Home Loan Recommendations

Answers above in red
cheers

 

BV , in the line where i said "The interest on the $180k would not be dedictible"

You said NO.....does this mean it is deductible or does it mean it is not deductible?

With these package home loans, you pay fees up to $400 per annum....can you claim the lot back as deductions?

 

Sorry I meant to say YES its NOT tax deductible
I have corrected it now.
There are fees with such loan packages but you also get a 0.7% discount on the interest so your savings are much more than the tax deductible $400.
You will also get a free credit card and pay no other monthly or account fees.

 

Thanks BV, you've been of great help....i'm understanding this better now.

Sorry everyone, I'm still learning this - it's so hard when there's so many things to consider and some new concepts you've never even heard of. I'm trying to be extra cautious.

On a side note:

I've heard about the Govt's First Home Saver Account.....are they really putting this in at the start of July?

Will I still be eligible if i've owned property before (but not PPOR?). Can I use this to work into my strategy above of purchasing a PPOR and then rent out after a year?

 

0.7% discount???.....i'm looking at NAB and it's giving me only 0.5% on the Choice Package...

Can someone point me in the right direction, i'm finding it hard to chooise between the choice packages of the following banks:

* NAB
* CommBank
* Westpac
* StGeorge

 

Where is the property?

 

The property is in inner Melbourne...about 10-15 mins from central.

I've just had a look at the Packages and here's a summary:

St George Advantage HL Pkg:
* Cost = $375 p.a.
* 0.7% discount brining the rate down from 9.47% to 8.77%

NAB Choice Pkg:
* Cost = $375 p.a.
* 0.5% discount bringing the rate down from 9.46% to 8.96%

WestPac Premiere Advantage
* Cost = $395 p.a.
* 0.7% discount bringing the rate down from 9.47% to 8.77%

CommBank Wealth Package
* Cost = $300 p.a.
* 0.7% discount bringing the rate down from 9.44% to 8.74%

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BV, on the St George site it lists the Intro Discount as an option for the type of loan you can choose for the package (that rate is currently 8.34%)....so does that mean you get an additional 0.7% discount off that bringing it down to 7.64% for the first year???

Also, I'm not sure how the Interest-Only conditions are on these packages. They don't really specify how long you can choose interest-only for.....CommBank says max 15 years.

Also, does it automatically revert to P+I after the term of the interest-only period or are you expected to pay off the entire amount at the end of the term?

Is 5 years ok for an interest-only loan period?....then renegotiate for an extension or refinance?


I'm currently liaising with NAB because i've been using some of their other products....though their interest rate and fee for the Choice Package is quite expensive copared to CommBank especially. Do you think NAB can match CommBank if you present them your research?

 

ANSWERS IN RED

 

BV,

Is there specific legislation which governs the fact that if you used the unused portion of the loan (parked in offset) and buy a PPOR that you could claim that portion as interest deductible as well. I.e. specific standards in the tax legislation?

Just want to read up on what the actual legislation says about this concept....and don't want to be penalised for putting in incorrect deductions.

Thanks.

 

But you are not taking an unused part of the loan and using it to buy your ppor. You are taking your own money out of the savings account.
I will explain.

When you go to the bank you will borrow $400K for a property worth $500K.
Your parents are transfering the IP at market value you can't avoid that.
Is there any benefit if they sold it to you for less?
I am not an accountant, check it out.

Anyway lets assume that the above scenario applies
you then take the loaned $400K minus the outstanding $125K =$275K
and you give it to your parents and they choose to gift it to you so they deposit it into your offset (savings account).

This is now your money.
it's got nothing to do with the IP loan, and while it stays in the savings account it saves you interest.
If you take the $275K away the IP loan is not affected in any way.
It's still $400K as it was on day 1 but from then on you will incur more interest. All interest charged for the $400K loan is deductible.
The offset account benefits you as well as the ATO but it's your money and you spend it as you see fit.

Ask your accountant and he will confirm the above.
Anyway, I feel It's time to see 1 anyway or if your parents are employing a financial advisor perhaps you can check the validity of our posts here
and he may have some other ideas too.

Cheers

 

OK, you're saying here that I should be giving my parents the unused funds of $250k.....so in order to get that entire thing interest deductible...I need to give them the $250k (i.e. deposit it into their bank account) as consideration for the property transfer.....they would then gift it back to me by depositing back into my offset. Is there a formal process (i.e. any paper work) of gifting as we're talking about some large sums of money here.

I was under the impression that if i don't give it my parents and just park it straight away into offset that any future purchases (i.e. PPOR) will be fully interest deductible???

Must I give the unused portion to my parents for this concept of offset to work? Is this like a formality you need to go through to basically clear the money and make it so that it's your own savings and not just the banks money parked into offset.

They have their personal accountant....i don't have one yet, though as I start to accumulate more assets I definately will.

Thanks.

 

These are the fine details that you will have to discuss with your solicitor and with your lender.

Assuming you are buying the place at market value why would your lender hand over the cash to you to park it into your offset account?
You are not the person who is selling it.
Unless ofcourse they have an authority to do this by your parents
(If they were guarantors for example?)

Otherwise the following would be the process at settlement.

Your bank will draw 1 cheque for $125k and hand it to the solicitor of your parent's bank to clear the old loan and will also issue 1 cheque in your parents name for approx $275k and hand it over to your solicitor.

If your solicitor (who will also be your parent's solicitor (don't forget to negotiate the fee for sale+purchase)) has your parent's instructions to hand it over to you, then you take it and deal with it.

Otherwise your parents have to put it into a shared bank account
or to issue you with a new cheque.

Cheers

 

What if the consideration ($400k) is less than market value ($500k)....would there be any complications....as i can't see how I could get the bank to loan me that extra $100k without paying LMI.

 

$400K is 80% of $500K
if the property is valued at $480K then you can borrow 80% of that which is $384K
The figures can vary a bit but you get the idea.
I wouldn't want to borrow more than 80% and pay LMI
but I believe Westpac will go up to 85% without LMI.
Check it out.

 

BV,

I guess what i'm trying to say was is there any complications for this loan structure if my parents sells it to me for less than market value....say $400k.

 

Why would they sell it to you for less than market value?
It will have to be valued for CGT purposes and you can't avoid that.
Your solicitor will take care of this and I doubt that you will be able to find any valuer who will value it for much less than it's actual value.

The reason being that they do comparisons between other sold properties in the area and yours so they will have to justify their valuation in writing.
Also they don't want to go to jail and neither do your parents.
You will be using a solicitor so why don't you discuss these things with him?

 

Because this will be a transfer of natural love and affection. I won't be paying anything extra with the exception of taking over the mortgage.

we're not going through a solicitor...we're organisng settlement ourselves between the two banks.

We have actual appraisals by professional real estate agents and will be using this figure to pay stamp duty.

 

I see....
I have heard about the love and affection thing.
From memory it's big in VIC. but to tell you the truth I don't believe it works with the ATO.
I believe you will have to transfer it at market value.
I am actually surprised that the lenders are doing this with no solicitors present.
Anyway, this is one area where I have very little knowledge of
but this process sounds dodgy to me and it seems open to fraud.
It's all ok until you get caught.
What does your parent's accountant think about all this?

Cheers

 

Ok this is driving me insane.

My parents are under the assumption that if they transfer to me that they won't be liable for CGT (this was their first home). Their accountant apparently recommended that I should claim this transferred property as my first home (and hence, be a CGT-free property for the rest of my life....that is if i live it in at least once within the 6-year span). This of course, would mean that I would have to take out principal + interest loan and live in their for 1 year. I would only need to borrow up to the limit.

Now what you guys are saying here is that I should borrow up to the max and claim the property as an investment on an interest only loan. I explained the thing about the gifting of the $250k back to me....but they questioned me why we need to go through all this mess.....all it is just a transfer. I'm finding it hard justifying why I need to borrow the maximum amount to them and setting up an offset...etc.

On one hand I'm keen to keep them happy by keeping things simple....but on the other hand, i'm torn because i'm worried that if i don't take advantage of what you guys suggest here that i might regret it in the future.

Can someone please help me to understand this thing.

Is there any point borrowing to the limit on a P+I loan (if i decide to claim it as a PPOR straight away)......and parking the rest in offset.?

 

BV, was just re-reading a paragraph in that document which you posted earlier about the power of offsets.

My questions are in red....

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Suppose Jane (from the example above) bought her existing house five years ago for $250,000. She paid $50,000 deposit, and thus borrowed $200,000. The loan she took was an interest only loan, and was linked to an offsetting savings account.

Why would Jane be taking an interest-only loan in the first place for her existing house (which i'm assuming is a PPOR)....when she cannot claim interest deductions on that? I don't get why it's deductible

Through a combination of overtime and a second job, Jane managed to save $200,000 into the savings account, such that now the total amount of the loan is totally offset by the savings account. She is not paying any interest at the moment. In essence, she has ‘paid off’ her loan.
Jane also has $40,000 in a separate savings account, such that her total assets are again $440,000.

Jane has now decided that she would like to move to the new townhouse. Her existing house is now worth $400,000, as is the new townhouse. To finance the new purchase, Jane withdraws the $200,000 from the savings account, uses the $40,000 cash and borrows a further $183,000 to pay for the balance (remember there is stamp duty etc).

Interest on the loan of $183,000 will not be deductible. At 7%, this means that Jane is paying $12,810 interest per year.

Interest on the existing loan of $200,000 is deductible. At 7%, the interest expense is $14,000 a year. On a property worth $400,000, we would expect a net income of say $12,000 (3%). Thus, the investment property (which this house now is) has a loss of $2,000 a year. The tax benefit of the loss is $600 (30%), so the total after-tax loss is $1,400 per year.

The non-deductible interest is $12,810 a year, and the after-tax loss is $1,400. Thus, the total amount that Jane has to find is $14,210 a year. This is still 28.4% of her pre-tax income,3 but this amount is far less than the 62% represented above. Thus the strategy is much more affordable than keeping the original home and buying the new one using 100% debt.

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Perhaps I should follow what my parents suggest and just claim it as a PPOR, forget offset..........and if I want to purchase any investment properties in the future, i'll just use the equity in this house to fund the deposit for the investment property.