10 Strategies to help you buy a property when you cannot service

Discussion in 'Investment Strategy' started by Terry_w, 10th Jun, 2017.

Join Australia's most dynamic and respected property investment community
  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,666
    Location:
    Australia wide
    10 Strategies to help you buy a property when you cannot service


    Lets imagine a person who has a pre-approval at their ‘maximum’ borrowing capacity and is out there actively looking for properties to purchase. Everything they look at seems to be going for more than they can afford. They then see the dream property and they want to somehow acquire it. To do this they will need to come up with an extra $X in either extra borrowings or deposit.



    How?



    1. See a Broker

    You might actually be able to stretch that borrowing capacity a little further by speaking to a broker. Different lenders assess things differently so it may work out better with a lender other than the one(s) you have considered.

    Before trying any of the below it would be best to check your serviceability with a broker. It might even pay to seek a second opinion too.



    2. Add an extra borrower

    Where someone was looking to buy the property on her own and be a sole borrower simply adding a person to the loan can increase serviceability. This is generally only possible with spouses – married or defacto. It can work even where the 2nd person is not working if they have rental income for example.



    3. An extra owner

    Where someone doesn’t have a spouse they may be able to use another relative to go on the loan as an additional borrower. But banks will generally only allow this if the other person is also a legal owner of the property. In this case legal advice should be sought, but one possible solution may be to add the other person as a 1 to 10% owner as tenants in common.



    Later on when the serviceability improves the main owner can acquire the 1-10% share of the other owner. Because this is a small amount of the property the CGT and stamp duty should be relatively small.



    4. Related party loans – the shortfall amount

    The person may be able to borrow money from a relative. This could be the shortfall amount, that is the purchase price and costs less what the bank will lend.



    Now with most banks this will effect serviceability because they view it as an additional debt. But there is a way to structure this without the bank having to take this debt into account.



    5. Related party loans – the whole amount

    It may be possible to borrow the whole amount for the purchase of the property froma related party. A client of mine did this recently where the parents had a large LOC and where able to lend the client the whole purchase price.



    6. Gifts

    Parents or other persons or entities could gift the short fall amount to the borrower so that they need a lower loan amount.



    Later on this gift could be returned if desired.



    7. Discretionary Trust Structuring

    The trustee of a discretionary trust could purchase the property and this could be structured in such a way that the lender will take a guarantee from 2 or more people. Later as serviceability improves the loan could be refinanced and the 2nd person’s guarantee be removed. This may need to involve changing the internal structure of the trust and legal advice should be sought, but in most states there would generally be no stamp duty on this and there would be no CGT either.



    8. Unit Trust

    The ownership could be held by the trustee of a unit trust with 2 individuals owning the units. The 2nd person could later sell their units to the main person. This would generally be stamp duty exempt, but legal advice should be sought. CGT would apply.



    9. SMSF

    A SMSF may be able to acquire the property and service even where the individual cannot. This can be possible because the SMSF will have additional income to the person’s behind it. Legal and financial advice should be sought before doing this.





    10. Wait

    Waiting doesn’t appear to be a popular strategy with people. They want things now! But if a bank says you can’t afford a loan, just maybe you can’t afford to buy that property just yet.



    Longer term there are also many ways to improve serviceability too – I have compiled a list of over 300 ways, but that is for another day.
     
    Rusty12, Crabman, Gypsyblood and 10 others like this.
  2. Chris Au

    Chris Au Well-Known Member

    Joined:
    4th Jul, 2015
    Posts:
    1,247
    Location:
    NSW
    @Terry_w , your broad thinking (along with others) has benefited the forum community, thank you.

    Sometimes concentrating on the current properties, value adding, maximising rents etc will provide the best returns longer term, rather than stretching the funds to another property, possibly past the bounce back point.
     
    Sandiccc, Gypsyblood and Terry_w like this.
  3. neK

    neK Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    2,842
    Location:
    Sydney
    Terry could you elaborate a little more on this?
     
  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,666
    Location:
    Australia wide
    Doug wants to buy a property worth $100,000. He can only borrow $80,000 from a bank and has $10,000 cash. He borrows the other $15k from a related party.
     
  5. neK

    neK Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    2,842
    Location:
    Sydney
    So how does one structure this without the bank taking this debt into account (without forgiving the debt)
     
  6. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,666
    Location:
    Australia wide
    That is a trade secret that I am not willing to disclose.:)
     
    ashish1137 and Gypsyblood like this.
  7. neK

    neK Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    2,842
    Location:
    Sydney
    @Terry_w
    You taking on clients at the moment ? :)
     
  8. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,666
    Location:
    Australia wide
    Just 1 more for this week!