I am in the position to buy my next (cheap <$300k) IP outright. Is there any benefit to buying it with my cash and then searching for the best mortgage later? The reason I am considering this is:
– I can get a short settlement without worrying about bank being ready for settlement.
– don’t have to get pre approvals and have the “subject to finance” clause in offers which can put vendors off.
– being able to hunt around for the best loan after purchase with no time constraints and pending settlement dates.I’m sure there are other pros and cons. What do you think?
Thanks
JonHi Jon,
That is a darn good question. As a knee-jerk reaction, my initial thoughts were “Yeah, you beauty – buy an under-valued property for cash, then refinance later up to its value to allow you to go again.
e.g. Buy a $350k house for $300k unconditional – a lender would likely have limited any mortgage to 90% of that, so $270k.This way, you then arrange a mortgage relative to its value of $350k, so $315k instead of $270k. You beauty !!
But then, I thought – wait up !! This is where I should shut up, and leave a Mortgage Broker to call in – as, though the lenders might be OK with it, I have no knowledge of whether the ATO might look unfavourably on that type of thing. In one way, it seems to me it should be OK – but could they see such a move as “contrived” to garner increased Tax Deductions?
Anyway, as I started off – “Bloody good question, and I will be very interested in the answer too”.
Benny
It’s a strategy that some of our clients use – but with the lending environment moving in it’s current direction it is becoming more difficult to finance. The whole strategy is dependent on the lenders being happy to release significantly large funds each time without another purchase lined up, which in many cases they are now rejecting or controlling the use of funds much more.
It’s simpler just to establish the finance needed in advance and so long as you have a strong finance position, you can still put in unconditional offers – after all you still have the emergency fallback position of putting the cash sum down.
Corey Batt | Precision Funding
http://www.precisionfunding.com.au
Email Me | Phone MeInvestment Focused Finance Strategist - servicing Australia-wide
Are you concerned about deductibility of interest?
Tools
It can be a good idea, but the interest on the loan will not be deductible because you are not borrowing to purchase the property.
However the interest could be deductible by starting out with a related party loan and then refinancing this, and/or if you use the borrowed funds for further investments. Speak to your tax agent or tax lawyer first.
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 there, thanks for replies. Well just spoke to loans.com.au and they said they would not mortgage a property that had been bought outright unless it was within 3 months of purchase due to their “responsible lending criteria”. So I wonder what lenders would look at it?
Hi Jon,
Many other lenders will do it but often to prevent fraud need a signed letter from the mortgagor to confirm you are aware it is unencumbered.
Can’t see any reason why you would do it this way.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Hi Jon
It’s possible – but not all lenders will be comfortable with this approach as there’s no way they can guarantee that the funds won’t be used for something else.
The majors should be ok with it.
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]
Thanks for the replies. Another reason why this strategy would be good for me is that I often do a few years of contract work then have a few months break between new contracts. Having little time to look whilst I’m working means those few month off are a great time to find new investments, but by being between contracts I would have to use my own funds. Thanks
Thanks for the replies. Another reason why this strategy would be good for me is that I often do a few years of contract work then have a few months break between new contracts. Having little time to look whilst I’m working means those few month off are a great time to find new investments, but by being between contracts I would have to use my own funds. Thanks
Understood. It is also possible to get help with the buying part ;)
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
Banks are wary of this type of scenario as it’s considered a Cash-out position – you could potentially be laundering money and so the bank has to be extra vigilant around Anti-Money Laundering/Counter Terrorism Financing (AML/CTF) rules – this is on the radar at the moment.
I agree with Corey – toward the end of your contract (when you believe you may have time to find the investments), get pre-approval on a loan. You then have the flexibility of loan or cash for purchase.
Hi Jon,
While getting cash out against an unencumbered property is more difficult than lending to fund the purchase there are plenty of lenders who will do this for you, particularly if you apply for finance prior or shortly after settlement. The main issue is maintaining the tax deductibility of the loan. When you access the equity, there will be no immediate use for the funds so what you do with them from that point will determine whether the interest is claimable or not. It’s far cleaner to preserve your cash and borrow to assist funding the purchase, then there is no doubt what the use was for and you can use your cash for whatever purpose you want.
Regards
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