How much can my son borrow?

Our son is keen to know whether he can buy again.

He currently has a bank loan $350K for a house value $600K. He has lived there for nearly twelve months, and his obligation regarding transfer duty is fulfilled.

We had a bad time of getting the loan, and used family money to settle. Then his bank lent him $350K to part repay the family loan.

At the time the bank accepted that we treat this residual debt owed to us as a "gift" so the bank would leave it out of the equation.

He is keen to increase his borrowing with his bank (or move to a different bank) to pay out the family loan, but also keen to move back home, rent out the house and maybe buy something that he can live in and renovate slowly. That may be a unit if he cannot afford a cheapie house.

So... what could he borrow?

Let's say he moves back home while he looks for his next project and rents out his house for $550 per week.

He would get good depreciation due to having gutted the house, new kitchen, new bathroom. So he would get a depreciation report.

He earns $65K per annum.

So, my calculation is gross income plus rent come to approx $1800 income per week.

Bank loan currently $350K.
Family loan currently $170K.

He is currently paying both the bank and us with no problems.

1. Could he increase his bank loan (NAB) or refinance with another bank to pay out NAB and repay the family loan?

2. If he rents out his house, he would want all loans to be tax deductible. Is this possible?

3. How much extra could he borrow? Could he borrow enough to buy a unit for $350K?

Any brokers who can help?
 
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It makes quite a difference if he moves back home. If everything stacks up, he should be able to finance up to 80% of the property value.

You've made a few assumptions in your own calculations that aren't correct, and there's probably a few more things that need to be discovered, but overall I think the property can be refinanced to pay you out.
 
The issue of him borrowing to repay family may not satisfy tax tests for a loan refinance used to acquire the property. This needs to be explored in detail to ascertain the original nature and use of the funds to acquire and if a trail is conclusive.

Don't assume that just because family money settled the property then he borrowed and repaid that a deductible loan is available. Especially as you refer to a part repayment. The same info used to inform the bank that it wasnt a loan may bite him if he argues it was a refinance. Personal tax advice would be needed.
 
Thanks Peter.

My main concerns are that as large a loan as possible ends up being tax deductible for him.

So you are saying it could be that if the valuation comes in at $600K he could borrow up to $480K on the current house?

On his income, and with $550 rent coming in, would he have the ability to borrow again to buy something?
 
The issue of him borrowing to repay family may not satisfy tax tests for a loan refinance used to acquire the property. This needs to be explored in detail to ascertain the original nature and use of the funds to acquire and if a trail is conclusive.

Don't assume that just because family money settled the property then he borrowed and repaid that a deductible loan is available. Especially as you refer to a part repayment. The same info used to inform the bank that it wasnt a loan may bite him if he argues it was a refinance. Personal tax advice would be needed.

Thanks Paul. Who do we see to get that personal tax advice? I'm happy to get this right if we can.
 
Thanks Peter.

My main concerns are that as large a loan as possible ends up being tax deductible for him.

So you are saying it could be that if the valuation comes in at $600K he could borrow up to $480K on the current house?

On his income, and with $550 rent coming in, would he have the ability to borrow again to buy something?

Based on the $550/wk rental income and $65k salary, without any other debt at all, borrowing capacity is over $700k with several lenders.

He should be able to refinance to 80% of the property value ($480k) and still have a reasonable amount of margin for another purchase. Exactly how much is very speculative at this point as the information available is still in the preliminary stages.
 
The issue of him borrowing to repay family may not satisfy tax tests for a loan refinance used to acquire the property. This needs to be explored in detail to ascertain the original nature and use of the funds to acquire and if a trail is conclusive.

Don't assume that just because family money settled the property then he borrowed and repaid that a deductible loan is available. Especially as you refer to a part repayment. The same info used to inform the bank that it wasnt a loan may bite him if he argues it was a refinance. Personal tax advice would be needed.

I was going to say something similar. If you told them bank it was a gift then it probably is evidence that it was a gift.

What documentation do you have in place?
 
We have the private loan documented, signed off by our son and myself and my brother (we control the trust). He makes regular repayments at a slightly higher rate than we are paying for our trust LOC (to ensure we don't fall foul of the FBT rules).

The loan is documented and the information all goes to our accountant and in the books of the trust.

If we had to put the loan into the documents for the loan, he wouldn't not have been able to borrow as much as he did.

Ultimately, if that $170K can never be claimed then we accept it.

Are you saying it is the leaving out of the private loan from the bank application that is the issue?
 
We have the private loan documented, signed off by our son and myself and my brother (we control the trust). He makes regular repayments at a slightly higher rate than we are paying for our trust LOC (to ensure we don't fall foul of the FBT rules).

The loan is documented and the information all goes to our accountant and in the books of the trust.

If we had to put the loan into the documents for the loan, he wouldn't not have been able to borrow as much as he did.

You mean he didn't declare it to the bank? That may be an issue, but that should be between him and the bank. Were any statutory declarations or other evidence of it being a gift given to the bank?

If the ATO audit then you appear to have proof that it is valid loan, possibly on commercial terms. A stat dec surfacing showing it was a gift would mean the loan was forgiven and this may affect future deductibility of interest.
 
You mean he didn't declare it to the bank? That may be an issue, but that should be between him and the bank. Were any statutory declarations or other evidence of it being a gift given to the bank?

If the ATO audit then you appear to have proof that it is valid loan, possibly on commercial terms. A stat dec surfacing showing it was a gift would mean the loan was forgiven and this may affect future deductibility of interest.

Banker was initially reluctant about leaving it off, said it should be put on, but acknowledged that if we did so, our son's borrowing capacity with the bank would be considerably reduced. I said we were happy to call it a "repay when able" loan, and he was comfortable with that.

I don't recall whether I signed anything. I could ask the chap who did the loan if we signed anything, and if so, get the wording. I can certainly ask if we signed a stat dec.
 
Talk about 'Responsible lending' under NCCP what a joke NAB.

And they say we brokers submit misleading applications.

Some of the actions taken by Banker these days is a disgrace and it is good to see the book being thrown at those that carry out such lending practices.

Cheers
 
In his defence, he was not prepared initially to ignore the loan, but with us clearly being prepared to call the loan either a "gift" or "repay when able" (I cannot recall exactly, but both scenarios were discussed), I guess he made the call.

I believe now that we either signed something saying the loan was "gift" or perhaps it was a "repay when able" loan. I do know he changed his thinking after we discussed it. It wasn't easy.

I plan on running this past our accountant. If he says we can do it, even if that means getting a private ruling, we will try. If not, we just leave it and he claims only what he can claim.
 
Ultimately it is up to your son to claim or not claim the interest on his return, as it is him that signs it an takes the responsibility.

If it was me I would be claiming it. There is a clear trail of funds.

The trust lent him the funds, he used them to purchase the property, there is a loan contract, he has been repaying the loan, he will then refinance and pay out the loan from the trust. Seems very clear to me.

While the letter to the bank may be of interest to the compliance department of the bank I can't see in the incredibly rare instance of an ATO audit that it would mean anything as the trail of funds and repayments clearly override the words of the letter. If it was around the other way a letter would be thrown out if used as evidence of purpose if the trail of funds showed the reality to be different.

If i took $200k out in equity and used it on a car and holidays and there was letter to the bank from my Mum saying i was going to use it on renovations on my IP's it probably wouldn't be accepted by the ATO and make the loan deductible.
 
Maybe get your son to do all the ground work?
Seems a bit like you're essentially doing his investing in his name for him.

Offer guidance, by all means, but I think that he'd be far better off in the long run if the impetus came from him.
 
Maybe get your son to do all the ground work?
Seems a bit like you're essentially doing his investing in his name for him.

Offer guidance, by all means, but I think that he'd be far better off in the long run if the impetus came from him.

I agree. This is the problem with online questions. With his first house, he asked for my help and guidance and we looked together. We renovated with him. He knows how much we've done to help and appreciates it.

He came to me last weekend with the idea of buying again. I'm doing some legwork for him as he is on night shift, works probably 60+ hours per week, is new to this caper, and we've been doing it for many years.

He came to me for advice and guidance, and knows I'm doing some homework. He will make the decisions though. I'm not pushing him, but following his lead.
 
A loan with no set term, no security offered and no repayment required. Awesome, where do I get one?

In seriousness though it does sound like everyone did the right thing here IMO.
 
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