Structuring finance for first property

[gradeng]

Hi all, been reading the forum for several months now and trying to soak up as much information as possible.

I'm hoping to get some opinions on how to best structure the finance for our first property with a view to the future. A bit of background -

My partner and I graduated from uni at the end of last year, saved a bit of money towards a deposit ($18k). We've both recently started graduate jobs (engineering) and have a combined income of $120k with 6 months probation. We currently live at home, only debt is car finance at $80 p/w and we are currently saving ~ $1000 p/w towards our deposit.

Our current plan is to purchase an apartment up to ~6km from the CBD (Brisbane) to live in for approximately 2 years. We're wanting to go interest only with an offset account paying the interest and putting the remainder of the ~$1000 p/w into the offset.

We're open to 1 or 2 brm apartments, ideally under 350k but could go over for the right property. Also comfortable with somewhere slightly cheaper that we could add value to through superficial renovations (tradies in the family).

My parents are willing to go guarantor on the loan, so we're hoping to get away with as small a deposit as possible (5%) and put the remainder of our savings straight into the offset account. By the time our probation is up and we're able to apply for loans, we will have approximately $40,000 saved.

After the initial 2 year period (or sooner depending on career progression) we would like to use the money in the offset account as a deposit towards a second property that will become our PPOR and renting out our initial apartment. My understanding is that by not paying down the loan on the first property, we're maximising the tax deductibility of the interest on the loan once it becomes an investment?

Sorry about the format of the above; it's been sitting in my head for a while and this is the first time I've tried to put our plan into writing! Any ideas/comments/experiences would be greatly appreciated!

 

[Aaron_C]

You're pretty much summed it up except for this part:

we would like to use the money in the offset account as a deposit towards a second property that will become our PPOR and renting out our initial apartment

The entire point is to use the equity in the first property to buy the next one rather than cash itself. Cash is to be used as a buffer.

As for the loan approval re probation - it's not as big an issue as you think given you are both professionals but of course this depends on the lender.

 

[Peter_Tersteeg]

Overall I don't see anything particularly difficult about your plan and the loan structure seems reasonable. Assuming your parents do qualify to be guarantors, they can be used to reduce the amount of cash you need to put into the deal.

Whilst I don't think this type of arrangement is ideal, it does help you get into the market with a minimum cost. My suggestion would be to split the loan into two portions of (a) 80% of the purchase cost and (b) the balance of the amount required. This makes it easy to identify the portion your parents are essentially guaranteeing (b).

Different lenders have different criteria for family guarantee loans, they also have different views on how much your family may be liable for. Also keep in mind that there are plenty of lenders who will likely be comfortable with your application with only 3 months employment (rather than waiting until you finish probation).

 

[alexlee]

Have you considered not living in the property at all and buying solely for investment and rent somewhere else? You're young. You've just started working. You're likely to move for work.

 

[Brady]

You're pretty much summed it up except for this part:



The entire point is to use the equity in the first property to buy the next one rather than cash itself. Cash is to be used as a buffer.

As for the loan approval re probation - it's not as big an issue as you think given you are both professionals but of course this depends on the lender.

That's not correct at all, the point isn't just to use the equity from first property, it's about the best structuring for that individual client.

OP sounds like you have nailed it. Family guarantor support for 2 years IO w/ offset preseving all your capital then use the funds at a later stage for PPOR deposit instead of equity, as the 1st purchase will become IP. Sound great.

As mentioned by alexee living in the 1st property might not be the best option, buying somewhere as a pure IP and renting where you want to live could perform better. Still could have the guarantors and preserve your cash for when you would like to purchase your PPOR. By doing this you could claim all the IP expenses and possibly purchase in a better location for investment and a better spot to live for the same or less cost net.

 

[Peter_Tersteeg]

The entire point is to use the equity in the first property to buy the next one rather than cash itself. Cash is to be used as a buffer.

Given that the first property will be purchased under a family guarantee, I don't think there will be any equity available to purchase the second property within the proposed time frame. Using equity is a good way to go (cash is king etc), but in this case I doubt it will be viable.

 

[Terry_w]

Since this property will become an investment property I think it best to maximise the loan. Borrow 100% plus costs.

All spare cash should be kept in the offset account and this will free up cash for the new PPOR purchase down the track.

If you paid say 5% deposit now this will cost you more non deductible interest.

eg. $400,000 purchase
5% deposit = $20,000

Interest on $20k at 5% = $1000

So structuring it with a 5% deposit is going to cost you $1000 in lost tax deductions every year for 20 to 30 years or more. Compounding that is a **** load of money.

 

[Aaron_C]

Given that the first property will be purchased under a family guarantee, I don't think there will be any equity available to purchase the second property within the proposed time frame. Using equity is a good way to go (cash is king etc), but in this case I doubt it will be viable.

That's assuming they do use the family guarantee which may/may not be necessary.

 

[gradeng]

Thank you all for the comments. Great to hear we may be eligible for the loan sooner than first thought re probation.

The reason for living in it as our PPOR for the first 18-24 months is to make use of the transfer duty concession and to qualify for the Great Start Grant should we decide to purchase a new property. My partner is also fairly set on having ?our own? place and whilst I'm sure I could twist her arm into buying a pure IP and renting, it?s definitely something we?re going to have to discuss further.

I actually hadn't thought about borrowing 100% + costs Terry_w. Would the lending criteria on this type of loan would be a lot more stringent?
Really appreciate the feedback guys, thanks.

 

[Brady]

That's assuming they do use the family guarantee which may/may not be necessary.

May not be necessary because they have a deposit already...

But as OP mentioned in his original post the plan is to purchase, live in for 2 years then turn into IP.

If he uses the cash then debt will be lower and unless value has increased wont have equity and will need guarantor for new PPOR in two years.


I think how OP suggested works well, higher debt on IP, preserve cash in offset to use for PPOR.

Happy days... pending.