Hi folks,
I’m a first-timer on the forum but have done a lot of reading and would appreciate your advice…
My wife & I have always thought that the non-deductible debt associated with purchasing a PPOR was a bad idea, and have been quite happy to rent while saving and investing in other ways. We currently rent a small apartment (in Brisbane) for $400 pw.
My in-laws are very keen for us to own a “suitable” property and have offered us a significant early inheritance to help us to purchase a PPOR, there would be some strings attached re the features of the property (a “nice” place, in a “nice” area, with space for guests to stay) but certainly nothing that we’d be unhappy to live in if were free :).
This is all a bit “hand wavy” because it’s early days, but combining in-law expectations and our available funds I estimate that we’d need to borrow somewhere between $0 and $400K on a property worth $800K to $1.2M (let’s say a worst case LVR of < 40%).
We could afford to service a $400K loan, but to pay it off quickly will certainly cost more than we are paying on rent right now. A back-of-the-envelope calculation tells me interest-only at current (historically low) mortgage rates will cost us about the same as our current rent, but we’d also be up for the additional costs of owning the property.
My questions are:
1. Should we take advantage of this offer?
2. What sort of calculations did you use that make you think so?
3. If we did go ahead, how would you suggest we justify this “bad debt” to ourselves?
4. How might we structure things to position ourselves well for property & other investment in the future?Thanks for your advice.
I can only talk to what I would do in this situation. I wouldn’t accept it – there seems to be too many conditions and strings attached to the ‘gift’. It would always hang over my head and it wouldn’t feel like ‘my’ home. If I was happy renting where I was then I would stay there, as long as my partner and I are happy does it really matter if the in laws don’t approve?
IF I did take up the offer the only motivation would be to draw on the equity to fund other investment purchases.
But, that is just me.
Kinnon Bell | Kinetic Funding
http://www.kineticfunding.com.au
Email Me | Phone MeMortgage & Personal Loan Broker based in Cairns and Melbourne but servicing clients Australia wide.
Hi Kinnon,
I know what you mean re the inter-personal dimensions, and that’s not something I’m dismissing at all – the two of us would need to ensure that we’re comfortable with that before we decide to proceed.
But I guess what I’m really asking you guys about is more the financial aspects of such a proposal. A couple of hypotheticals in the range of possibilities:
Scenario A: $0 Loan required, $1M property
Nice property to live in, we save $21K pa in rent
We pay holding costs / body corp fees (which should be no greater than rent savings right? If so, CF+ for us)
Asset with untapped equity to invest if we want to (80% LVR on $1M -> $800K) any equity we contributed would be accessible
Also get benefits of CG on $1M with no tax payable on PPOR (which should at least match inflation right?)Scenario B: $300K Loan required, $900K property
Nice property to live in, we save $21K pa in rent
Using pessimistic rate assumption, IO on $300K @ 7% is $21K which exactly cancels out our rent saving
We pay holding costs / body corp fees (into CF- territory now)
Asset with untapped equity to invest if we want to (80% LVR on $900K -> $720K-$300K=$420K)
Also get benefits of CG on $900K with no tax payable on PPORWhile we *would* appreciate living in a nicer place, for the sake of the exercise I’d do the sums on the assumption there is zero “lifestyle benefit” to us in moving.
Even with that assumption, I don’t know how you would start in calculating an effective rate of return?
I would:
1. Bloody oath
2. Rents go up as do property values. Main residences are generally tax exempt – what other investment can get you this?
3. read 2.
4. Consider borrowing capacity for now and the future. Go For a loan as high as possible, up to 80%. This could be split into an IO loan with offset and a separate LOC for further investments, but this would depend on how much cash you have and the size of the property.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 GP
Welcome to the forum and I hope you enjoy your time with us.
Not sure which part of Brissie they would want the property to be located but i have to say i would definitely look at taking it further.
Take the loan to 80% but set it up as a split loan being the amount you need to settle the PPOR purchase and the balance of the 80% as an equity loan. Use the equity funds as deposit to start your investment portfolio.
If you intend to keep the PPOR longer term structure the loan so that as the non deductible split reduces the investment split can be increased by the same amount.
We link an offset A/c to the non deductible split to save additional interest.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Also get benefits of CG on $900K with no tax payable on PPOR
I can’t comment on whether its worth it due to the emotional baggage – that could be a deal breaker. Otherwise good replies above from Terry and Richard.
The CG exception alone could see you in a good year making 100k in tax free equity gains. Thats a pretty big deal.
BuyersAgent | Precium
http://www.precium.com.au
Email Me | Phone MeSouth Coast NSW Independent Buyers Agent - Wollongong to Batemans Bay and Regional NSW. DOWNLOAD OUR FREE 14 POINT PROPERTY BUYER'S CHEATSHEET to avoid painful mistakes at precium.com.au
Thanks everyone, I really appreciate your input.
So what I’m getting is that with an investment hat on I should be thinking about it something like this:
* Non-deductible interest charges are bad, but no worse than paying rent
* Any outgoings in excess of current rent payments in this situation are essentially for the purpose of purchasing tax-free equity growth
* To evaluate the value of this it needs to be compared to any other investment made with after-tax money
* Separate to that we would also be receiving a gift of equity which we can leverage to make other investmentsWhat is a sensible estimate for rates + maintenance + body corp + insurance for a property of this value? I suppose it depends on lots of factors, but would $10K be a reasonable ball-park estimate?
If so, Scenario B above could be thought of as a highly leveraged $10K investment yielding ~$54K (~6% on $900K) tax-free equity and no income.
(A 440% return does, of course, make it sound like a very good deal.)
Have I got that right?
Just realised that the above figures don’t account for the cash associated with our own equity contribution to the purchase.
So, for example, if we have contributed $100K in addition to taking on the 300K loan then the actual cost to purchase the ~$54K yield is $100K + $10K pa.
One thing I would say is work it out based on NOT having that money first, it is never truly a gift especially from the in-laws who can hold it over your head. (That being said, they may be the perfect in-laws and it IS a great opportunity).
One easy solution (as others have stated) is to borrow the maximum amount (80%) and put the money they give you in an offset account, that way if anything ever happens its not in the house, but just saving interest, if it ever needs to be given back it’s a simple bank transfer, this also has benefits if you need to access the cash for any reason, don’t expect the bank to extend your mortgage to help cover injury or medical costs if you can’t work, if it’s already there you don’t have to beg them to help.
As an example bought our property in Sydney in 2009 and the property has gone up about around 50% since then (60-70% if I was quoting as an overly optimistic seller), if we sell it we don’t pay capital gains and as we have a large portion of it paid off (via offset account), our interest is only around $600-700 a month. When we bought it rents in the area were around 350-500, now they are more like 500-700, so if we were renting in the area, we would now be paying almost weekly what our mortgage costs monthly, and we would not have the equity in the property. Whenever we want to use this equity for personal or investment we can.
To quote Terryw above (as long as you have considered your options)
I would:
1. Bloody oath
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This reply was modified 9 years, 11 months ago by
aussieguy2000.
To terryw, I can see that the CG exemption can be a huge benefit but many of the books I’ve read pitch the “never sell” idea as the answer to avoiding capital gains tax on IPs. If we’re not planning to sell anytime soon is there any benefit to be had in putting the property in a trust and claiming the deductions of a normal IP, building a carry-forwardable loss, and allowing distribution of future capital gains? I understand we can do this provided we rent the property from the trust at a commercial rate.)
In answer to your query Richard, Brisbane’s inner west is where we are now and would prefer to stay. I guess the sensible financial approach is to chase the best capital growth we can while meeting our other requirements so that may dictate our choice of suburb to some extent. I note from an article on your website that you’ve got some experience in the area – any ideas on that front?.
To aussieguy2000, I know what you are saying about keeping the money available – if we needed to pull the pin our exit strategy would be to move out, switch the property to a pure investment, and negotiate some sort of nominal split with the in-laws. Does a LOC make this harder to do than would an offset account or does it work out basically the same?
I appreciate everyone’s feedback on the loan structuring – let me repeat what I understand:
* Borrow at 80% LVR, with a split between a LOC and an interest only loan 100% offset account
* Use the offset as our non-deductible personal savings / transactional account
* Use the LOC as our tax-deductible credit card for investment spending, capitalising interest if need be
* To start, we’d set the split based on the amount of contributed equity so for a $1M property with $800K cash you’d end up with a $600K LOC and a $200K IO Loan with offset (and $200K equity to keep the bank happy).Am I on the right track?
I gather it’s pretty easy/cheap to swap offset balance for increased LOC limit if we want to, but that moving in the other direction may be fraught with unpleasant tax implications? Or does it not matter because the accounts are still considered separate?
Any there any significant additional costs / margins involved in setting up a facility as flexible as this?
To terryw, I can see that the CG exemption can be a huge benefit but many of the books I’ve read pitch the “never sell” idea as the answer to avoiding capital gains tax on IPs. If we’re not planning to sell anytime soon is there any benefit to be had in putting the property in a trust and claiming the deductions of a normal IP, building a carry-forwardable loss, and allowing distribution of future capital gains? I understand we can do this provided we rent the property from the trust at a commercial rate.)
In my experience there are few people who never sell. A property will change hands eventually, even trusts end in 80 years.Buying in a trust now will mean always subjecct to CGT, even if you live there, land tax in most states and eventually the property will be positive geared so you will be paying tax on something you wouldn’t otherwise. Assuming you do rent from the trust the trust will need other income to offset the loss or there will be no benefit.
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
So Terry, starting with the end in mind, a good portfolio strategy would be:
Put the property with expected highest $ value (not rate) of capital growth in personal name and make it the PPOR for maximum benefit (even if only nominally via 6 year rule).
Put IPs in personal names so long as there is taxable income to offset and you are within the land tax exemption thresholds.
Put IPs in trusts when there is limited personal taxable income to offset or when you can offset negatively geared property losses with other trust income.
Consider multiple trusts to segregate portfolio for asset protection and for additional land tax thresholds.
Consider borrowing arrangements with trusts to provide asset protection for the properties held in personal names.
As long a serviceability is OK, no problem to put PPOR in name of lowest income/lowest risk partner, because the burden of deductible borrowings can easily be shifted through loans @ LOC rate (0% margin).In Qld having numerous Trust will not get you around the Land Tax threshold as your hold in will be aggregated where the Trustees are related.
We hold all of our Brisbane properties via 5 Separate Discretionary Trusts however this has nothing to go with trying to reduce the Land Tax liability.
Agree with most if your other conclusions however certainly not so easy to change the loc splits especially if the anticipated credit changes which APRA are considering come to fruition. Careful selection of lender will be required.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
In Qld having numerous Trust will not get you around the Land Tax threshold as your hold in will be aggregated where the Trustees are related.
Richard I disagree with this bit. Carefully structured each trust will get a separate threshold in QLD due to s20 Land Titles Act QLD.
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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This reply was modified 9 years, 11 months ago by
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