Mortage question

Hi,

I'm not very knowledgeable on property financing so here's my question.

Say my wife and I have equities worth $700 000 geared at 50% with a margin loan. So we're worth $350 000.

We want to buy a PPOR worth $700 000.

Can we structure the borrowing such that we

a) don't have to sell the equities (I don't like CGT)
b) keep the non-deductible debt to a minimum.

Now the spanner in the works is that our trust owns the equities, all we own is 350 000 special income units in the HDT.

Thanks

 

Hi Glebe,

I know that some margin lenders will "wrap" property finance in with margin loan financing at the same rate...

Although without selling any of your existing equity, you're looking at a very high LVR against the property (if my understanding of your situation is correct), probably with lenders mortgage insurance.

You'rs also looking at a higher than 50% LVR against your equity, which places you at a higher risk of margin calls.

 

Thanks for your post Michelle, it's made me do some more thinking. I wouldn't want a high LVR against the property because that's non-deductible debt. My total LVR would be high though (75%) (1 050 000 / 1 400 000), so I would need as much of it as possible against the shares.

Somehow, I would want to transfer the $350 000 I have in shares into the house to act as a deposit without selling the shares. I don't know if this is possible or not. Is this the wrap you're talking about?

I would then have a PPOR worth $700 000 made up of a mortgage of $350 000 and equity of $350 000. I would then owe, err, someone $350 000 for my shares also. But I'll get to that.

So at this point I would have equity of $350 000 and debts of $700 000.

Now taking it a step further, I would then look at a LOC to use unrealised equity. 80% of my $700 000 house = $560 000, meaning I can unlock an extra $210 000 ($560 000 - $350 000).

I would then look to 'double leverage' by using this $210 000 as a basis of a margin loan, at 70% gearing I'd be borrowing $490 000, taking my debt to $1 050 000 made up of a $350 000 mortgage, a $210 000 LOC and a $490 000 margin loan.

Who's still with me?

If that is conceivable, since the end result is me having equities of $700 000 can I get there by not having to sell any of the shares I currently own?

Thanks to anyone for reading this far

 

Hi Glebe,

To buy another place of $700,000 you'll need $742,000 to cover the purchase price, plus expenses of about 6%.

You can borrow $560,000 against the new property without mortgage insurance.

So, you'll need to borrow $182,000 against your existing property, which looks like it is possible, from what you've said. Beware of cross-collateralisation, though, it's ideal to keep them separate. Since you can probably take an extra $18k, consider taking this for a buffer, even if you don't intend to use it .

Because you're buying a PPOR, the purpose of the funds is for personal use. So the interest costs won't be tax deductible. Talk to your friendly accountant to see what they can do about this .

I don't have any information on your ability to service the new lending, but you'll have to check this out first. A pre-approval would be ideal for this.

Cheers, Medine.

 

Hi Glebe,

If you don't want to go above an LVR of 80% against your property (to avoid lender's mortgage insurance and because it's non-deductible debt), you will need to physically hand over 20% of the value of the property to the vendor, plus costs including stamp duty etc. (A bank lender will hand over the other 80%.) If purchase costs are 6%, you will need to come up with $182,000.

If you did not want to sell any of your equity to fund this $182,000, you could potentially borrow this $182,000 from your margin lender (using the $700,000 of existing funds as security), depending on the lending ratio that your margin lender will allow against your equity. However the additional funds you borrow from the margin lender would not be tax deductible (because it is for personal use) and the LVR against your equity would dramatically increase, leaving you at a much greater risk of a margin call. If you have no other spare funds, it may be that a margin call will force you to sell your equity anyway - but at a lower price.

Without knowing how much capital gains tax you will have to pay, it seems to me a simpler option to sell all your shares, pay down your margin loan, use the net proceeds to fund your property purchase, then refinance your property to 80%. Use the funds available against your PPOR to purchase back some of your equity (so some of the debt against your PPOR will be deductible debt), then take out a margin loan against this to get you back to somewhere near where you were before.

MichL

 

Michelle, Medine,

Thanks for your responses.

Glebe.

 

Mich's suggestion is worth considering - just remember to factor in the CGT which will be triggered by the sale of the asset.