Security on Finance (Newbie Questions)

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From: Anonymous


Is it possible to have a different lender for your IP than the one you have for your owner / occupier home loan? I have an O/O loan for my personal place of residence with a mortgage a particular bank. Can I go to another bank and borrow the money for the IP, but will the 2nd bank be allowed to take security over my personal home if the first bank has a mortgage on it?

Also I am thinking about having a component of variable and fixed on my IP, and also set up a LOC for expenses incurred throughout the year before claimable at tax time. Is the interest incurred on this LOC for IP expenses tax deductible and do you think it is a good idea to have this facility in place?
 
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Reply: 1
From: Gail H


Hi,

Sure, you can have a different lender for your IP, but the mechanism you are suggesting (cross collateralising) is best avoided. Different lenders don't really like taking out second mortgages when someone else is there first,and it complicates the transaction.

Don't use your home as security for the IPS. Have a line of credit against your home to raise deposit/s for IPs, and then take out a freestanding loan (with whoever you want) for the IP loan. So, only the deposits for the IPs are secured against your home (split it into a separate account for tax purposes).

I don't think you can claim the interest on your expenses, as well as the actual expenses themselves in the same tax year. Dale, the accountant extraordinaire will know. Dale?

Good luck

Gail
 
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Reply: 1.1
From: Ray Webster


Thanks Gail,

After reading Jan's book I had the thinking that I would use the equity in my house to fund the entire cost of the IP in one loan. I'm a bit confused now because in the examples she gives, say I am looking at a $220k property with buying expenses of say $9K I thought I would be taking out an IP loan for $229, not using a LOC for the deposit side. In this example if I wanted to go to a second lender will they take security of the IP plus $9k security on my personal home? Thus securing the full $229k.

2nd Question. To clarify in my mind your suggestion. I want to buy the $220k IP, so I set up a separate LOC (does this have to be with my lender on my home or can it be with the IP lender?) This LOC is secured against my home and would need to be at least $22k (10% deposit) leaving me a $207k IP loan with the second lender ($198k+$9k buying costs).

Have I got it right or am I complicating things with my lack of understanding?
 
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Reply: 1.1.1
From: Les .



G'day Ray,

It is unusual for any lending institution to lend you the full (106%) cost of purchasing an IP, UNLESS they are also holding your Home Loan. Therefore, they are cross-collateralising your home and your IP.

Some lenders will go as high as 95% + LMI (around 97%). Even if you've bought at discount, the maximum lend on an IP is still that x% (95%?). This is because most lenders state they will lend to x% of "contract price or valuation, whichever is the lower".

What this means is, even if you buy a $200k IP for $170k, the Bank will only lend x% (95%?) of $170k. So, you must kick in the extra from your own home, or cash.

As Gail says, it is better (safer) to avoid cross-collateralising with your home. So, DON'T have your home loan and IP loan through the same lender.

In your case, simply arrange an LOC (or a loan extension - doesn't have to be LOC) on your home to provide deposit plus costs. Then borrow the x% against the IP, and make up the difference from the loan against your own home. Do keep the extension as a separate account from your Home Loan (whether LOC or not) so that it is easier to know which is Tax deductible, and which is not.

Re your second paragraph:- "I want to buy the $220k IP, so I set up a separate LOC (does this have to be with my lender on my home?) - YES!! Keep your home with one lender, then borrow for IP's with any other lender(s).

"This LOC is secured against my home and would need to be at least $22k (10% deposit) leaving me a $207k IP loan with the second lender ($198k+$9k buying costs)." Well, nearly right.... It will depend on your lender - let's say they will lend 90% on your IP - therefore the other 10% PLUS COSTS would have to come from your own home. Using the figures you used, the second (IP) lender will loan 90% ($198k) - the remaining $31k (10% deposit + $9k costs) will come from your LOC against your home.

But, if the IP lender will lend at 95%, then they will lend $209k, and only $20k needs to come from your home loan extension.

My suggestion would be to contact a mortgage broker of repute (if you're in Sydney, check out our resident guru, Rolf...) as they should come up with the "best fit" for your situation.

Does that help to clarify things, Ray? If not, come back with any concerns

Regards,



Les


- "Eschew Obfuscation" - ;^)
 
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Reply: 1.1.1.1
From: Geoff Whitfield


Les,

I'll just take issue with one statement:

"So, DON'T have your home loan and IP loan through the same lender"

You can have a LOC from one property, and use that as a deposit for a separate loan on another property, with the same lender, and without a second mortgage on your own house (as I have just done). By doing it through the same lender, through the NAB Professionals Choice package, I haven't had to pay application fees, valuation charges, or bank legal fees for my IP.

But by using the LOC to finance the deposit on the IP, as you recommend, I have saved a lot on Mortgage Insurance (which is calculated on the combined value of two properties if a second mortgage on the first property is used).
 
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Reply: 1.2
From: Dale Gatherum-Goss


Hi

Yes, you can claim the interest on a LOC established to pay bills for your IP. The interest relates to your income and so it should be fine. The expenses themselves remain tax deductible.

It is a good idea because you have some flexibility should something go wrong.

Have fun

Dale
 
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Reply: 1.2.1
From: Les .



G'day Geoff,

Of course you can do it with the one lender - but the suggestion put to me as I started out was to keep your own home lender separate from your IP lender(s). And cross-collateralising is THE WORST (so if you're using the same lender for both, make DAMN SURE they AREN'T cross-coll'g you before you sign the mortgage).

The rationale given was that if hard times came, and the one lender had to sell you up, AND they could choose which of your properties they foreclosed, guess which one it would be????

Your own home likely has less mortgage outstanding than any of your IP's, thus much easier for a lender to get their cash out in a fire sale. But if your own home is with a separate lender, and hard times come, then your home is far safer (you've likely paid down a lot more of the mortgage - so your "home" lender won't be selling you up). The IP lender has no direct path to selling your home, so can only foreclose on IP's.

Make sense? I welcome any other comments too - if the advice given me is flawed, I'd sure like to know.

Regards,

Les


- "Eschew Obfuscation" - ;^)
 
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Reply: 1.2.1.1
From: Brian H


Hi Dale
So If I understand you correctly,I should be able to place any expenses from IP,
E.G Rates,insurance,body corp.fees on LOC as long as interest doesn't get capitalized.And place that money on personal mortgage.
Do you know if the ato has kicked up on this or if they have any rulings to go off in our favour.
Regards
Brian
 
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Reply: 1.2.1.1.1
From: Dale Gatherum-Goss


Hi Brian

I'm not aware of ant tax office rulings on this issue and I'm at home, so I can't even check for you just now.

To me, the issue was not even in contention as it is a normal business practice to pay all business related expenses from the one account, regardless of whether the account was a LOC, overdraft, or savings account.

It might be dangerous to even say so, but, I cannot see the tax office giving this one even a passing thought.

Does this help?

Dale
 
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Reply: 1.2.1.1.1.1
From: Owen .


I have a central LOC account which all my rental income and expenses, including the IP loans interest payments, come in and out of. Until recently, this account was always in debt to some extent so I was being charged interest on it. I have had no trouble claiming the interest costs and also the expenses each year. As you said, not a problem as long as the interest is not capitalised.

Owen

"Gambling promises the poor what property performs for the rich – something for nothing"
 
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Reply: 1.2.1.1.1.1.1
From: Brian H


Thanks Dale,Owen
Your answers are much appreciated.
Regards
Brian
 
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Reply: 1.2.1.1.1.1.2
From: Anonymous


:A central LOC" Does that mean in simple terms, a line of credit against your PPOR which you pay all of your expenses for all of your IP's? And what does capitalization mean, please.

gunna
 
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Reply: 1.2.1.1.1.1.2.1
From: Rolf Latham


Hi Gunna

Are you related to Round To it ?

Capitalisation means adding something to the loan amount, for example interest or Lenders mortgage Insurance premiums

Ta

Rolf
 
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Reply: 1.2.1.1.1.1.2.2
From: Owen .


Yes, my 'central LOC' is secured against my PPOR and is used ONLY for investment costs. It's what the loaned money is used for that determines it's tax deductibility, not what it is secured against.

Capitalisation is when you don't pay the interest on the loan and this is added to overall total. The interest the following month is then increased. This is a no-no for the ATO as you will be claiming interest on interest. As long as you have a source of income that will cover the interest cost each month, you are OK.

Owen

"Gambling promises the poor what property performs for the rich – something for nothing"
 
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