Hello all,
This is my first post here and I would like to firstly thank all the contributors for making it such a friendly and informative read. I need some advice and opinions on my current state of affairs as its getting all too much for this computer nerd to handle. I recently purchased my first IP and settlement is in just under two weeks. Finance has been arranged through the ANZ, but we are still in the process of accepting the loan offer and completing the paperwork.
We currently own our home and my wife has been noted down as the guarantor for my IP loan. (The title of our house is in her name) This is where my concern lies.1. I believe a guarantor situation is not very common, with most loans secured by either a cash deposit, payment of mortgage insurance and use of existing portfolio equity (not really sure how this last part works).
I must admit, we are both very naive when it comes to financial matters. I didn’t realise that our house will be mortgaged to the ANZ if she plays the guarantor role.
2. I believe a guarantor isn’t required when you can pay 20% deposit for the IP? Is this correct? I paid 10% of the deposit myself. But then I was thinking, as it is an IP and I want to maximise the tax deductions, why would I want to inject so much of my savings into the loan?
3. If our house is mortgaged to the ANZ, how will this impact my future IP purchases. Say we find another IP and want to use CBA for finance this time. Does that mean we can’t use the equity in our PPOR through the CBA as ANZ has the mortgage against it?
4. If we go ahead with this loan and the ANZ has its name against my IP and our house, what will happen if we want to sell our PPOR normally? I am sure this happens quite often, but I am just not aware of the details.
So there you have it. I am sorry if explanation is not that eloquent or coherent. Just a little bit stressed at the moment.
Many thanks in advance for any advice given.
Ray.
Hi Ray,
Let me see if I can start answering some of the questions for you & I am sure the others will fill in the gaps for me.
Q1/ Guarantors are becoming more common these days as property prices rise & first home owners struggle to break into the market. Mum & Dad guarantors are coming back to help out. With regards to your wife being guarantor, the ANZ are using her income to enable you to meet their servicability requirements. Guarantors could still be required even if you do have a cash deposit because you need security & the ability to repay to make a deal fly.
Q2/ I think I covered some of this in Q1. The other point to make here is that you do not want to use alot of your cash which is fine but if by not using some cash you now have a negatively geared property, how many of those can you afford to subsidise?
Q3/ You are right on the money. There are very few institutions that will accept second mortgage & I am pretty sure the majors like CBA are one of them. I am sure the mortgage brokers on here can confirm or deny this for me.
Q4/ If you sell your PPOR, ANZ will require you to pay down your IP loan to 80% to come in line with the credit requirements. Unless of course you have another PPOR lined up that you can just change the security on the loan & move on as usual.
Hope this helps.
Kim
Hi Ray,
A couple of questions,
1) Is your wife going to be included on the title of the IP, and does she earn any income.
2) Has the ANZ included the proposed rental return on the IP when calculating your serviceability for this loan, Cheers.Regards
Steven Crane
Mortgage BrokerMobile Mortgage Market
Ph: 0402 483 216
[email protected]
http://www.mobilemortgagemarket.com.auPLEASE note comments made should not be taken as specific taxation, financial, legal or investment advice.
Hi
1) I think that having a guarrantor for a loan in which you put down a 10% deposit like this is rare. Maybe it was done to save LMI fees?
2) you could have even put down a 5% deposit without your wife or other property being utilised. Using your other property ties things up unnecessarily and using your wife adds risk unnecessarily.
3) It will affect your future borrowings. You could not go to CBA etc while ANZ has a mortgage over your house.
A better way to have done this may have been to setup a LOC against your home, and take the deposit from this for the new home. Keeping them totally separate – avoiding cross collateralisation.
4. If you wish to sell your home, you will need to apply for a release of security. This basically means ANZ has to let you remove the home as security for the investment property. It should not be a problem if prices are going up, if they drop, ANZ may require you to pay money off the investment property loan for them to release the home.
Terryw
Discover Home Loans
North Sydney
[email protected]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 Steven and Kim,
Thanks for your feedback and comments. Kim I am not quite clear on your point 2. Is there a typo there? I read a few times and it still didn’t make sense to me (yes, maybe I am really that thick!)
Steven, the answer to your questions. My wife works full time as well in the medical profession. As such, she gets fantastic salary packaging options to reduce her tax. As I am paying more tax than her (we are both on the top tax bracket for FY04/05) we thought it would be more tax effective to put the IP solely under my name to get the maximum tax benefits.
In regards to the rental return estimate, yes I believe that was one of the questions asked during our initial application meeting.Cheers,
Ray.Terry I think the problem relates to servicing issues, hence the guarantor,
Grant, as you are on the top tax bracket it seems strange that servicing is the problem, however without being privy to all your details its very difficult to be certain,
If you want a second opinion regarding the ANZ decision, feel free to contact me with the numbers and I will estimate your max Borrowing capacity, Cheers.Regards
Steven Crane
Mortgage BrokerMobile Mortgage Market
Ph: 0402 483 216
[email protected]
http://www.mobilemortgagemarket.com.auPLEASE note comments made should not be taken as specific taxation, financial, legal or investment advice.
Ray,
Sorry if I confused you, sometimes I confuse myself – ha ha
What I was trying to say is, not all property deals are positively geared unless you put in a cash deposit & hence borrow less. If by not putting in any cash, the deal is now negative, how many properties can you afford that are losing you money each month????
I know that with our package, I am guarantor (but to a small limited amount) for the investment loan in my husband’s name. I don’t earn anything and I’m fairly sure it is because our family home is used as security for a loan in his name only. It certainly wasn’t anything to do with my income.
Regards, Wylie
Hi all, Ok as embarrassing as it may be, I finally managed to get hold of the broker and ask “So why did I choose this loan again?” This is what he said…”As we establised we wanted to maximise your tax deductions, the loan was structured so you could borrow the maximum amount against your PI. This is why your wife was set up as the guarantor, so you could borrow 110% of the PI value and get maximum tax deductions from it”…So there you have it. Did I get suckered into something? The method of setting up a LOC against the home suggest by Terry sounds painfully good. Painfully, because its the 11th hour now and probably too late for my to do anything about it.
I did get some finaly assurance from him though, that if I built up enough equity in the PI (I guess either through capital growth or my own contribution), the mortgage on my PPOR could be lifted. Is this as easy as he made it out to be?
Many thanks,
Ray.Hi Ray,
It seems serviceability is not the issue, but the fact that your PPR is solely in your wife’s name, this is the reason the bank has requested your wife go guarantor, as in the banks eyes she is the owner of the security they are taking in order for you to borrow 105% on the new purchase.I’m not certain and I may be wrong on this point, but if you did access equity via an LOC on the PPR towards the new purchase you may have had issues with claiming deductions on that portion of the loan, as the LOC would be in your wife’s name. (What’s your take on this Terry?)
As others have already mentioned, this structure may only become a problem when the need arises to access further equity in the PPR.
BTW, ask your Broker about your wife providing a limited guarantee,
Sorry if this seems as clear as mud but it’s been a very long day & I need sleep, good luck with it all Ray, Cheers.Regards
Steven Crane
Mortgage BrokerMobile Mortgage Market
Ph: 0402 483 216
[email protected]
http://www.mobilemortgagemarket.com.auPLEASE note comments made should not be taken as specific taxation, financial, legal or investment advice.
Wife can lend to husband. Just sign the right loan document.
TMA
http://www.email4money.info
Essential Links
First Home Buyer WebsiteSteven, I can vouch for the loan deductability. I went to an ATO seminar yesterday where they advised if the loan is not in the name of the person who owns the property – NO DEDUCTION. I was actually surprised to hear some of their ideas on interest deductability. I will give an example, husband & wife buy $600,000 IP as 50/50 owners, husband only sources $600,000 loan to complete. ATO advise only $300,000 of loan is deduction as husband only has a $300,000 interest in property. I was like TMA & thought it could be lent onto wife & they are saying NO. Obviously I am doing some more research on this.
Kim
Kim
Surely with a loan agreement interest could be charged and hence claimed. At the seminar, did the ATO mention a written agreement? Without one, it probably could not work, but with one it should.
BTW, there was a recent case in the AAT where the ATO disallowed the interest claimed on a loan in a personal name where the funds were used by the client’s Pty company. AAT overruled the ATO and allowed the claim as there was a clear connection with the person borrowing the money and ‘lending’ to their company. (this is from memory, so may be a bit wrong)
Terryw
Discover Home Loans
North Sydney
[email protected]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
Hello all,
Here is the latest after a mad day of running around to the accountant and solicitors. Talk about baptism by fire! My head is still spinning.
So it looks like we will be going ahead with the loan as currently structured with my PPC mortgaged to the bank so that I could borrow 110% of the IP value. After doing some basic maths with the accountant it quickly became obvious that my tax benefits after doing this IP wouldn’t be as attractive as I had initially thought. As after my company provided salary packaging I would be in the 30% tax threshold and with the IP I would still be in this threshold. His advice was to pay 20% on the IP if possible so we won’t have to mortgage our PPC (hence reducing our overall risk).
Speaking to the broker, his suggestion is to inject funds post settlement so that we can apply to have the mortgage lifted on my PPC. Sounds quite straight forward, we just need to scrape up the funds ASAP. Any pitfalls I should watch out for? I couldn’t see any minimum term or exit penalties. The only potential problem I can see is that they can take back the 0.75% discount they gave us on the standard variable rate. But we would still get the 0.5% discount at least.Cheers to all,
Ray.Originally posted by JKM:I was like TMA & thought it could be lent onto wife & they are saying NO. Obviously I am doing some more research on this.
Kim
You are not like me!!!
I clearly stated “Just sign the right loan document”.
What this means is that money can be borrowed from anywhere as long as it can be proven to be a loan and the funds were used for investment.
Your example outlines a completely different issue which involves 50% ownership of the property. You will never be able to deduct more than what you own.
The ATO can not refuse the deduction if the husband borrows money and then onlends onto his wife. Onlending money is an investment even if you charge the same rate you are paying. They just require a loan agreement be in place. The wife will then be able to deduct her 50% if the property is an IP.
TMA
http://www.email4money.info
Essential Links
First Home Buyer WebsiteGeez sorry if I offended you TMA.
The ATO advised that they are looking solely at the loan obtained from the financial institution. They did not mention accepting any agreement between the husband & wife.
I am not offended at all. I just like using punctuation!!!
I think the person from the ATO just neglected to define the full scope of borrowing money. What if you borrow from a friend and pay back with interest under an agreement and the funds are for investment? They are not a financial institution but the funds are clearly for business purposes.
Besides purpose of funds, I think enforceability of a loan agreement is important. An Accountant should be able to clear this up quickly.
TMA
http://www.email4money.info
Essential Links
First Home Buyer WebsiteHi TMA,
I understand your point & the debate got heated with the ATO. If I find more documentation, I will post the link.
Kim
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