Protecting assets held in own name

[MichaelM]

So in a nutshell what are we saying here?
YES - keep your privately owned property geared to the hilt with mortgage continually drawn down.
NO - best not to use the $2 company method with second mortgage over the property UNLESS the company is controlled by an unrelated third party (may be risky though).
MAY NOT be possible to refinance and increase first mortgage without first discharging the second mortgage.

 

[NickM]

I think you would have an issue trying to prove that the 2nd mortgage by a $2 coy was legitimate.

one option i use particularly with high risk professionals married to each other is that you gift say $1M to a trust. the trust then legitimately lends you the $1M back to repay the loan. Takes a mortgage over the propery.

Yes it will affect your borrowing capacity in the future.
These arrangements are very much on a case by case basis.

NickM

 

[Ebbie]

- i did not think you had to roll out of a second mortgage to refinance as the value increases (meaning in my example with 1st and 2nd mortgage - u are saying say the house goes up to 800k in value, u want to get it re-valued and leverage off it to buy more - of course. I don't think the fact that the 2nd mortgage is there hinders this process because it is no.2 behing no. 1 mortgage - as i said i will check

Did anybody find an answer to this question?

I was considering a similar idea to what NickM has suggested.

Say you have a $300K PPOR in your own name with a $150K mortgage. You gear it up to 80% LVR which frees up a further $90K in a LOC. Even so, with an LVR of 80% there is always 20% of your equity at risk.

So gift the $90K to a trust and the trust then loans the $90K back to you. You now have a $240K Bank Loan (first mortgage) AND a $90K loan to the trust (second mortgage), which means on a $300K property you have $330K debt - or NEGATIVE EQUITY!!!

This sounds good in theory but does it work in reality? I'd be interested to know if anyone here has actually done this, and if there is in fact a problem with the first mortgagee when it comes time to increase your original LOC. It could be an expensive and tiresome exercise if you need to discharge the second mortgage and start from scratch again everytime you revalue/increase your LOC.

 

[agent007]

What if I continually revalue and use the equity to buy units in the trust? That way the property is always kept at 80% LVR and most of the equity is safely placed in the trust, leaving 20% at risk if you are sued.

If you get sue, the units you bought are at risk.

Regards,
James.

 

[Ebbie]

If you get sue, the units you bought are at risk.

Regards,
James.

True, but if they are income units in a hybrid trust there would be no entitlement to capital. I'd imagine the trustee would simply 'spend' the income on all sorts of different 'expenses'. No net income to distribute means the units would be fairly worthless to the person left holding them.

 

[agent007]

True, but if they are income units in a hybrid trust there would be no entitlement to capital. I'd imagine the trustee would simply 'spend' the income on all sorts of different 'expenses'. No net income to distribute means the units would be fairly worthless to the person left holding them.

Thanks Ebbie, didn't know this.

 

[Ebbie]

I don't think the fact that the 2nd mortgage is there hinders this process because it is no.2 behing no. 1 mortgage - as i said i will check. - i will check with my accountant who is also a big property investor, trust advocate and seminar presenter. dale may know the ans.

Perhaps best to ask a mortgage broker. Rolf L or Rolf S?

 

[Ebbie]

Looks like there are no forum members who have done this or can comment on the problems associated with refinancing.

Has also occurred to me that a disadvantage would be the 6/24 month rule. When a law suit is filed against you anything you have done within the last 6 months and possibly the 24 month period before that can be undone. As such a second mortgage is only 100% safe after 30 months have passed, but if you need to undo the second mortgage whenever you refinance and increase the first mortgage then you might never reach the 30 month mark!

 

[Terry_w]

The problems associated with the 2nd mortgage strategy are that a mortgage secures something, usually a loan. If A is lending money to B it is still A's money so if A went backrupt the loan could be clawed back.

If A gifts money to B then a gift is a transfer of title. So A gifting to B means B is the new owner of the money. But there are clawback provisions in each state's conveyancing acts and in a few sections of the Bankruptcy Act. Undermarket value transactions can be reversed for up to 4 years and transfers to defeat creditors can be reverse without limit.

Having an uncommercial mortgage will be reverseable too.

Yes it will hurt serviceability if you have a debt due to a private loan. If you do not declare this debt to the lender it may be fraud and it may also be used against you in bankruptcy - evidence will show the loan wasn't declared so maybe it doesn't really exist or didn't exist then.

Refinancing will not be possible without the mortgagee's permission either. This includes increasing the first loan secured by the first mortgagee. In some states you also need the permission of the first mortgagee to lodge a subsequent mortgage too.

I am not saying this is not a strategy worth implementing, but care needs to be taken and it depending on the circumstances it may not be that strong if trustees in bankruptcy start digging - which in many cases they will not do.