Hi everyone, I’m a new aspiring property investor who wants to make the first right step hence your opinion and advice will be very much appreciated. I’ve attended a few of Steve’s seminars and have so far benefited from it.
Scenario:
We have a PPOR house valued at $420k (No existing mortgage and under my wife’s name) and a savings of around $100k.
We have no property investment and are free from any existing debt. I’m currently working full time and getting about $80k per annum.
I’m looking at buying a house under my name (either to subdivide or renovate around the $350k market). My mortgage broker has encouraged me to set up a Line of credit (LOC) loan from Bank A through my PPOR (No existing mortgage) and use it as a deposit for the new house. I will then loan the rest from Bank B(Interest Only).
Questions:
- Can I draw the equity from my PPOR even though it’s under my wife’s name? I’m planning to buy the investment house under my name only or perhaps using a trust.
- If Bank A allows me to draw up to $336k (80% of $420k) of LOC equity from my $420k PPOR house, I can put down a 20% deposit + stamp duty+ other fees (About $90k) for a $350k investment house. I then have $246k ($336k-$90k) left to play with for other house deposits hence I can buy more houses (Obviously subject to how much I can borrow based on my income). Is this correct?
- Should I be better of paying the deposit (90k) using my cash savings and not incur interest from LOC (Borrowing at 100% from 2 banks)? Or should I only use my savings once I have used up all the LOC loan by buying other houses?
- Any other better ways to pull equity from my PPOR other than LOC for my case?
Thanks for your valuable input!
Regards,
Andrew
Whose name will you get the LOC in? Probably best just in your wife's name
1. Yes. Your wife could borrow the money could lend you or the trustee of your trust the money.
2. Yes.
3. Probably best to use the LOC. Then set up a 100% offset account on the new IP loan and place your cash into that. If you use your cash now then it will be tied up in the investment and then you cannot use it for personal stuff without reborrowing it. Then you could have to pay non deductible interest to access the money.
4. IO loan. Or cross collaterise the security (not good). I think a LOC is the easiest and safest way.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
lyh14 wrote:- If Bank A allows me to draw up to $336k (80% of $420k) of LOC equity from my $420k PPOR house, I can put down a 20% deposit + stamp duty+ other fees (About $90k) for a $350k investment house. I then have $246k ($336k-$90k) left to play with for other house deposits hence I can buy more houses (Obviously subject to how much I can borrow based on my income). Is this correct?
Hi Andrew
Just one thing to keep in mind is that banks will treat that $336k as a liability (even though it hasn't been drawn) – just as they would view a credit card limit rather than the amount owing on the credit card. I'm not sure what your borrowing capacity is like but this could play a part in your serviceability.
Also, a LOC may not be neccesary. An IO loan (possibly with an offset attached) might suffice. It will also be a little cheaper for you.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
Hi Terry,
I thinking of getting the LOC under my name. What will be the pros and cons of using my name and not my wife’s name? My initial thoughts were to start my investing journey solely under my name/trust.Good to know the LOC will be tax deductible. If I use the LOC loan for my deposit, I understand that I will be charged a higher interest. Should I try to pay interest off the LOC (deposit) or the normal loan first? If I pay the LOC loan, that means I can use it for another deposit?
Hi Jamie,
If the LOC is a liability and might impact on my borrowing capacity in the future, do I actually have a better chance of borrowing more with an IO loan with an offset attached?Thanks for your help guys!
Andrew
Andrew
If your wife owns the property then getting the LOC in your name would mean she has to guarantee the loan, this adds double the risk as you are both on the line.
You should probably only pay the LOC back if you have paid off all personal debt first. Personal debt is not deductible whereas investment debt is. You don't seem to have any personal debt, so you could pay off the LOC, but it may be better to just place the spare cash into the 100% offset account attached to the IO loan.
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 Terryw,
Thanks for your reply. I don’t have any personal debt at the moment so I think I will weight out if I should pay off the LOC slowly or have the spare cash in the offset account attached to the IO loan.
Thanks again!
Do you think you may need any cash in the future. eg if you are buying a main residence or upgrading. If you pay down a loan you will be short of cash meaning you may need to borrow more non-deductible debt.
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 all!
I finally met up with a mortgage broker yesterday. He recommended me to go for the I/O loan to pull out my equity.
One thing he mentioned is the involvement of my wife in all the loans to draw the equity out of my current house because the house is under my wife’s name only. So she has to guarantee all the loans (Technically I don’t have equity)
I’m thinking of going to the conveyancer to add my name as joint owners of my current PPOR. Will that actually make life easier where I can loan without getting both of us (wife and myself) involved in the process?One more thing he mentioned was I’m still limited to how much I can borrow – it’s solely dependant on my income.
So for example, based on my salary I can borrow $400k from a bank. If I buy a $350k house (Use $100k equity from PPOR to loan and pay the deposit /fees and $300k from a bank loan), I’ve pretty much used up all my borrowing capacity.Even if i have $300k left of equity from my PPOR, I can’t borrow more because I’m limited by my salary. Is this true?
Happy to hear your thoughts and guidance. Thanks again.
Andrew
Sounds like you are doing it wrong.
Having the loans in 2 names is doubling the risk without providing any benefit. It may not be possible for your wife to get the loan in her own name, for the LOC I mean, if she has no income, in that case it may be unavoidable. But if your wife has income then she should get the loan and on-lend the LOC money to you or to the trust. There is no sense in putting your name on the LOC as it will limit your borrowing capacity and add to the risk.
Don't transfer your house from one to 2 names as this will also weaken the asset protection. If you go bankrupt you will lose half the house. Only consider if your wife is at risk of getting sued – and even then the asset protection will be limited.
Your borrowing is limited to what you can afford to repay. This comes down to your salary and rental income compared to your existing debt. If you also have a $300,000 LOC then this will severely limit you. If you wife has one then less so.
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
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