Tapping Equity - Interest Capitalising

[Ian (WA)]

Evening All'

I replied to another thread on the forum "Tapping Equity" but decided to repost here (see below) in the hope of gaining an alternative view from someone who may have had recent experience with this type of thing.

My broker feels we may be up against the wall when it comes to approaching Westpac, particularly trying to explain why I want the funds.

Any feedback appreciated.

Cheers Ian.


G'day All,

W2BW......do you mind if I ask which lender you you actioned this with please? It seems way too easy in current fianancial climate.

I am in discussion with my broker now with a view to trying to rearrange 3 x loans with Westpac to set up an interest capitalisation regime and she is saying that it could be very difficult to get things over the line (especially if we tell them the truth!!). Her view is that by me wanting to revalue 2 x IPs and dump excess funds in LOCs and set about paying down our PPOR with normal PAYG & rental income funds, Westpac will just say no! Yet if we come up with some **** & bull story we might just get the approval we need.

I'd rather tell them straight up what I want to do (unless anyone else has an approach which might be a bit "rubbery" but may be more palatable to Westpac).

What ever happened to easy money?

Ian.

 

[Rob Williams]

On a re-fi, I didn't get past the initial credit scoring with Westpac.
NAB (Homeside) came through within 48 hours. I'll have the money in the bank by month end.
I've got a re-fi in progress with Another lender at the moment and hope to get that one sorted out soon, too.
Money is still available. You just need to know where it is and how to ask for it

 

[Ian (WA)]

G'day Rob,

Thanks for the reply. Just to clarify....all three loans are currently with Westpac (I just wish to refi to facilitate Interest Capitalisation).

To quote my M/Broker:

"....Westpac is also one of very few lenders that will let you capitalise interest at all any more - however, having said that, I'll need to double check their policy, as lenders are continuing to tighten the reins on an almost weekly basis.

The trickiest part of your idea will be how to present it to a bank - telling them you want to borrow so that you can draw on the borrowings for 3 years, so you effectively don't have to pay the loans, isn't the right answer in this current environment - might work from an accounting and tax perspective - ain't going to wash with place that has the funds! So, we'll just need to be a little more creative about what we tell them the purpose of the funds is....."

Having gone back over a number of recent threads, stating a purpose (or providing evidence of purpose) for accessing equity funds is a real problem for a lot of people.

I think Westpac will play as we have only just last year had dealings with them in buying our PPOR here in Hervey Bay. They #$%@ed-up big time through the Lockleys Loans Centre with docs, which resulted in one of their Senior Public Relations people "Sarah" (can't recall surname).....doing some very timely kiss and make up work with us to keep us on board. In fairness she was very good given that she copped an earful from me when she asked me to detail all the failings as I saw them. NB: I saw one of your earlier posts Rob whereby you mention you are with Westpac, so I am cognisant of maintaining respect for your position as well as common decency.

So the gist of my question is, "What do I provide as a reason for the application?" Given my MB who has done a power of good work for me over the last 14 yrs is uncertain as well.

Thanks Rob!

Cheers Ian.

 

[Rob Williams]

I wouldn't be telling them I was capitalising interest, that's for sure.
I'm not sure what my broker puts on the applications, but I imagine it to be something along the lines of "renovations" or "share investments".
Don't let past performance be a guide to future performance, either.
They knocked back a re-fi application of mine within a week of settling another. Change of policy trumps all previous promises.
YMMV

 

[Rolf Latham]

id agree with ur broker,

if u tell that stroy u will be in trouble.........they dont like it told that way

AS Rob says, there are ways to easily sell the story, as long as you are looking at an 80 % lend.

if you are looking at more than that, different gravity and curvature of light applies

"Renos" will trigger interesting murmours of progress payments, fixed price contracts and various other forms of financial interruptus.

Un-geared share portfolio can work well.


ta
rolf

 

[HiEquity]

Un-geared share portfolio can work well.

Which is rather strange coz once the deal is done, that same bank will, for the right shares (of which there are quite a number), then turn around and give you an 80% lend on that share portfolio no questions asked....

It's a funny old world we live in!

 

[Rolf Latham]

The problem is that wesuck DON'T have the funds, especially for facilities that arent going to be used fully from day one.........

They and CBA and others are on about "arrears control, and risk management and responsible lending etc" While there is some limited thruth there, the REAL issue is we want to limit the loss we are making on good mortgages

ta
rolf

 

[Rolf Latham]

Which is rather strange coz once the deal is done, that same bank will, for the right shares (of which there are quite a number), then turn around and give you an 80% lend on that share portfolio no questions asked....

It's a funny old world we live in!

yup

and we have no issue with providing you with a 30 k unsecured personal loan, and a 45 k credit card

The difference on those is we can make a margin..............as we can on margin lending

Strange world indeed HI Eq................sooner or later the truth will become more mainstream media. Meanwhile ACA et al will continue to have stories about mortgage stress.

ta
rolf

 

[Ian (WA)]

Thanks Rob & Rolf,

YMMV.... (that's why I went for a 200 Series Turbo Diesel....)

Sad part and indeed the irony in this Rolf is that to be ethical, up front & honest to the point of providing a stat dec stating what the funds are for (and a perfectly legitimate proposal too) is to see a knockback coming at a million KMs / hr........regardless of refraction of light, or convergence of planets.

Bottom line is I want the money, so therefore i'll lie & prostitute myself..... (just like being at work I suppose?).

I might just leave the justifcation to my MB.

Cheers,

Ian.

 

[HiEquity]

To reply to the OP the share acquisition story works well - you borrow the funds to have them available for share investing when the shares you want reach your target price. Trouble is they never quite seem to get there so in the meantime....

No inconsistencies there - however, if you are concerned about it at all just leave the problem with your friendly MB - it's all part of the service!

 

[tobe]

You can always try future possible share and or property investment. In a sense its correct, in that if you get offered the deal of the decade, you will probably put off the debt recycling strategy and use the funds to purchase a new property or some undervalued shares.... In the meantime, the best use of the money as advised by your accountant, is to use it to recycle debt.....

 

[Rolf Latham]

One thing with accountant advice, often dont try that one on against bank policy, logic has NO place here please.


2 great examples.

1. U need the wifes/hubbies income to service the loan, Accountant says make the property 99/1. CBA with LMI will say no Sir, there is no benefit to the minority spouse, needs to be 50/50.

2. Beneficiary guarantees on named beneficiaries that arent directors of the trustee........... Many lenders insist on this guarantee even though its actually against their own policy. Its akin to asking 80 year old gran to guarantee the 18 year olds purchase. the named beneficiary may never get a benefit, since the discretion of income and capital distribs lies with the trustee and not the bene.

ta
rolf

 

[MSL]

Evening All'

I replied to another thread on the forum "Tapping Equity" but decided to repost here (see below) in the hope of gaining an alternative view from someone who may have had recent experience with this type of thing.

My broker feels we may be up against the wall when it comes to approaching Westpac, particularly trying to explain why I want the funds.

Any feedback appreciated.

Cheers Ian.


G'day All,

W2BW......do you mind if I ask which lender you you actioned this with please? It seems way too easy in current fianancial climate.

I am in discussion with my broker now with a view to trying to rearrange 3 x loans with Westpac to set up an interest capitalisation regime and she is saying that it could be very difficult to get things over the line (especially if we tell them the truth!!). Her view is that by me wanting to revalue 2 x IPs and dump excess funds in LOCs and set about paying down our PPOR with normal PAYG & rental income funds, Westpac will just say no! Yet if we come up with some **** & bull story we might just get the approval we need.

I'd rather tell them straight up what I want to do (unless anyone else has an approach which might be a bit "rubbery" but may be more palatable to Westpac).

What ever happened to easy money?

Ian.

Hi Ian and everyone,

I know this is an old thread but wondering if you had any luck doing this? Am i correct that to set up an interest capitalisation you need to have all your properties cross securitised?

My income is not very high and so serviceability is a problem for me. I started out quite negatively geared but now it is basically neutral taking into account the interest repayments and all expenses. My LVR is now around 60% with 4 IPs but I'm not sure how to move forward.

One advice was to move everything over to Macquarie for their optimum package LOC to pay down one IP and capitalise interest of other three. I understand this would be a good strategy if i had a PPOR that i paid down first but all my debt is investment debt.

I've read a lot in this forum especially the dangers of cross collateralisation so I was very uncomfortable with this suggestion.

Any opinion welcome, especially from ppl who have used this strategy for a time to move forward and then Un-crossed.

Thanks,
MSL

 

[Rolf Latham]

Hi MSL

Seems very odd request that all things need to be crossed.

Thats either a lazy broker or a risk managed lender talking

DONT ever make the assumption that u can uncross later once having gone down that track..

There are other less complicated ways to do this


ta
rolf

 

[Ian (WA)]

Hi MSL & All,

We did eventually get this across the line with no crossing whatsoever; you don't need to cross, so avoid it like the plague.

Our accountant felt that rather than have a LOC in place as perception was that a LOC was just seen as a giant credit card, her preferred structure was to have our PPOR loan with a 100% offset account hanging off it for all rents & other income to be dumped into, i.e. the offset acct was perceived to be an inextricable link to the home loan acct. ......I guess it's all about perception, BUT........

........as has been stated elsewhere on a number of occasions, you must absolutely NOT contaminate the offset account with non-property related withdrawals; as soon as you do, you have broken the nexus of the intent of your capitalisation strategy in the eyes of the ATO. Your intent must be seen to be, "To pay off PPOR faster" otherwise you may be seen as trying to earn a taxation benefit or indeed avoid paying tax.

My brokers' concern at the time of approaching Worstpac for this arrangement was what reasoning do we give for requiring the funds. In the end it was just a Stat. Dec. signed by a JP stating "Funds to be used for income producing investment purposes."

Under new NCCP guidelines, I don't know how easy or difficult it is to do this in the current climate. Rolf will be in a better position to explain this and as he has already mentioned, there are other ways to achieve what you are looking for; perhaps a PM to Rolf might be in order.

Ian.

 

[Peter_Tersteeg]

........as has been stated elsewhere on a number of occasions, you must absolutely NOT contaminate the offset account with non-property related withdrawals; as soon as you do, you have broken the nexus of the intent of your capitalisation strategy in the eyes of the ATO. Your intent must be seen to be, "To pay off PPOR faster" otherwise you may be seen as trying to earn a taxation benefit or indeed avoid paying tax.

You must not mix deductable and non deductable loans. Putting multiple streams of income into a single offset account is fine as long as you pay the appropriate tax on the various income streams. What people forget is that rental income is taxed, but deductions from investment property expenses tend to offset the income when figuring out the payable tax.

If you do make withdrawls for property expenses, your PPOR loan interest will increase (as it will with any other withdrawl). You can't claim this increase in interest because the PPOR loan is not tax deductable.

In using an offset account for all of your income (personal and rental), you haven't changed the loans over your IP or changed the amount of interest charged on those deductable debts, so there's no issue of increasing deductable to reduce non-deductable debt. What you have done is place the money where it can do the most good until you have to use it to pay an expense.

Take the word 'offset' from what your accountant has said and replace it with 'savings' and see if you get the same result.

In all this I'm assuming you're not drawing down on a loan to make interest payments (which could be seen as 'capitalising interest').

As a very, very crude comparison, your accountant appears to have said that you and your partner need to put your PAYG incomes into different accounts and you need to separately draw your personal living expenses from your own accounts. If you don't do this you'll contaminate the purposes of your separate funds.

 

[Rolf Latham]

Under new NCCP guidelines, I don't know how easy or difficult it is to do this in the current climate..

Ian.

depends on the lender............most lenders are ok without a rigorous inspection as long as the LVR is below 80.

Some want a full financial plan or a purchase contract !

ta
rolf

 

[mattnz]

I'm in a similar position, also with Westpac. I am in the process of doing a development. I am intending to revalue the property now that I have the DA for 2 additional townhouses and withdraw the funds to be able to pay the interest on the loan, while I drawdown on the construction loan until completion. Then the rent will easily pay for the full amount borrowed. Will they be ok to lend if I advise my genuine intent for the revaluation and drawdown?

 

[MSL]

Hi Ian,

So you have rearranged your 3 x loans with Westpac to set up an interest capitalisation regime as in your original post? How do you do that without them being cross-securitised?

I was told "By crossing your properties this allows you to interest capitalize existing properties whilst paying down one property."

Is that your strategy atm - ie. interest capitalizing whilst paying down one property?

Thanks,
MSL

 

[Rolf Latham]

I'm in a similar position, also with Westpac. I am in the process of doing a development. I am intending to revalue the property now that I have the DA for 2 additional townhouses and withdraw the funds to be able to pay the interest on the loan, while I drawdown on the construction loan until completion. Then the rent will easily pay for the full amount borrowed. Will they be ok to lend if I advise my genuine intent for the revaluation and drawdown?

Who will be providng the build loan ?

I would assume Worstpac, but never assume

t
arolf