lending problem (LOC in whose name ?)

lending problem

Hi,

My wife and I have our home loan with RESI. We have about $210k equity in our home, and we wanted to take out a LOC against the home to invest. The home and the home loan are in both our names. However, we want to take out the LOC in just my name (I'm on the highest tax bracket, she is not earning an income at the moment plus she is entering a litigious type of career so we don't want investments in her name). But when I approached RESI they refused to put the LOC in my name only as they say that it has to be in the name of the people on the original home loan.

Is this typical of most lenders? Is there any room for negotiation? I mean, we're basically living on my salary alone at the moment, so we've proved to them that we are able to handle the loan very well with only one income.

If we re-financed with another lender would we have the same problem?

Cheers

John
 
Hi,

I should probably add that RESI's explaination was that legally they cannot give us a LOC under my name only and that:

"the only thing we could do
is discharge the current mortgage and reapply under one name only for the
entire loan."

Does anyone know if this is true?

Cheers

John
 
Hmmmmmmmm JD

Always a convenient excuse isnt it, its not legal, its fattening or its immoral. Resi is not alone in this, but you will find its more prevalent with the smaller managers deling primarily with MA and PA loans

Many lenders will allow a single borrower even with the spouse on title, though commonly they will want a guarantee from the spouse.

Why are you looking for a loan in your name only ? I dont believe this will give you any tax or asset protection advantage unless you have an odd structure because I suspect you are talking PPOR debt here.

You want the LOC to purchase shares or IPs ? If that is the case just take the LOC in both names to save the likely exit penalty and buy the assets in your name or a trust only. That way you get full dedn and some asset protection.

Please check with your tax and legal practioner.

Ta

Rolf
 
Hi Rolf,

Thanks for replying. To answer your question, I wanted to borrow in my name only as you correctly guessed...to protect the assets. For some reason, I thought that if my wife borrowed any money in her name then this money is potentially up for grabs by creditors if she is ever sued. This is even if we use the borrowed money to buy assets in my name only. I probably think this because I was told that if the wife borrows money to give to a family trust to invest, then the amount of borrowed money is fair game for creditors, even though the assets in the trust aren't.

But from what you've said it sounds like I could be mistaken, which would be great! Does anyone else have any comment?

Cheers

John
 
Hi JD

I suspect Dale will be able to shed light.

My view is if you lock an asset away in a trust and you get sued some years later then that asset should be protected provided you have a replaceable trustee regardless of where the money came from unless its the Family Court chasing you.
Ta
 
John,

I don't know about some of the ins and outs of the instititutions as Rolf does.

But what I've done may be similar to what you want to do.

If not, just ignore!

We have just recently settled on a property.

The property ins in the name of the family trust- which we have only just set up, for the express purpose of buying this (and hopefully other) properties.

We borrowed 105% of the property we are buying- based on the equity of properties held in joint names.

To do this, my wife had to act as guarantor for the family trust property, using our ppor & another property.

This structure avoided the LOC situation completely. And avoided mortgage insurance.

The use of the family trust not only protects the assets- it also provides for flexibility in distributing income (our property is +ve geared, so negative gearing is not an issue).

Previously, we have had the LOC in joint names. But that's just provided the deposit for the property bought in my name.
 
Hiya geoffw

Can I just see if I have this correct then:

You borrowed money to finance a property that is in the name of the family trust. Your wife is acting as a guarantor for the loan. And she is using the equity in your PPOR and another IP as "backing" for the loan as well.

So, when you borrow money this way, is the loan for the property that now is controlled by the family trust in the name of the family trust???

Cheers

John
 
Originally posted by john doe
You borrowed money to finance a property that is in the name of the family trust. Your wife is acting as a guarantor for the loan. And she is using the equity in your PPOR and another IP as "backing" for the loan as well.
Almost. Not "as well". She can only act as guarantor given the equity in the other properties we are using (ie, we had the properties valued. The new valuation meant that our borrowings were much less than 80% of value. So we increased that to 80%).

The intention was to get a LOC on the two properties, and to use that as deposit, as we have done before. But the property is a block of flats (rural), and the mortgage insurers would not give us LMI. So our banker rearranged the finances to do it in this way. We got the loan, avoided x-collat. and have our property.

So, when you borrow money this way, is the loan for the property that now is controlled by the family trust in the name of the family trust???
Yes
 
btw, another method we could have used was to put a second mortgage on the original two properties. We did this on the first IP we bought- five years ago, before we knew better. That's the way the banks still suggest you buy an IP.

Two problems-

1. Your own house is at risk if anything happens to the IP
2. If you borrow over 80% of joint valuation, mortgage insurance is payable on the joint value of the two places.

I also suspect you'd have trouble putting the IP into a family trust.

Another point for the long term future. When you're a property baron.

People who know use one family trust to put no more than four properties into. And then put further properties into a new trustr/company/whatever. So that if something happens to a property in one structure, the properties in the other structures are protected.
 
Hi GW

Avoided xcoll - I hope so - good to avoid if you can. From memory though passing a guarantee from a PPOR to a trust in the form of equity indmenity is no diff to a second mortgage in effect ?

How did you get around the Loan to valuation ratio by offering a guarantee that could not have been done with a LOC. I come across this a lot and have not managed to get around it ? Equity is equity, be it in the form of cash or guarantee ?

ta

Rolf
 
Rolf,

The guarantee may well be the same in effect as an xcoll. If it was, I was not aware of it.

I hope to be able to develop the block in the next 12 months. The extra I hope will take the xcoll off again.

The problem with the LOC was the LMI. The LMI insurers treated the block as commercial- and would not cover it to the 90% I had requested (even though the bank treated it as residential). They would not cover anything over 70%. So I would not have been able to get the loan at all.

By structuring it the way they did, I could get the loan. And I avoided the LMI. So the xcoll is an unfortunate side affect. I shall chase it up- thanks for the pointer Rolf.
 
Hi GW

Nothing wrong with xcoll providing you know of the pitfalls - ask Paul Zag. I wasnt being critical just sniffing, coz its a common perplexion hehe

An issue thats come up recently with PMI (Australias largest LMI provider) is that they want EVERY adult beneficiary of a trust to be a guanrantor. Yep not just unit or hybrids but seemingly basic boiler plate family trusts as well.

Could be a long haul that one BUT we will utlimately win.

Ta
 
Every beneficiary of a trust being a guarantor? Would that be legally possible?

My kids will be beneficiaries of the trust. $500 pa, or whatever is allowed (as long as they really can do work to help)- but they are obviously not allowed to be guarantors.

That's not an issue with me (yet) I guess- because we're guarantors for the trust- the trust is not being used for guaranteeing other properties. I'd MUCH prefer going down the LOC line.
 
Hi GW

All it is some newby within PMI making new rules I suspect.

Treating adult beneficiaries like shareholders of the trustee company wont work for them. While they are the largest LMI provider, they may soon not be. I wont put up with that crap for my clients, its just that PMI are the only ones doing 95 % I/O IP lends boo hoo.

At the end of the day one important issue for borrowing is about minimising your risks, and that includes the security one gives.

Ta
 
Hi everyone,

Thanks for your replies. So Rolf, what do you think I should do? SHould I play the game my current lender wants me to do to get a LOC with them, or should I approach another lender??? Will a different lender still require to re-finance everything with them, or will allow me to keep my home loan with resi and just take out a LOC with them???

Cheers

John
 
Hi JD

Most lenders are not fond of second mortgages, STG may look at it, but then again if your mrs is on title and you want the loan in your name only then they may baulk.

Id look at Westpac to do the refinance if youre going to go that way, since the overall rate would not be more than RESI and it is a far superior product mix at 5.97 % if youre borrowing more than 250 k.

ta
 
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