Loan structure on a block of units

Hi,

I have not yet posted on these forums but I read them all the time and have found them to be extremely helpful in my relatively short property investment journey!

I have a question about financing a loan on a block of 3 2-bedroom units, all individually strata titled. If our offer on the block is accepted, my husband and I are planning to live in one of the units initially and rent out the other two. Ultimately we envisage that all three will be investment properties in the medium term.

CBA has given us approval to borrow the full amount of the property, with my husband?s lovely parents agreeing to be a guarantor for 20% of the loan using their property as security (this way we can avoid LMI).

I would think that the best way to set up the finance is to have a separate loan for each of the three units (i.e. if the loan is 1.2 million, it would be ideal to have it set up as three $400,000 loans). However, I think CBA wants/needs to set up the 20% guarantor-secured part of the loan as its own separate loan. I guess my first question is ? is this the case, or can we ask them to combine it with one of the three loans secured by the actual units?

If it is the case that this 20% component needs to be separate, I was wondering how we should structure the finance given that part of the property will be owner-occupied to begin with. I?m specifically thinking about how we would be able to claim the fair amount of interest as a tax deduction.

The other potentially complicating factor is that while all units are 2-bed 1-bath 1-car, the third unit which we are planning to live in has a larger total floor space. Does this mean that we should be allocating more than one third of the loan to that one (again, specifically for tax deductibility purposes)?

Thanks, hopefully I have explained it all well enough!
 
80/20 is the banks preferred method for guarantors. It seperates the guarantors debt, should be done that way. 80% against the purchase property remaing against the guarantor.


If you wanted to you could still get each loan seperate

$320,000 against UNIT 1 $80,000 against gaurantor for UNIT 1

$320,000 against UNIT 2 $80,000 against gaurantor for UNIT 2

$320,000 against UNIT 3 $80,000 against gaurantor for UNIT 3

Note the $80k loans would also be secured against the Unit along with the guarantor property, this is one of the few times that x-coll is acceptable IMO.

Above will result in 6 seperate loans, but this is how I would set up the loans if it was me or my clients. You only mentioned the 20% against the guarantors, are you putting in funds for the purchase costs (stamp duty etc) from your own funds? Personally I would borrow 20% + COSTS for each property and keep the funds you were going to use and put them in offset against the property that will be PPOR. This will also assist you preserve your capital for later purchases. Need to make sure guarantors are clear with your entry and exit plan, but likely this discussion has already happened.


Will leave the tax side of things for the accountants, but my bet is need to apportion value of each seperately. Not just 1/3 for each.
 
Thanks very much Brady, that is really helpful. I hadn't thought about splitting the guarantor component across the three units but that does make sense. We were planning to put up the stamp duty/borrowing costs ourselves, but only because I didn't think there was any chance the bank would agree to funding them after already funding 100% of the property value! Guess it can't hurt to ask the question though :)
 
With the family guarantee in place, you can't really avoid cross collateralising the units with the parents house, but it is possible to keep the units separate from each other.

The structure that Brady has outlined means you'd have 6 loan accounts which can be cumbersome, but it does minimise what's crossed and how. It also means that in you pay off each of the $80k loans, the parents guarantee can be removed.

You can incorporate the stamp duty into the various $80k loans (increase the appropriate amount, subject to normal lending criteria).
 
They can, do and likely will. Especially if you already have the funds available.

Direct from CBA Policy -
Where an application is submitted involving a guarantor who is providing security support only, the recommended structure is to have an 80 / 20 (+ cost) split unless the customer has specifically requested a different loan structure.

Explain just like you have on here your plans, that 1 will be PPOR you would like to offset against this and then they all will be IP. Therefor you want to preserve your $$$. Shouldn't be a problem at all.
 
80/20 is the banks preferred method for guarantors. It seperates the guarantors debt, should be done that way. 80% against the purchase property remaing against the guarantor.

Im not a big fan of family guarantees on PPORs.

CBA methodology makes it a little less of perceived risk.

I tend to insist in PI on the 20 % split.

yeah, ok its not the best gearing or tax benefit long term but, sometimes optimisation must take a back seat to risk management.

What my planner has thought me is that good intentions dont always play out into reality and reducing that 20 % by a bit over time will speed the time where the equity can be released.

As a parent myself, I fully understand that sometimes we do things for our kids that arent necc smart................

ta
rolf
 
If you go guarantor for someone and you owe say 20% of the properties value with Bank A are they only able to get a property with bank A using you as guarantor or can they go to a different bank?
 
If you go guarantor for someone and you owe say 20% of the properties value with Bank A are they only able to get a property with bank A using you as guarantor or can they go to a different bank?

If the guarantor (say X) has a mortgage with bank A, the other borrower ( usually the child of X) can go to bank B.

Bank B will take out a second mortgage on X's property behind bank A.

Bank B will need to seek out permission from Bank A, but this is usually not a problem.

Cheers,
Redom
 
If the guarantor (say X) has a mortgage with bank A, the other borrower ( usually the child of X) can go to bank B.

Bank B will take out a second mortgage on X's property behind bank A.

Bank B will need to seek out permission from Bank A, but this is usually not a problem.

Cheers,
Redom

Sweet thanks Redom :)
 
If the guarantor (say X) has a mortgage with bank A, the other borrower ( usually the child of X) can go to bank B.

Bank B will take out a second mortgage on X's property behind bank A.

Bank B will need to seek out permission from Bank A, but this is usually not a problem.

Cheers,
Redom

Usually not a problem can equal a complete nightmare in a lot of cases, dependent on the lender holding first mortgage of the property providing guarantee.
 
It would be pretty straight forward in this case. Follow Brady's post. Keep each loan separate but borrow costs as well, including the costs for the one you are going to live in.

Once settle you then keep all cash in the offset account of the one you are living in. Saves you non deductible interest while maximising loans.

Once you move out you take your cash with you to the next PPOR.

And as these properties rise in value you can remove the guarantees. Do this as soon as the LVR reaches 80%.

And remember that stamp duty will be aggregated and payable on the total amount, even if you have 3 separate contracts.
 
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