Seeking advice on structuring a new purchase

[grubar30]

Hi all,

My partner is looking to purchase a property. It's situated 3km from Brisbane’s CBD and the asking price is $147,000. It’s a 1 bedroom, 1 bath, 1 lock-up unit, approx 48 meters squared.

She currently owns 1 property outright, a 2bdr, 1bath, 1 lock-up in Kedron. Market value is approximately $205-215K. It rents for $170 pw.

She also has $80000 in cash sitting in a 6 month term deposit. Her annual salary is approx. $23K per year.

Btw, of this $80k, she only wants to commit $70000.

So how should she best approach this purchase in terms of finance? Mortgage her current property? Using the cash as deposit and borrow the rest? In other words, how can she best structure her finances to get the best out of this deal?

Open to all suggestions.

Regards
George

 

[Simon]

Based on the size of the property she may be restricted in LVR.

She should consider taking a loan against her current property for enough to cover the deposit and purchase costs of the new one.

Then take a seperate loan for the new one.

If she uses a Pro Pack it will reduce fees and give an interest discount.

The entire loan will be deductible.

She will not need to use any of her funds if she so chooses.

Or, she can use her own cash for a deposit. This will be much more than the $7K she wants to spend and will reduce the tax deductible interest.

Her income is low but the lender will take the rents into account as well.

A NODOC loan will help if needed but will severely restrict her future borrowings.

Cheers,

 

[grubar30]

Based on the size of the property she may be restricted in LVR.

She should consider taking a loan against her current property for enough to cover the deposit and purchase costs of the new one.

Then take a seperate loan for the new one.
Cheers,

Two loans to purchase the new property? Why?

Or, she can use her own cash for a deposit. This will be much more than the $7K she wants to spend and will reduce the tax deductible interest.
Cheers,

Simon, it's $70K. Does this change things?

 

[Rolf Latham]

A key question

Is it to be POR or IP ?

Simon like most of us doesnt like xcoll, so we are better to spread the loan across both properties.

There could be some argument for raising enough loan just on the exist freehold place but Id need some more feedback on the above q pls



ta

rolf

 

[grubar30]

Rolf,

Both properties are IP's. She lives at home with her parents. No debt whatsoever.

George

PS...why spread the loan for the St Lucia property against both? She wants to put in $70K of her own money, which means she'll only need to borrow ~$75k. There's no need to mortgage the existing property (ie Kedron) is there, for equity or security sake?

Pardon my ignorance in advance.

 

[Rolf Latham]

Hi George

The easiest and most future proof thing is to take a 152 or so k mortgage on the property she owns freehold.

At least 80 to 100 k of the loan should be with an IO offset acct so she can park her TAX paid money, and save interest.

Why ?

Because ay some point she may want to buy a peronal purpose home or a car or something non deductible, and when that happens she would have to redraw on the investment loan. This would mean a pollution of deductible and non deductible debt.

So with this structure she can put the 70 k toward the deal and not change the nature of the money, it will remain hers

ta

rolf

 

[grubar30]

Rolf,


Hmmm, interesting concepts and thoughts.

However, let's say she has no intention (anytime soon, say within 4-5 years) of purchasing a PPOR or car of whatever. So, does it make sense to mortgage the existing property to purchase the St Lucia property and park the $70K in an offset account? OR, does she use the $70K towards the deposit and therefore only have to borrow ~$75k.

I may be simplifying things, but wouldn’t it make more sense financially to be repaying a $75K loan as opposed to a $145K loan? Sure, I understand that mortgaging the Kedron property would free up her cash for non-deductible debt purchases and give her a nice fat offset with $70k to reduce interest. But if this is not an issue, then what’s the point?

I see all the positives in what your saying (and thank you!), but the bottom line is – how does any of it outshine the repayments of a mere $75 K loan?

George

 

[Rolf Latham]

Hi George

4 to 5 years is one quarter of your girlfriends current life span, and while it may seem a long while away, it will come quickly as will changes in her life.

If one day she is in the top tax bracket and she has lost a 70 k dedn at todays rates that would be around 2500 a year compund.

What you are suggesting is almost the same as the structure put forward with the offset acct, the repayments are as if she had the smaller loan.

The MAJOR cost is the increased mortgage stamps, which would be arund 280 bucks

ta
rolf

 

[Richard Hunt]

The better return on the $70,000 is for it to be utilised to reduce the debt exposure on the IP purchase. Whether this is by way of "larger loan/offset combination" or "smaller loan/cash deposit" may be influenced by a number of factors including servicability and your partner's attitudes on an acceptable level of ongoing discretionery income to fund their preferred lifestyle choices.

If your partner has yet to claim any FHOG, depending on the timing of the interests held and the use of the existing IP, there may also be an opportunity to claim the $7,000 FHOG on the proposed purchase.

The optimal management of the circumstances that would lead to a valid triggering of a claim for the FHOG could also be relied upon to provide some significant CGT exemptions on the proposed IP purchase into the future.

Make sure your partner investigates all these issues to ensure they optimise their return on investment.

 

[grubar30]

Thanks Guys for all the feedback,

It's all food for thought....that's exactly why I posted this thread - to get some opinions and options. Personally, I feel she'll take the safe approach and just use the $70K towards the deposit. But at least your repsonses made her think outside the square.

Regards
George

 

[Rolf Latham]

Safe ??????????????????/

You started this discussion, now we had better finish it

Pls explain ? unless she has trouble with having 70 k sitting around in the bank, I really have great concern how she can be advised to be safer by locking the $ away into the deposit.

It would in my mind be the worst option for a number of reasons, including little safety margin, future likely tax considerations, limitations on loan type and package due to size.

Unless she has trouble with holding on to money, its my view that anyone advising this young lady to put her cash into the loan is not acting in her best financial interests.

For the sake of all who may take your lead, what is the benefit in putting cash into the loan vs having it sitting in an offset acct in this situation.

ta
rolf

 

[Twitch]

I have to agree with what Rolf has said in the previous reply.

I could be wrong George, but you seem to be confusing "Safe" with "Easy". In this case putting 70k in as a deposit is "Easy", however it is not the safest option. What Rolf has outlined is the "safest" option.

Take the trouble to digest what Rolf has said. The obvious solution to me is for your friend to engage Rolf as a broker.

 

[grubar30]

Ok Rolf, I'm all eager to fully explore our options here...so let's have it...

I want to know EXACTLY which of the following two scenarios will cost her LESS

1) Mortgage her Kedron property in order to borrow $145k for the purposes of purchasing the St Lucia property. Btw, most banks will lend her up to 90% of the purchase price, so she'll probably only be borrowing ~$130. Am I right? Anyway, for sake of argument lets say she's borrowing 100% from the bank, so its $145 K…. lets continue - she then parks $70K of her savings into an offset account, therefore reducing her interest on the debt.


Vs.....


2) She uses $70K towards the deposit for the St Lucia property. Therefore, she only has to borrow $75K from the bank.

Other info that might be beneficial to your analysis:
She wants a 30yr P&I loan.
The property will be strictly an investment.
She isn’t entitled to the FHOG
The St Lucia property returns $165 a week in rent
She earns ~23K per year
The Kedron unit returns $170 a week in rent…



Now, given all this info, which of the above two scenarios is better? That is, over the lifetime of the loan, which of the following two scenarios is going to cost her less?

Remember, she doesn’t care about having the $70K available (i.e. offset)
for purposes of other purchases…i.e. PPOR, car, yatch, holiday, whatever….as far as she’s concerned, this $70K will be “dust in the wind” once its committed to the St Lucia purchase


I’m all ears…..

George

 

[Rolf Latham]

Hiya

The Current net Economic Cost will be similar if she uses the same loan product.

The Net Present Value Economic Cost of the "in the wind" proposal is huge, and indeterminate, because of current unknowns in this persons life.

Id also recommend against a P&I loan for the same reasons as for putting in the cash.

I cant but help suspect you arent aware of the fundamental principle of this model, in that the interest paid in both scenarios is the same.

145 k loan with 70 k in the offset has a net loan balance of 75 k, interest payable is on 75 .

145 k purchase, stick 70 k in loan balance = 75 k, interest payable 75 k.


There are no Exacts and absolutes in life............................there is only experience, we pass on the experience that we have gained to those that seek that knowledge so that they can move beyond ours.

In regard of some of the other issues you raise such as a 90 % lend, this brings in things like mortgage insurance etc etc and just isnt required at this time
Ta
rolf

 

[handyandy]

Hi george

Rolf is spot on and has touched on future implications which you may not have understood.

If in the future your gf wants to buy a PPOR and has used the $70k towards the purchase instead of the offset. In this case she would want to re extract the money out of the new property or out of the existing property. As this money is being used for personal use it becomes non deductable, although the loan is against an investment property.

If she went down the offset route then she can simply use the $70k her interest costs go up on the investment loan and those increased cost are fully deductable as the nature of the investment loan has not changed.

You may want to search around on more details re this sort of situation to further clarify your understanding.

Cheers

Andreas

 

[grubar30]

Hi Rolf,

Nice retort…..and I’m seeing things objectively.

Let me explain,

A P&I loan makes your argument null and void in terms of what would cost her more over the life of the loan. On the other hand, a P&I loan in terms of overall investment flexibility makes much less sense (if any!).

And yes, your advocating an interest only loan (btw, personally, I see the benefits here) and I do understand the fundamentals in that a $145 k loan with a $70K offset is the same as a $75K loan (well I do now anyway). I also accept this as the "safest" option in that you’re building in contingencies for the unexpected. Yep, there are unknowns in life and we must prepare for them.

Personally, I am willing to open my mind to all of this. But I feel my partner is from the old school and changing her mindset is a challenge in itself. You tell her about the positives of an interest-only loan and she'll say, “What’s the point in that - I'll never pay the thing off”. You say it'll increase her borrowing capacity and she'll say "I just want to concentrate on paying off this property for now.” You tell her "a 70K offset will give you a 'safety net' for life’s many problems" and she’ll say “what problems?”…lol….are you frustrated yet?…


So I see where you’re coming from and I like it. In fact, I’ll be restructuring all future investments within the context you spoke of.

In essence, what you’re saying is sensible and smart investing. What she’s doing is pro-active and wonderful in itself. Your experience should not be under-valued, but whether she wants to open her mind to it is the question. I’m trying, so I thank-you for your contribution.

George

 

[Richard Hunt]

..and just to add, further to my point above about your "partner's attitudes on an acceptable level of ongoing discretionery income", remember that a 30 year P&I loan under both of your scenarios will have very different "minimum repayments" and interest expense profiles.

For example, a $145k loan @30yrs will have min repayments nearly twice that of the $75k loan. If you were to deposit $70k into the Offset account from day one, the $145k loan would be fully repaid in a third of the time with an interest saving of about $80k, compared to a $75k loan where just the min repayments were made. Of course you always have the option of paying more than the min repayment on the $75k loan to reduce this difference.

To compare the precise financial characteristics of each loan go here www.mortgagewerx.com.au/Calculators/calculators.html and choose the "lump sum calculator". By inserting either $70k or $0 as appropriate into the "lump sum amt" field and setting the "lump sum payment made after" field to 0 days you'll be able simulate the affects (eg. interest saved over term of loan, time saved in repaying the loan) for a deposit inserted into an Offset account.

The maths don't lie and in combination with all the advice provided in the thread, will help you partner make an informed decision.

 

[Rolf Latham]

Hiya Richard

So true, the facts and the numbers rarely tell a porkie.

The problem all of us have with some decisions is that we make them emotionally, and then, try and justify them logically.

Perception is reality and pre judgements borne of incorrect information and coloured experience are usually why people willingly choose what is comfortable and convenient, over what is emotionally challenging but right.

ta
rolf