Home Loan Recommendations

archangelsupreme

People who do that in a rising share market can make a lot of money.
I am not an economist but from what I read I have come to the conclusion that people who do this today they risk on losing some or much of their equity in an environment of questionable returns.
Margin loans are great when shares go up because you can double your capital gains and if you chose shares that offer a good dividend your borrowing costs should be covered.

Timing is the key to investing and many people made a lot of money from shares in the past 5 years but in recent times they would have had to downsize their portfolio or they would have lost most of their gains in a matter of months.

No investment is risk free but I would not use my equity for shares or funds at present. Leveraging on property is more powerful because you only need 20% deposit and you are not likely to get a margin call either.

We are in a very unusual phase where the banks are afraid to lend to each other so there is upwards pressure on interest rates.
It looks like inflation is on the way down now, although I've read somewhere that world food prices are on the increase and we could be in for another big surprise.

Anyway I would not use the spare $250K for anything at the moment.
I'd sit and wait, if the sub-prime & intl credit issues are resolved IMHO it could be the right time to put more money into property.
With shares, I will wait till after the next property boom when
Everyone’s attention fades away from property and turns on shares again.
Only then (IMHO) it would be a good and relatively safe time for me to gear into shares again.

Cheers

 

The thing is, i don't think I can borrow more than $400k, if I use $200k on the transferred property....i'm left with $200k, what sort of property can that buy me? I want a residential house, with at least 2-bedrooms.

I'm kinda worried about taking out an interest-only loan, no only is the interest rate above 9% (while the standard ones are around 8.5%)....i won't be paying off the property.....as i said before, this is not a property a want to sell in the future.

Can someone help me out of this, i'm in two minds. What sorta finance arrangement would work?

 

If you're worried about the fact that you'll "never" pay off an Interest Only loan, keep in mind that you can pay lump sums into them. Maybe not all lenders will allow you to, but you can definately pay some of the principle off if you wanted, with the right lender.

However an IO coupled with an offset account, you could always put the difference between IO repayment and a Principal+Interest repayments into the Offset. At the end of the loan term (assuming you've never sold) your Offset should the balance required to pay out the loan. Meanwhile your accountant will have had a much easier ride along the way as your investment portfolio has grown.

 

I've been looking around for a good Interst Only Loan and could only find the following from the major banks (i like to stick with a reputable bank):

* Westpac Rocket Repay
* NAB Choice Package
* CommBank Wealth Package

The thing is, most of them have a condition that you are only allowed to keep it interest only for about 10-15 years. And they charge like an annual fee of $350+...wow, that's pretty steep.

Do people just refinance after 10-15 years or how do you negotiate a longer period with the bank...like say for the entire term of the loan?

Is there an Interest Only Loan which people recommend might be good for my purposes?

Thanks.

 

The westpac rocket will probably do the trick but there are others.
Shop around and see what they can offer you.
The other advantage in having a larger mortgage is that you will most likely
be given the professional package with a 0.7% discount off their standard loan rate. If you choose to go for a small mortgage you won't get that.

Cheers

 

Should I really worry about the interest rate, after all 0.2% or 0.5% discount is not gonna mean much when I can claim the thing back in interest?

Westpac only has a 10 year interest loan...and I think their fees are quite sustantial.

NAB i think offers a better package in total?

 

Yes that's fine, there are various products around so compare them and see which 1 suits you best. 0.1 & 0.2% is not much to worry about.

Cheers

 

why are you tryign to work out which package is best. Let the MB do it for you..

It all depends on timing. Remember 6 months ago fixed rates were at 7.64%, 4 months ago it was 7.99% and i just looked at today, 9.19%

Most loans are going to be 30 years, 5 years IO and then the remainder at 25 years P&I. What you usually do is refinance at the end of the 5 years for a better deal, or you ask them to extend it for a further 10 years...

A 10 year IO loan will ask you to repay the entire amount back at the end of the 10 years, a 5 year IO will revert to P&I repayments for the next 25 years. I know which i would prefer.

You dont want to become a centro and have to sell your asset because you cant refinance your debt and are being forced to pay back the entire amount at once, do you?

 

Firstly, what's an MB?

Sorry for being stupid....i guess your point is that I should go for a short term IO loan (for 5 years)...and then refinance latter right?

Thanks.

 

MB= mortgage broker

 

no its just from a risk management point of view... if you can get a 10 year IO which then reverts to P&I thats even better... but you need to consider where you will be in 10 years.

Will you be potentially a parent? (ie one family income and little hope of refinacing the 10 year)
What will the market be like?

Your looking long term in an attempt to do everything to keep you keeping the asset. While you might get a 10 year IO loan and year 9 refinance and youll be fine, however what is the risk that this wont happen? Its this risk your trying to minimise...

always remember you can refinance loans however your circumstances at refinancing date will always alter the way you do it... (ie have you hit your loan servicability limit) atleast this way you can revert to a P&I loan and keep the asset rather than have to pay the bank back the entire amount at the end of year 10...

 

Something smells fishy ...

When eventually you use this as an IP, so much of the loan that represents the purchase price (plus any improvements) is deductible - plus any borrowings used for assessable income.

*IF* your parents are transferring title for less than market value (i.e. $150k inc costs) and this is what you borrow IO, then when you rent it out this loan becomes deductible.

You cannot borrow $500k, park $250k in an offset account until you vacate and rent it then withdraw that offset $250k for private purposes expecting full interest deductions. It will have to be for income-producing purposes otherwise you have contaminated the loan.

The BIG ISSUE is what is the cost of acquisition if this asset ?

Generally your parents will be deemed for CGT to have received market value less the remaining mortgage if you do not actually pay them a sufficient amount. CGT cost base operates independently of your actual loan deductibility.

Cheers,

Rob

 

Rob,

instead of gifting the property at $150k and claiming the deductions. couldnt the parents gift it at market value? It will make no different from CGT (as its going to be a market value transfer).

The only issues i would see is the cheque needing to be drawn out for the entire amount of the loan to the parents. You would then need to get that back to your personal name to sit in an offset (weither they can gift cash back to you, im not sure). Depending on your parents age this might affect centerlink benefits etc

Regardless, these are issues i wish i had....

 

Always be mindful of Part IVA and dominant purpose ...

Gifting from the parents' after-tax income should be a benign tax event, but if it enables the "purchaser" to claim interest deductions on larger borrowings than it really cost them then the Commissioner may be put on notice. It is effectively claiming interest deductions on the personal gift !!

Its clearer where the transactions are on arm's length terms.

The problem is how to finance the borrowing for the larger (market) amount.

If the parents "gift" back some of the proceeds would this be a reimbursement agreement ?

Alternatively, if the parents help out with interest payments will this be an assessable recoupment when a rental property ?

However, if the "gift" is unconnected (i.e. not part of a scheme) then the purchase on its own could be regarded as arm's length if you borrow the market value.

I venture no opinion except to say that details matter, and cases have been successful on borrowings to purchase assets from relatives - by emphasising the arm's length nature of the transactions.

Always better to get specific advice BEFORE acting.

Cheers,

Rob

 

Just a note, as my post reads ultra-cautious.

Where you can argue that the gift is not a tax avoidance exercise, then there may be no problem with borrowing market value and depositing the "gift" into an offset account for future needs.

Cheers,

Rob

 

I'm not paying my parents the market value of the property,.....I'm simply taking over their loan (refinancing it) and change the title to my name.

On the Transfer of Land form, we're just going to put for natural love and affection....though stamp duty would be of course based on actual market value (i.e. formal appraisal).

This property is already rented out....and will remain an investment property....so I would assume I can claim interest deductions from day 1.

I plan to park the unused amount into offset....then in a years time, purchase a property, claim it as PPOR....live in their for 6 months and then to rent it out and move back home. Would I still be able to claim the interest deductions for those 6 months when I withdraw from the offset?

I spoke to my parents about CGT and they said they won't need to pay it? I'm not exactly sure...this has me worried. Though if they claimed the property as a PPOR...they wouldn't be liable for CGT right?

The reason my parents are giving the property to me is that they are retiring and want to claim unemployed/sickness benefits with Centrelink.....i.e. asset clearing.

 

By declaring the transfer as a gift, this implies you have paid less than arm's length price.

"park the unused amount" implies you borrowed more than the cost of the IP.

When you remove this "unused amount" from the offset to acquire a PPOR then the incremental interest expense might be regarded as for a private purpose.

When the new property becomes an IP then it could be regarded as 100% income producing purposes across two IPs.

This is an alternative to the argument that you borrow and pay market price.

I suspect that your parents will be deemed for Centrelink purposes to still own the IP for a number of years, so a title transfer at less than market value is not much of a benefit to them.

It might be possible that they have nominated their IP as their main residence for up to 6 years but it means they will not be able to nominate another in the meantime - so it will get caught for CGT.

Meanwhile which of their residences gets ignored for the Centrelink assets test ?

I really think you should all talk to a Taxation and a Financial Advisor before proceeding.

Cheers,

Rob

 

If that's the case, then why did someone say earlier that if I was to use the unused amount on a PPOR I would still be able to claim the entire amount in deductions? Did I misunderstand something.

Why would my parents be deemed to still own the property when it has transferred to me?.....

They currently own (jointly with my sister) another property....this will be the house they still hold onto going forward...