employed, but you mentioned you get directors pay and this is paid in Aus $$ and paid directly into a Aus account? am i right?

2. Which country? ( lenders will only lender to certain currency exchange/ income for ex-pats)

Regards
Michael

Thanks for the quick reply Mick.

1. Yes, directors fee AUD is credited in AUstralian bank a/cs. O/s income is more than enought to cover living costs.
2. India. Expats can repatriate 75% of after tax income. Also cost of living here is pretty low (so if quality of life )

 

[IRR]

Hi PT_Bear,

Thank you for the prompt reply.

Can I safely assume I will be able to buy an IP by borrowing 80% x $700k = $560k @80%LVR secured solely by new IP?

Next question: What is the best way to use equity from inner west unit?

The unit was bought with low doc loan (SGB) when I was living in Sydney. SGB didn't seem helpful without cross collatoralizing.

1. Is it possible to revalue the unit and take a fresh full doc P&I loan now from SGB (hopefully without incurring refinancing charges), borrow 80% against new val and leave it in offset a/c?
2. Can such money in offset a/c be used for deposit of new IP (especially if new IP is financed from another lender?)

LOC (or normal P&I loan) from another lender is the last option as I would like to minimize total cost as far as possible.

 

[mortgageman]

Hi IRR,

Subject to servicing, you should be able to do what you are wanting to do. The only think I would say is that for the increase on your current property, I would keep it as interest only rather than P&I, to give you more flexibility with your repayments (particularly as all debt is deductible), although that is a personal preference (that is not to be construed as advice). You can use the money in your offset account as a deposit for your new property. The only issues are that some lenders are difficult with cash out and you may need to have a contract of sale on your new purchase before being unconditionally approved, or you can refinance to one of the lenders that has no problem with cash out. Other than that, you seem to have the right idea with your structuring.

Regards,

 

[Mick C]

Hi PT_Bear,

Thank you for the prompt reply.

Can I safely assume I will be able to buy an IP by borrowing 80% x $700k = $560k @80%LVR secured solely by new IP?

Next question: What is the best way to use equity from inner west unit?

The unit was bought with low doc loan (SGB) when I was living in Sydney. SGB didn't seem helpful without cross collatoralizing.

1. Is it possible to revalue the unit and take a fresh full doc P&I loan now from SGB (hopefully without incurring refinancing charges), borrow 80% against new val and leave it in offset a/c?
2. Can such money in offset a/c be used for deposit of new IP (especially if new IP is financed from another lender?)

LOC (or normal P&I loan) from another lender is the last option as I would like to minimize total cost as far as possible.

Hi mate,

1. - yes ( but max LVR is 80% ; so if you want to cash out...hopefuly your new valution takes the place down to 70% LVR and you can cash out 10%- but some lenders do have restriction of on their cash out...)

2. yes

If your happy with your current rate and lender/service - then yes just do a interal refinacne/ adjustment....but if you want to re-finance it will cost around $1000-$1500 ( discharge, establishment) ; but you will be able to find lenders that allows
- High LVR ( i know of ONE only that allows of 90% for ex-pats...but im guessing there be a few more out there- matter of asking)
- Better Cash out policy ( ie... no question ask cash out)
- Better rate or service


Regards
Michael

 

[IRR]

Hi,

Thanks for the responses.

1. Serviceability - Do lenders apply the same serviceability criteria for resident and expat borrowers? Or do they consider actual surplus income available for investment (net income less living costs )? i.e. If we can demonstrate the situation with bank statements will it increase serviceability (without getting higher interest rates or LVR below 80%)?

2. Assuming we were able to build a small property portfolio which increases in value by the time we return to Australia, can we use the equity in IPs as follows without incurring CGT or creating tax complications?
a. Buy a property which will become PPOR on return to Australia
b. Rent it out while we are o/s
c. Refinance all other IPs to minimize debt on the new property
d. Use the new IP (now with minimum debt) as PPOR on return to Australia.

Does ATO require a minimum time gap between steps c and d above?

Regards

 

[Rolf Latham]

Hi IRR

The biggest chink in a to d may be the refinance bit to minimise the debt on the ppor.

While there isnt an issue when that new place is first an IP, when converting to a PPOR, and auditor going through records in detail may argue that what you wanted to do is exactly what you have done, minimise debt on PPOR and maximise on IPs.

might never be an issue, the tax guys can likley give u a better position than I

ta
rolf

 

[IRR]

Thanks Rolf,

Reply from tax forum was that a property will be IP until I actually start living there. So refinance of other IPs to reduce debt on 1 IP should (hopefully) not be an issue.

Any views on serviceability for expats based on o/s bank statements?

Regards

 

[Rolf Latham]

Any views on serviceability for expats based on o/s bank statements?

Regards

Something that I would not want to solely rely on for obvious reasosn.

ta
rolf

 

[Mick C]

You will need to have some equity in Australia ( wont need to x-cross), and not only that the bank want to see you have "something" to come back to, down the track.

ie - Family still in Aus, IP or PPOR in Aus or Your job contract/ employer is AUs based...


Regards
Michael