Proper structure for first property purchase

[FirstTimeBuyer]

I'll be meeting up with a broker tomorrow that a friend has referred. I wanted to get an understanding of what is means to properly setup the financing structure for the long term. I've read on different threads that if you screw up your structure with your first purchase it can limit your flexibility thereafter. Can someone provide an example of what this means?

We (my wife and I) have about $250k in savings and earn a combined amount of $250k/year gross excluding super. Our long term goal is to increase our equity for the long run for say another 30 years.

What are the various different "structures" that we should consider? Does this mean deciding whether to borrow the loan individually vs joint?

Any guidance will be much appreciated!

 

[Terry_w]

You would generally want to make sure you
1. use as little cash as possible
2. keep loans IO
3. ensure a 100% offset is attached.

Seek legal advice on spousal transfer strategy potential. e.g buy in one name now and sell to a spouse at a later date.

Also seek advice on spousal loan strategies so that you may be able to borrow 103% for this one.

All will depend on the state you are buying in, whether you will rent it now or in the future and how you currently structure you affairs.

 

[j_p]

What Terry said

Use as little cash as possible by borrowing 80% or 90% (if you don't mind some LMI) - you can reduce interest by parking spare cash into the offset account.

Is this going to be your PPOR or an IP? Or one now and the other later? Basically you want to reduce the interest you pay on loans associated with your PPOR as this debt is non tax deductible. By using interest only (IO) loans and offset accounts you can maximise your tax efficiency and have more flexibility to grow your portfolio.

 

[Jess Peletier]

This is a really good question to ask the broker you're meeting tomorrow. Get some answers here, then see if there's any glaring differences.

Is your friend that recommended the broker someone who is currently successful with property, or a FHB like yourself? If they are a FHB, there's a risk their broker may not be the best broker for YOU, simply because an investors needs are completely different.

It will pay to ask them as much as you can about building a portfolio and see how they go answering for you.

 

[FirstTimeBuyer]

Thanks for the replies all!

I'll definitely try and ask about building a portfolio and see if the broker's suggestions are sound.

An area that my wife and I just talked about was building the wealth of not only our assets but that of our parents. My parents do not have any property or assets but are bringing in decent monthly income. My wife's parents has ~1.5m in equity on their PPOR and decent income but they don't think they have any lending power due to their age so we're willing to use our name instead. I'll be asking the broker tomorrow on some creative but legal ways to leverage existing assets and income while using our name for the mortgage. I'll come back here as a sounding board to affirm any suggestions made.

 

[Terry_w]

Thanks for the replies all!

I'll definitely try and ask about building a portfolio and see if the broker's suggestions are sound.

An area that my wife and I just talked about was building the wealth of not only our assets but that of our parents. My parents do not have any property or assets but are bringing in decent monthly income. My wife's parents has ~1.5m in equity on their PPOR and decent income but they don't think they have any lending power due to their age so we're willing to use our name instead. I'll be asking the broker tomorrow on some creative but legal ways to leverage existing assets and income while using our name for the mortgage. I'll come back here as a sounding board to affirm any suggestions made.

Sounds potentially risky for the parents!

 

[FirstTimeBuyer]

Sounds potentially risky for the parents!

It very well might be! They've paid off most of their mortgage but my father in law wants to move to a more lively suburb that seems to have an average house price of 2.5m. If they can't borrow the money the idea is for them to put down the deposit while we take out the loan. It's just a thought at the moment. As I think about it while writing it feels like we're putting all our eggs in one basket...

 

[Terry_w]

It very well might be! They've paid off most of their mortgage but my father in law wants to move to a more lively suburb that seems to have an average house price of 2.5m. If they can't borrow the money the idea is for them to put down the deposit while we take out the loan. It's just a thought at the moment. As I think about it while writing it feels like we're putting all our eggs in one basket...

You would have to be on title to take out the loan.

 

[FirstTimeBuyer]

You would have to be on title to take out the loan.

Sorry Terry, what does that mean?

 

[Jess Peletier]

I'm obviously not Terry, I hope he won't mind me answering you - it means that you would have to purchase the property yourself, or jointly with your parents. You can't get a loan without being on the title of the property.

This also has implications for your own future borrowing capacity, as with many banks you'll be liable for the whole loan, regardless of your actual share of it.

It would pay to have a chat with someone like Terry, to get a clear understanding of the legal side of it.

 

[Terry_w]

Sorry Terry, what does that mean?

only legal owners of the property can get a loan secured on that property.

 

[FirstTimeBuyer]

Thanks Terry + Jess.

So our broker is knowledgeable but doesn't appear to agree with using property as a wealth building asset. He also sees LMI as a major cost and strongly encourages meeting the 20% deposit as not to incur the LMI costs. My wife and I have also recently started new jobs so we are in probation. I think this may also factor in to why our broker is pushing for the 20% deposit.

My plan is to focus on where and the price range for our first investment and then take things from there. As for the broker, I think we may continue to shop for a broker with experience in building out portfolios and have had successful clients in doing so.

 

[Redom]

A few things to consider in terms of loan structuring:

1. Ensure you set up all your loans as I/O (as Terry said). Given your relatively higher incomes, you may have excess day to day funds to deploy somewhere. You may want to pay some of it down, best to do it by putting funds in an offset account. I/O set ups increase/preserve your borrowing power significantly. Banks work out your borrowing power by calculating your 'surplus' income after expenses are paid. Going I/O reduces the expense calculation in plenty of borrowing power calculators, and thereby increases your borrowing power.

2. Start by crystallising this goal and seeing how property can get you there. For example, 'I want to build a $5mill property portfolio in the next 8-10 years, mainly purchasing in growth areas close to CBDs etc'. Once you've down that, you can build a finance plan to match those goals. To be fair, your broker you sat down with may have asked you this and then came to the conclusion LMI is not necessary. Its generally a very useful tool to build an asset portfolio quickly, but blanket advice of 'always use LMI to start' may not be appropriate to your situation. Generally it suits most, but most don't start with a $250k income and $250 savings pool.

3. Depending on what comes out of point 2, consider the pros and cons of LMI early. With $250k in savings available to you, you may not actually need to use it if you plan on a slow accumulation phase. Alternatively, if you're looking to build up that asset figure as quickly as possible, utilising LMI and stretching that $250k further is definitely a good idea.

4. If possible, get some idea around how you'll build your portfolio over the next few years. This again will depend on goal no 2. With your incomes though, you may have significant surplus income available and your borrowing power is likely to be strong. This may assist in focusing on lower yielding, more growth focussed assets. Most on relatively lower incomes need to achieve some sort of balance between yield and growth to grow their portfolio. You may be able to weight one side of it more than the other with that income, but this type of discussion will need to be considered holistically.

5. Basic loan structuring. Picking lenders appropriately, going I/O, not cross securitising, etc - this will stretch you out further down the track and save you from potential headaches.

6. Consider diversifying over time.

Cheers,
Redom

 

[albanga]

Terry just on the point about needing to be on title. Can I just confirm, the lender won't care that the parents are adding $0 to the serviceability? They just want to know SOMEONE on the title will service the debt?

 

[Terry_w]

Terry just on the point about needing to be on title. Can I just confirm, the lender won't care that the parents are adding $0 to the serviceability? They just want to know SOMEONE on the title will service the debt?

As long as they service as a group it would generally be fine. Some lenders want minimum ownership percentages too.

 

[Sonamic]

As an aside, (apologies for the thread Jack) what about structure/order of Lender usage?

 

[Shahin_Afarin]

As an aside, (apologies for the thread Jack) what about structure/order of Lender usage?

There are heaps of threads and comments about using the lower end servicing lenders first and keeping the more generous ones to later.

This theory is right and wrong.

For example, people say you should leave lenders like Macquarie, NAB, AMP towards the end of your portfolio.

Yes its correct to try and leave NAB towards the end of your portfolio since NAB calculates other lender's debt at actual repayment amounts (of say interest only 4.60%) whereas they calculate their own debt (be it margin loans, personal loans, mortgages, etc) at benchmark rates/amounts (much higher than actual repayments).

However in the case of Macquarie this is incorrect as Macquarie calculates their own debts also at actual repayment amounts provided that the debt has been with the bank for at least 6 months. in the case of AMP its important to note that they only allow customers to have 10 properties (can go higher with exception).

If you use a lender that is too conservative then you run the risk of not being able to draw upon equity when you have developed your portfolio and want to go back and extract equity from that property. If the LVR is at 80% then no worries but if you have paid LMI and need to refinance - then you will lose that LMI credit which is devastating.

So in short its dangerous for any broker or banker to throw blanket comments around which lender to use when in your portfolio. It is very much circumstantial.

 

[Sonamic]

There are heaps of threads and comments about using the lower end servicing lenders first and keeping the more generous ones to later.

This theory is right and wrong.

For example, people say you should leave lenders like Macquarie, NAB, AMP towards the end of your portfolio.

Yes its correct to try and leave NAB towards the end of your portfolio since NAB calculates other lender's debt at actual repayment amounts (of say interest only 4.60%) whereas they calculate their own debt (be it margin loans, personal loans, mortgages, etc) at benchmark rates/amounts (much higher than actual repayments).

However in the case of Macquarie this is incorrect as Macquarie calculates their own debts also at actual repayment amounts provided that the debt has been with the bank for at least 6 months. in the case of AMP its important to note that they only allow customers to have 10 properties (can go higher with exception).

If you use a lender that is too conservative then you run the risk of not being able to draw upon equity when you have developed your portfolio and want to go back and extract equity from that property. If the LVR is at 80% then no worries but if you have paid LMI and need to refinance - then you will lose that LMI credit which is devastating.

So in short its dangerous for any broker or banker to throw blanket comments around which lender to use when in your portfolio. It is very much circumstantial.

Thankyou for explanation. I have 1 IP and PPOR at 65% LVR. Also currently have 2 IP builds in progress @ 90% LVR. 1 build with NAB and 1 with AMP. Seems the "free pass" Lenders are being used early unfortunately.

 

[Shahin_Afarin]

Thankyou for explanation. I have 1 IP and PPOR at 65% LVR. Also currently have 2 IP builds in progress @ 90% LVR. 1 build with NAB and 1 with AMP. Seems the "free pass" Lenders are being used early unfortunately.

How are some at 65% and some at 90%? Are the properties cross securitised?

How do you find AMP for construction loans?

Also sometimes you have no choice but to use NAB early on in your portfolio due to servicing/borrowing capacity.

 

[Sonamic]

I was a slow starter. Lazy Equity. IP 1 was former PPOR and had a low LVR. Built new PPOR a few years back, have seen growth. Refinanced IP1 out to 65% to build IP2 and IP3. All 4 Loans IO. I'm a 65k PAYG. Hence needing to use NAB early. AMP are 5.75% for Construction. Will seek Rate reduction upon Completion.