Home Loan Recommendations

Hello,

My parents are about to transfer their investment property over to my name, though they still owe about $125k or so on the loan. The value of the property should be above $500k.

I want to take out a loan of around $150k (to cover stamp duty and the title transfer)...is it correct that i don't need to pay any sort of deposit because the house more than covers the 80% loan target? How does the mechanics work?

Also when looking for a loan, is there anything i should be looking out for besides:

* no upfront/setup costs
* low to acceptable interest rates (kinda hard in today's environment)
* mortgage offset account?
* fortnighly payments at least

Is there anything else?

I'm still not sure whether I want to go principal + interest or interest only. The property will be treated as an investment property....but i don't plan to sell it in the immediate future and its really something i want to keep. The property will be self funding as the rent will pay off the interest.

I also plan to buy an investment property latter this year or next year, which loan or type of loan will best allow me to use this transferred property to leverage off and borrow more to invest in property?

Thanks.

 

Hi Archangel

Not sure of the mechanics 'cos not sure if the property is being gifted to you or how its transferred from your parents to your name. Presumably the Govt will be after its stamp duty based on the market value unless you have a way round it thru gifting or something else creative (all a bit beyond me)

The need for a deposit is determined by the seller, not the bank.

Your circumstances probably mean the structuring needs some attention - if you consider it a long term investment, you'd normally borrow as much of the value as possible. ie. if its worth $500K, borrow $400K interest only. The interest on that is fully deductible. You could use the extra $250K (after paying your parents) toward the other IP you mentioned. I gotta say, you better make sure you are good to those parents if this is the headstart they are giving you

If you only borrow $150K, then for the life of that IP, the maximum you can claim as deductible is the interest on that $150K. You could later borrow against it and invest the extra funds in something else that then becomes deductible, but there's a chance you'll get hassled for cross-collateralisation, which you should avoid for as long as possible.

Chat to a broker like Rolf Latham (Mortgage Brokers Australia) who will get you the best deal, with his expertise and fees funded by the banks and not by you - win/win

Cheers
Carl

 

Hello,

The property will be transferred from their name over to mine, so i have to pay stamp duty on that. Are there any other tax implications i should be aware of?

I don't mind borrowing $400k, though the ability for me to service this is another matter. I did the calculations online and its apparently $3.2k or something per month given the current interest rates of around 8.5%. Although rent; which is currently $1.2k per month covers part of it, i'm not sure if the bank will take this into consideration (they may deem it too high risk). I'm quite frugal, so personally am confortable with paying the other $1.9k per month.

Though is it true that I only pay interest on the amount that I use. Say i use the $150K out of the $400k now.....but will not be buying another investment property until latter in the year.....where will that $250k sit (i.e. just in some account somewhere not accruing interest?).

So I would assume that in this case that since i'm only borrowing $400k out of $500k i.e. 80%, i don't get whipped for LMI right?


Sorry what do you mean by cross collateralisation? Also is Rolf Latham a reputable broker? Are u sure there's no fees, seems too good to be true? I'm in Victoria, any issues there?

Thanks for your help, I really appreciate it.

 

Hi

I probably only know enough about your situation to be dangerous, but short answers are :

Stamp Duty will be based on the market value of the property as far as I know. Not aware of any other tax implications

The bank will consider a percentage of the rent as your additional income, but yeah you might have serviceability issues. You may also not need to borrow $400K - my only point was to make sure you realise if you only borrow enough to pay out your mum and dad you might stymie future deductions ('begin with the end in mind' and all that)

80% LVR usually requires no LMI

Cross collateralisation is when the bank tries to tie up all your existing assets as security for each * new * investment. Ideally you want 3 standalone 80% LVR loans, not 3 loans all tied to each other so you can't sell a property / reborrow for another without screwing around with the other 2

Yep, ASAP Financial are a great operation. Ask for some advice on your situation and you'll see what I mean

'Luck
Carl

 

Hi,

Let's just say I could service the $400k loan.

If I took out a whole $400k loan, but only need $150k now.....but will use the other $250k latter in the year to buy an investment property.........will i pay interest on all the $400k now....or will I only pay on the amount i used?

How does it work?

Thanks.

 

The $250K you should park it into an 100% offset account.
As long as it's parked there it will be offsetting the main loan and you will only pay interest for the $150K

Cheers

 

Ok, got it. Any other uses for the offset account?

Is there a good one out there which people recommend for this amount of money ?

 

This is more of a question, but my understanding of this approach is that it sounds a little dangerous with regards to the ease of contaminating originally deductible debt. I.E. Assuming the offset is also used to park spare cash from time to time, and redraw for living expenses, wouldn't that contaminate the original $250k in the offset with non-deductible debt?

If the money (ALL money, not just the original $250k) in the offset is only ever used for investment purposes it isn't an issue, but if the point of the offset is to reduce interest payments and build up a savings buffer for later use e.g. car/holiday, I'd get the loan structured so that you have the $150k loan, with a $250k LOC. The LOC wouldn't be drawn down, so you don't pay interest on it. You can also set up a 100% offset against the $150k loan for savings etc and not worry about what you use the money in the offset for.

 

JustB

The $250K is not part of the loan, it's his own money so spending it for non investment purposes won't affect the deductibility of the IP loan.

I will explain:
The property will be transfered into his name so essentially he buys it at market rates.
His parents will get the money from the lender $400K -$150K and will hand it over to him.

He then places the $250K into his offset savings account.
The loan was $400K on day 1 and will still be $400K even if he pulls out his $250K of own money.

If he does pull out the $250K the payable interest on the IP loan will change but as long as he leaves it in there he won't have to pay the interest on that amount.

The offset is very powerful if it's attached to his PPOR as it will allow him to take his money with him to his next PPOR. If he doesn't have a PPOR and chooses to use the $250K as a deposit for more IP's he won't be able to claim the interest on the $250K.

Ideally, he should not use own money as a deposit for future IP's
He should use any future equity in his 1st IP as a deposit for his next IP and so on.
If the offset is attached to an IP loan he will only be saving 60-70% of the interest. Why? because depending on his income tax bracket he could be getting back 30-40%through his tax return

So to summarise it all if he does pay tax then he would probably be better off investing the $250K elsewhere. He can still park it in there while he has no other uses for it so he gets some benefit but he should look at other investment options.

I hope all this makes sense.

Cheers

 

Loans differ a little between banks, shop around and see what they can offer you.
If you are currently employed with a reasonably good wage and good savings history you won't have any problems.
See if anyone will let you borrow over 80% with no LMI including your purchasing costs.
Cheers

 

Sorry, I'm confused.

This property will purely be a change of title....why do I need to give my parents the market value of the property and for them to give it back to me....should i just be refinancing their existing loan so that it comes under my name now...and all we need to do is a title change

Also, this property will probably not be a PPOR....i'm just confused with what you said above about the implications of this.

Or should I just borrow $150k now, and then revalue the property latter and then use that to ask for a bigger loan to buy another property.

 

I am thinking that your parents will still have to pay CGT for whatever capital gain they've made on that property based on the market value which is $500K

So even though they are transfering it to you, essentially it's like they are selling it to you.
I don't know if there are any advantages of doing just a transfer when you live in VIC. What are the rules and advantages on the transfer of assets to family members? You will need to determine this for yourself.

In anycase, since you won't be using the $250K for anything else you could
only borrow the $150K and if later on you decide to buy an IP you could ask your lender for a loan increase but then the use of the new funds will determine if that part of the loan is tax deductible.

If the money is used for the purchase of an IP it will be tax deductible.
If it's used for private purposes, eg PPOR it won't.

If you do borrow all the money now and handle the whole thing as an IP purchase then the $250K is yours and you can do whatever you like with it.
At the same time the property has a full IP loan so you take full advantage of
the tax deductibility of all the interest.

You say now that you will buy IP's with the $250K but a year or 2 down the track you might find a partner and want to have a PPOR.
That's where those $250K could prove useful.
You could save a lot of money when you won't have to pay $250K worth of non deductible interest on your PPOR.

Does this make sense?

 

I agree. Borrow the maximum that you can service (according to the bank's calculations, not yours!). Park the excess in the 100% offset, then when you draw down on the offset - even if it's for a PPOR purchase - the additional interest payable (beyond the $150k mark) will be deductible.

The alternative is that you borrow the $150k, then go and borrow for a PPOR in the future... then the deductible interest is limited to the interest on the $150k.

$150k vs $400k? Tax deduction on interest on $250k is about $20k at 8%, so $6300 back in your hand each year at 31.5% tax rate. Now that's worth the effort.

 

Go for IO for any investment loan. *

This will keep your tax deductions maximised, and give you the greatest flexibility with your cashflow.

Instead of paying off the loan, make additional payments (eg the bit that would have gone off the principal) into the offset account.

One day you will've put as much into the offset account as is still owed on the IO loan, and so your effective loan is zero.
But when you then use the cash in the offset account, the interest on the IO loan remains deductible, even if you use the cash to fund a PPOR or buy a car.

If, on the other hand, you paid off some of the loan, you could not redraw from that loan for personal use without contaminating the loan. So you would need to get a new loan account, and the deductible interest on the investment loan would be less.

(* In fact, Go for IO for a PPOR loan as well! Better for cashflow, and your redraw limit remains at the original loan value, ie your 'buffer' is larger; this gives you contingency cash in an offset account against your PPOR).

One more point on interest only... the real loan value decays over time due to inflation, so even if you don't feel like you've paid any off, you really have: eg $200k in ten years is worth less than $200k today.

 

Hello guys,

So in short, you guys are saying

* Get an Interest Only Loan (as much as is serviceable, i.e. $400k)
* Get one with an offset, and put that unused portion into the offset. It will cancel out the interest
* Claim a tax deduction on the entire interest paid (i.e. $400k).
* When ready, used that unused portion to purchase a IP

One thing, the IP i'm going to buy first will probably be claimed as a PPOR in the first 6 months as I want to get that FHOG. What are the tax implications of using the unused portion and the interest.

I'm still relatively unsure of the mechanics of an offset, I understand that I will get a tax deduction on the entire $400k, but how will the offset reduce unused portion?

I understand the benefits of borrowing big and claiming it all on interest; but i think this is quite risky.....I really want to pay down on the oustanding amount of the transferred property ASAP. I'm worried that if a take out a Interest Loan....who knows when I'll be able to pay it all off.


---

On a side note: any recommendations for a Interest Only Loan? I'm quite interested in NAB's ChoicePackage, since i've also got a transaction account with them.

 

wow... go see an accountant....

it seems all you have done is taken the advice given above without having a professional review your circumstances....

A couple of points...

you could get a no doc of 60% or so with no income.....
you only get a deduction of the interest you incur.. if you have an offset, you incur less interest therefore less is tax deductible... however if you use money in the offset to buy a car the offset balance decreases and the remainder (between the loan amount and off set balance is deductible interest while it is rented out)
Does the property have tenants? do they have a good track record? do you want to kick them out just so you can get the FHOG? Maybe you can get that latter.....
If you dont claim the FHOG, never live in this property, this will mean you throw away of exemption and grant which could end up being 25k (7k grant + 18k stamp duty (max in nsw i think))

 

If you have a loan of $400K and you park your $250K into the offset
you only pay interest for the difference i.e for the $150K
I'd claim the FHOG with the 1st property i.e the one your parents will sell to you.

I don't see any tax implications.
If you don't pay interest you are not claiming it.
You can always decide not to park your $250K into the offset
and to invest it eleswhere on shares, managed funds etc but you will have to find a better return than the 9% or so the loan will be costing you.

Finally, as David said talk to your accountant.
Cheers

 

I can't claim FHOG on that property because it's currently leased out and I don't think i will be living there as a PPOR....might as well claim negative gearing.

So if i park it in an offset, and i won't be able to claim the full interest deduction on the $400k...then what's the point of people recommending me to put it in offset. I might as well just get a lone for that $150k and then refinance latter. Where's the benefit?

I don't think I would dare to use the unused $250k on shares.managed funds...that'll be too risky. On a side note, if i use that unused portion for share investment, do I need to tell the bank? or can I just withdraw it?

 

The benefit is this. When you buy an IP it should be fully mortgaged on purchase because if it's not and you decide to refinance and to increase the loan later on, then the interest on the increased loan won't necessarily be tax deductible. The purpose of the new borrowings will determine if they are deductible or not. If you used it to buy shares or invest it elsewhere it will be. If you used it to buy your PPOR it will NOT be.

If on the other hand you had used as little money as possible for the IP deposit and the remaining of your money was parked into an offset account then that parked money is yours and you can do whatever you like with it.

While it's parked in there it's offsetting the IP loan so you pay minimal interest just like if you had a small loan but......
later on when you decide to buy your PPOR you can take the offset money and put it into your PPOR offset instead.

The obvious benefit is this
The IP loan of the first property now has an empty offset account so the loan is maxed and you will be able to claim all the interest.
If you had not done this and did it your way,
you initially will only have a small loan on the IP but later on when you refinance to buy your PPOR the increased loan won't be tax deductible because you will use the new borrowings on your PPOR.

So you will end up with a $250K non deductible loan which
if it was deductible would be resulting in a tax refund of approx $7Kpa
or $130/week (assuming 30% tax rate & 9.1% interest)

And to answer your last question, you don't need to ask the bank to withdraw your own money from your offset.

Cheers

 

On the topic of using the excess funds for shares/managed funds....this would be a good way to leverage right....after, even the most expensive interest only loans are 9.4% at the momment...compared to how much you are getting for a margin loan..i.e. 10%+. And you also don't run the risk of the margin calls right?..........is there a catch with using the offset cash to purchase shares....do a lot of people do that?