Loan Structure Advice Please

[eXc]

Hi All,

Could I please have some advice on structuring my loan? This will be my first IP.

Future Position:
- Looking to purhcase land in immediate future for around $200,000, which will then have a PPOR built in around 5 years time (obviously borrowing money for that - probably around $350,000)
- Current house is a PPOR which we plan to swap into an IP in around 5 years time


Current Position:

- $305,000 loan, paid down to $280,000 (Principal and Interest loan)
- $80,000 in offset account.
- PPOR bought for $325,000 in 2008, estimate current value at $350,000
- Additional cashflow of around $30,000 per year. Risk of reduction in pay (restructure at work), resulting in around $10,000 less. Wife has potential to either gain additional $30,000 p.a at the start of 2015, or stay on same rate (PHD student)


I welcome any advice with regards to loan structuring, however the following is what I was thinking.

House Loan (existing PPOR - will become IP)
- Change loan to IO
- Change loan amount to $280,000 (current position)
- Ideally, fix low for 5 years (Who does IO fixed @ 5 years?)
- No need for offest, as we'll have that on land loan
- Presumably need to use up 10% ($28,000) of our current offset to avoid mortgage insurance

Land Loan (Future PPOR)
- P&I
- Fix low for 5 years
- 100% offset
- Use left over offset ($80,000 - $28,000 = $60,000) on land, therefore loan = around $140,000

Future Building Loan
- Start (or extend) a loan from the land loan
- use cash gained over next 5 years in offset as deposit


Another option...we don't buy land just yet...wait 5 years, and get a house and land package.

So please, any advice? What are the benefits of using different lenders across the loans? Should we use the same lender, or different?

Thank You

Chris

 

[Aaron_C]

It's fine as long as you don't x-coll. I wouldn't go P&I on the land loan....interest only for everything is best.

 

[HLE]

Int only fixed for 5 years is available from all lenders.

Just be aware that not all lenders do 100% offset on fixed rate loans. Personally I wouldn't fix the land loan in case when you go to build the valuation comes in low and you have to refinance to another bank.

You could fix the land loan later when you have commenced construction. Usually the construction loan is a separate loan account so that could be variable with the offset account linked. Simple.

Using the same lender for each should be fine. Like Aaron said, as long as you don't cross collateralise it is no problem. It's better this way as you get a better rate with the larger loan size.

 

[tobe]

dont buy land first and leave it vacant for years. only very rarely does the capital gain outweigh the land loan repayments/rates etc. This is especially the case in new estates.

You are better off buying a rental property now and a house and land package in the future.

 

[eXc]

thanks for the advice all


I hadn't heard of x-coll - thanks for the tip, I'll watch out for it.

 

[Moneyman_85]

Sorry Chris I'm going to hijack this thread instead of creating a new one.

Who would the best person be to talk about loan structure for one's circumstance?

An accountant or broker. (Or both?)

John

 

[Peter_Tersteeg]

Sorry Chris I'm going to hijack this thread instead of creating a new one.

Who would the best person be to talk about loan structure for one's circumstance?

An accountant or broker. (Or both?)

John

A broker from this forum.

 

[Terry_w]

Sorry Chris I'm going to hijack this thread instead of creating a new one.

Who would the best person be to talk about loan structure for one's circumstance?

An accountant or broker. (Or both?)

John

A tax accountant or tax lawyer for the structuring, a broker for the loan structure side.

 

[Moneyman_85]

A tax accountant or tax lawyer for the structuring, a broker for the loan structure side.

2 types of structures?

 

[Terry_w]

2 types of structures?

2 angles of the one structure. Brokers can't give tax advice so you need to work that bit out first with a tax adviser and then how to structure the loan to give effect to the tax advice.

 

[Moneyman_85]

So someone like Terry_W should be good with that

Edit: just saw your website and emailed you.

 

[eXc]

thread dig....

So our offer fell through from August last year, but we have found another block we are interested. Numbers are pretty well the same as above, except loan is reduce and offset has increased a little.

We are also looking now at building this year, not waiting a few years

So a few more questions if you don't mind...

Our broker has advised;

1) that we will struggle to get a land loan now, and a construction loan in 6 months, so we should get them both now.

2) To get both now, we will need the home builder to sign off on a fixed contract

3) that fixed loans with 100% offset don't apply the savings of interest until after the fixed period?


1 does not seem right....thoughts?

2 seems crazy, how can we get a builder to agree to contract, when we don't own land, dont have geotech, survey etc

3 does not seem right...if it is right, why would you bother with the offset?

I am wondering if this is the right broker to be using...

thanks

 

[Terry_w]

Doesn't seem right.

Are you circumstances changing in 6 months?

 

[Peter_Tersteeg]

1) that we will struggle to get a land loan now, and a construction loan in 6 months, so we should get them both now.

2) To get both now, we will need the home builder to sign off on a fixed contract

3) that fixed loans with 100% offset don't apply the savings of interest until after the fixed period?


1 does not seem right....thoughts?

2 seems crazy, how can we get a builder to agree to contract, when we don't own land, dont have geotech, survey etc

3 does not seem right...if it is right, why would you bother with the offset?

1. Unless something is going to change for the worse, I don't know why you can qualify for the construction now but not later. If something is going to change adversely, you probably need to reassess what you're doing.

2. Some properties come as a complete package, you buy the house and the land immediately but the house isn't built yet. In this case you qualify for the loan shortly before completion which could create a problem with your first point anyway. My experience is that it takes time to line up everything in a construction deal (sometimes years).

3. There's one or two exceptions, but fixed rates generally don't come with offset accounts. After the fixed period the loan reverts to variable and an offset account could be applied, but prior to that an offset account on a fixed rate is useless. Leave some of the loan variable so you can at least have an offset account against that portion.

 

[Aaron_C]

Why not go for a house and land package?

 

[tobe]

You dont need to purchase the house and land off the same vendor (a house and land package). Your builder can prepare a contract prior to owning the land, it is the norm. I wouldnt go near a vacant land purchase without knowing how much it was going to cost to build, and you cant be sure of that without a fixed price build contract.

I dont know why there is a diference between your borrowing capacity now and in 6 months time, and its immaterial because you should always do them together anyway (see point above).

 

[eXc]

Thank you all for the responses.

Doesn't seem right.

Are you circumstances changing in 6 months?

No...although we would have an extra $15,000 extra in the offset...but that's a positive, not a hindrance.

Why not go for a house and land package?

New estates don't suit us (land size/cost/location). The exception to that resulted in the land being sold immediately and we missed out.

 

[HLE]

The only reason why your broker would suggest you do it together is due to serviceability.

If you are buying land only then you will need to be able to afford your current rental commitments plus the land repayments. If the loan was done as land plus construction then your existing rental commitments will not be factored in servicing.

Another reason could be that without knowing how much you will spend on the construction (and have it approved by the lender) it's hard to predict how much the final value of the property will be.

Some people spend way too much on the construction of their house - in other terms their house is the best in the street which will result in the "on completion" valuation coming in low. When this happens you will need to either put in the difference (could be a significant amount) or reduce the building price but this may in term again reduce the value of the property. Either way this is very risky especially when your deposit is limited.

I agree that you should do the land loan and construction loan together to ensure you don't encounter any issues when you are ready to construct. if you have yet to find a builder at least do a pre-approval for the construction as they are good for up to 6 months. This will give you plenty of time to find a builder.

 

[eXc]

looks like it was a misunderstanding and we are able to do the land and construction at different times (as in, the next 6 months)...