We presently have the one property, and that is our PPOR. It is in both my wife's and my name. We have about 30% equity in it, and the 70% that is mortgaged is offet, so we are presently paying nothing in the way of interest. We are looking to upgrade, that is, buy a new bigger and better (and more expensive!) house for ourselves, and turn our current property in to an IP. In order to eek out the extra equity we have in the current home, it has been suggested by a number of people that one way to do this, would be to take out a larger loan in just one of our names, and transfer the house to that persons name. Effectively in this scenario, one of us would be buying the house from both of us, but in the process, we could greatly extend the loan (say up to 95%), and do so without paying stamp duty etc (in SA).
At this point, we now have to decide, in doing this, would we be better off paying LMI now, and just being done with it. Or option b
Option B is, we can create a term deposit with the bank for the shortfall of the LVR not meeting 80% (ie. create a term deposit for the 15%), and have the bank put a stop on this term deposit so we can't touch it. Then, after we tranfer the current house to one of our names, and later on go out and find the "dream home", purchase it, and then use the combined LVR to get the stop removed from the term deposit used as a security against the first property. This option avoids LMI, but does mean we would need to cross-collateralise our new home.
We're leaning towards option B. There are a couple of downsides, such as any interest earned on the term deposit would be treated as income etc (not really a bad thing), and the fact that our new home would be getting used as a security on the current home (soon to be IP).
Can anyone tell me what the major pros/cons are here? More to the point, what negative impact will this cross-collateralisation have on us in the long term future? We would not be intending on selling either property for at least 10 years (if at all).
Appreciate your time and advice.
Hi Peter
What you are describing is a bred and butter Transfer and something we do weekly.
I am also one of the biggest advocates of not cross collateralising your loans so can see both sides of the story.Remember if the property was owned as Joint Tenants then all you are able to do is purchase the other partners share i.e
If the original property was purchase for $100K and both of you had 50K share and the property is now valued at $200K then
you could purchase the original share and a further 50K so in effect would have a new loan of $150K.If you are able to do this under a "Love and Affection" clause in SA without Stamp Duty then i think it is well worth it however think the process you are describing is unlikely to be acceptable (Most lenders wont take security over a Term Deposit with the odd exception) so the Transfer would be dated the same day as the Settlement of your new PPOR.
This course of action is one of the few times i believe cross collateralising your loans is a positive thing and there is nothing to stop you uncrossing them once the values are appropriate.
Richard Taylor | Australia's leading private lender
Hi Richard
Thanks for your advice. Our present lender indicated they could do a stopped term deposit as a security, but I'd be happy to consider other options, such as just doing it at the time of the settlement of the new PPOR.
I'm mildly confused about the scenario you have described above:
If the original property was purchase for $100K and both of you had 50K share and the property is now valued at $200K then you could purchase the original share and a further 50K so in effect would have a new loan of $150K.
The current scenario is as follows:
– Purchase Price: $310,000
– Purchase Date: 5/09/2007
– Initial Loan/Principal: $248,000 DR
– Estimated Present Value: $340,000
– Present Principal: $216,060.34 DR
– Current Offset: $216,060.34 CRIf I'm reading what you've said above correctly, I could say that both my wife and I had a 155,000 share in the house at the time of purchase. However, over the course of time, each of our shares in the property has gone up to 170,000. Therefore I could get a loan for 155,000 (my original share) + 170,000 (her present share value), to a total of $325,000. Is that what you mean? or am I way off track?
Thanks again
Peter
Yep thats about it.
Richard Taylor | Australia's leading private lender
Thanks Richard!
Peter,
I am confused. I can see no reason why you would have to cross collateralise or to use a term deposit as it is now. Also can't see why you would pay LMI.
What you can do is to take the $216,000 in the offset account and use that as deposit on the new one. This will leave your existing house (which will be an investment) with a loan of $216,000. Value is $340,000 so that means 63% LVR.
Assuming you use all of your $216,000 as 20% deposit and 5% costs for your new one, this would mean you could buy up to $864,000 without the need to pay LMI. (unless you are a low doc borrower).
You purchasing your wife's share would help you extract more equity out – but not that much.
eg. You jointly owe $216,000 = $108,000 each.
You buy her share for $170,00
Your total loan will be $278,000That means you will have extracted $62,000. I guess this is a fair amount, and would result in $3720 in interest pa. If you would deduct this it would save you around $1000 in tax pa, approx, depending on your income.
You need to weigh up the costs of doing it verses the savings.
Another method is to get a LOC on the existing property in addition and separate to the current loan. Up to 80% LVR. This would be approx $56,000. You can then use this LOC to pay for all investment related expenses, maybe even interest. This allows you to divert the money that would have been used to your home loan. It will acheive similar to the buying of the wife's share, but with less cost, although it may take a bit longer.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Hi Terry
Excellent advice. I'll do some more research tomorrow, and weigh it all up.
It certainly seems like an easier way to go.
Thanks for your time and efforts
Peters
Hi Terry
Excellent advice. I'll do some more research tomorrow, and weigh it all up.
It certainly seems like an easier way to go.
Thanks for your time and efforts
Peters
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