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Best Way To Structure Loans For Long Term?

Discussion in 'Property Finance' started by TyroneS, 6th Jul, 2015.

  1. TyroneS

    TyroneS Well-Known Member

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    Hi everyone,

    I'm still learning and I'm looking to get my 2nd property investment and I wanted to get an understanding of what is means to properly setup the financing structure for the long term. I've read on different threads back on SS if you don't set up your structure with your property purchases it can limit your flexibility thereafter. Can someone provide an example of what this means?

    What are the various different "structures" that we should consider? Does this mean deciding whether to borrow the loan individually vs joint? Or is to do with the loans I get from banks?

    Any guidance will be much appreciated...
     
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  2. Ed5000

    Ed5000 Member

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    Good one @TyroneS. It is definitely a topic I would like to learn more about too.
     
  3. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    write to APRA for advice : )

    using the right lenders at the right time was one strategy to make sure you could maximise your resources, and make a decent life for yourself in retirement .

    While there is still some value in this, the "neutering" of lenders to a serviceability floor, with what the ACCC would classify as reprehensible anti-competitive behaviour if it were a private mob............. makes the structuring thing less critical, and will in the end have more people reliant on government............

    My advice today is, be careful, but find a way to make an extra 50 to 200 k to get around the APRA changes, which are poorly and inadvertently targetted around the middle income earners,ie the working poor that now have another government created gap to get swallowed into.

    ta
    rolf
     
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  4. tobe

    tobe Well-Known Member

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    Structure is still important. Don't cross, use a couple of lenders.

    Order of lenders is a little up in the air at the moment, as recent and future changes to credit policy makes forcasting borrowing capacity a little harder.
     
  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    There are 2 aspects to structuring

    1. Ownership structure. This will effect the
    2. Loan structure

    Where there are spouse plan carefully both of these are it can get you further in tax savings and in serviceability. There is no point in having a non working spouse on the loan for example as it just doubles the risk and hurts this spouse's borrowing capacity down the track if he/she does get a job.

    As a general rule borrow 104% for all investment properties. Use 80% or 90% secured on the property being purchased with the remaining 14 to 24% to come from other property. Don't cross. If there is no other property try related party loans rather than using cash as deposit.

    All loans should be long term IO loans if possible (getting harder to do).

    Plan on which lenders to use when - keep in mind what works now may not work in 6 months.

    Don't fix if you want to be taking out equity soon as you may need to change lenders to do this.
     
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  6. Mick C

    Mick C Well-Known Member

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    Gonna copy and paste from our company blog; about loan structuring and increasing borrowing capacity, hopefully it''s some sort of help in this ever changing banking system.


    ======
    There are over 30 different ways we can structure the same loan and each structure will produce a different result and is suited to different needs, short/long term goals and scenarios

    - Each lender have a different formula and credit policy to calculate your maximum borrowing capacity and equity amount and policy etc...

    Stop- Important considerations

    End of the day, you as a borrower also needs to make sure you don't over commit yourself especially in this current low interest rate market; always

    1. Have financial buffers in place

    2. Consider a range of insurance such as income , mortgage and life insurance to protect your biggest asset- you and your family.

    3. Consider your financial and mental capacity

    4. Plan for an increase in interest rate- what goes up must come down and vice versa

    5. Access your situation on a regular basis, as situations does change

    6. Plan ahead and be smart about your commitments and goals

    Basic ways to increase your serviceability (that you can do now!)

    1. Cancel or reduce unnecessary credit cards limits

    2. Cancel or reduce unnecessary Store cards limits

    3. Pay out non- tax deductible debt first such as Personal loans, credit card and car loans

    4. Review your Investment properties weekly rent

    5. Consider a PAYG variation on your Tax return (for some property investors)

    6. Make sure your tax returns are up to date (We may need to rely on other form of income such as Shares. stock, dividends, trust distribution and bonds etc..)

    7. Review your current home loan interest rate on your loan compared to the market

    The geek- The technically ways to increase your serviceability (Loan structure and lender's choice)

    Example of the common 8 ways Loan structures and lender's choice can make a difference in the serviceability;

    1. Interest only set up- Setting up your current loans as interest only will reduce your monthly liability and allows you to direct funds to non- tax deductible first; this is only usefully with some lenders only. Some lenders have the reserve thinking and will increasing borrowing for Principle and interest set up- speak to your broker first.


    2. Using fixed interest rate at the right time- Using a fix rate for the right type of loan and property at the right time is criteria in increasing your serviceability; some banks will atomically increase your serviceability if you fix your loan for 3 to 5 years depending on the bank and proper type. Fixing the loan to early in your investing cycle or for the wrong property type is a common mistake some investors make.


    3. Choosing the lender based on their income policy – Each lender has a different policy on how much and the type of income they would accept, Example CBA as of June will only take 80% of Bonus, while others will still consider 100%.


    4. Lenders accepting Bonus and allowance- Banks can be very traditional in their dealing and thinking and as a result some banks will only accept base wages and may not consider bonus/commission or allowance as an income; especially if you have less than 2 years proof or history- This is not always the case for the “new age” thinking lenders of 2015.


    5. Different “servicing rate or assessment rate” formula- You might be able to afford a $400,000 loan today based on today’s low 4.20% interest rate; however when the banks calculates the repayments and affordability they will need to include a buffer into the increase rate and this will range from 7.25% - 9.25% depending on the banks.


    4. Refinancing – This in some instances will reset the 25/30 years loan counter which will also reduce your liability ( but not always the case depending on the lender) , however careful consideration and planning needs to be taken


    5. Choosing the right loan product– Some home loan packages with a good rate may come with some terms and conditions that may limit your borrowing capacity based on the banks calculation. Ie Some packages comes with a compulsory credit card


    6. Annual fee and bank fees- Reduce your fees where possible


    7. Understanding add backs (especially for self employed) – This is more common among self employed who’s taxable income on their tax turn might be a lot lower than their real income and this is probably due to the credit of a good accountant who within their rights have claims some non cash lost deduction, in this case we can get the bak to add these bank into the income calculations-also known as add backs.


    Common add backs are; Depreciation, Once off expense, directors salary or dividends, Interest expenses.

    8. How the file is presented- Sounds simple, but sometimes it comes down to how the file is presented and how the “mitigates” are presented.

    ====





    .
     
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  7. TyroneS

    TyroneS Well-Known Member

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    That's good to know. I've spoken to a few people on the forum in the past and they've mentioned to start with the top tier lenders (e.g CBA, Westpac, etc) and then work the way down to second tier lenders (AMP, credit unions). That's not the case anymore due to the credit policy changes?

    In regards to structure are you referring to ownership of the property?


    Thanks Terry. How would it affect us if we were to put the properties in trust instead?

    When you say long term loans - is that like 5years+?

    -------

    Many thanks to everyone elses replies as well.
     
  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    It would depend on the structure of the trust. You can stretch things further by setting things up so only 1 personal guarantee needed., but a second personal guarantee can be provided - if you choose.
     
  9. albanga

    albanga Well-Known Member

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    Great post Mick!
    Just another one is if you are self employed, start declaring your income! Besides the fact it is illegal (The odd cash job for a mate o.k but the amount of times a tradie asks me "I can do it less if you pay cash) it kills your serviceability.

    Start thinking long term, not short. By accepting cash and only declaring a small amount may give you the benefit of paying less tax but it also means you can't borrow money.

    Say you pocket 30k in cash jobs (again highly illegal but I just know so many people do this!) and it saves you paying say 10k in tax. If instead of worrying about that and you do the right thing and it allows you to borrow money and now leverage it into a property, say in Sydney 2 years ago then work it out but I'm pretty sure you would be miles ahead and what's more you would not be breaking the law.
     
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  10. Jerry O

    Jerry O Well-Known Member Premium Member

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    good point albanga! couldn't agree more.
     
  11. Mick C

    Mick C Well-Known Member

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    ^ Agree....the 2015 tax returns last for 18 month as well!!!

    ^ this is still the case...choice of lender is VERY important....which bank is now very different.
    Generally i would still use ANZ/ WBC for the first foundation property...and than move to CBA/ NAB for your mid tier servicing and equity releases...and for high end servicing move to smaller credit unions and interstate banks such as Me bank/ Firstmac/ BOQ etc...and if your servicing is Extremely tight start to use overseas funded mortgage mangers in Aus and non banks.

    Regards
     
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