Huilo, the borrowing capacity with many lenders for SMSF is calculated completely different to your personal name – the contributions are counted as income and in many cases your personal A&L is disregarded for servicing. This is an area we’re seeing a lot of clients venture into to increase their portfolios through a tax effective vehicle.

And it varies on the ‘type’ of valuation. Some will send out a valuer to inspect the property (full report), others will just drive past the property (kerbside), and sometimes banks will just use their own computer model to estimate the properties value without any inspection.

There’s no legal restriction, but there’s two main factors which will decide whether it’s the right time to setup a SMSF:

*the practicality – whether the benefits will outweigh the upfront and ongoing costs, this is usually the case as the balance increases
*lender policy – whether you have the ability to meet the lender policy requirements to borrow

This is a VERY common conversation we have with clients, to the point where our financial adviser will review whether it is viable at this time to setup their SMSF, and if not what steps are needed to get to the point of being able to build their balance up to start their own fund.

Definitely draw from equity then, especially if you have any personal non deductible debt.

When there isn’t sufficient equity and the borrower has a principal place of residence with a personal debt, the other option is to use the cash funds to reduce the existing home loan, then setup a new investment equity release to pull out the same funds back out. These borrowings are then able to be used for the investment purpose and claim the tax deductiblity on interest – best of both worlds.

You’re likely going to need to remain in your job to show sufficient cash flow for the development – at that small size a triplex can be done on residential rates, which is going to be a lot more cost effective than commercial lending.

Perth market – that’s an interesting one. Ensure you factor in values post development, as a number of perth development sites are in a spot of trouble at the moment from declining values + from increasing supply from all the development across the city.

Definitely agree with Jamie – with all the investors we see each week, the number one issue for first time investors is having a sufficient deposit.

After gaining a few properties, this quickly changes to having sufficient borrowing capacity to continue growing their portfolio.

Get a second opinion – it’s quite common that many borrowers will be told they can no longer borrow any further – but that may only be with one lender, or a limited panel of lenders.

If you’re well and truly out of borrowing capacity the only options are:

*earn more income
*reduce expenditure
*invest in a self managed super fund and OR commercial property where products are available which do not look at your personal servicing.

TheNewGuy wrote:

As above. The only risk is that your property doesn’t get as valued as high as you paid so you can’t redraw as much as you think.

A fairly low risk in terms of % of properties out there – but this can be mitigated for the most part by having the property valued prior to a debt recycle.

Sometimes with the right structure you can have your cake and eat it.

Very easy question to answer.

Pay down the mortgage, then release the equity as a seperate investment split. These funds can then be used for a deposit for a property.

You achieve the reduction in mortgage, but also maximise your tax deductibility by recyling the debt into investment use. Speak to a investment focused finance broker who can set this up to ensure you’re not potentially causing tax issues or limiting your ability to invest in the future.

As an example:

300k mortgage, 100k cash.

You would pay down the mortgage to 200k, then setup a SEPERATE split of $100,000, interest only/Line of credit. The 100k would then be available to be used for deposits as needed.

Just another reason to not invest in OTP/high density property in these markets – as they’re propped up by a distorted market which only allows overseas investors to buy one type of property.

I can’t see this causing an overall major impact on the rest of the Vic/Melb market – meanwhile its a tax increase that the government can put in to spur revenue whilst giving the impression of targetting housing unaffordability issues. No surprises here whatsoever that the government has put it forward.