Deposit and loan structure for first IP

I plan to buy my first IP hopefully by the end of this year. I'm trying to figure out what's the best way to prepare for the deposit and structure my loan, so would be great to run my case through the experts here I will definitely seek professional advice when I do the actual purchase, but this is a test to see whether I get the right understanding and application of strategies.

My current situation:

Home value: $895,000. Bought right at the peak in Sydney in May 2016.

Loan balance (borrowing): $775,000

Available for redraw: $19,000 - I do not have an offset account (did not know much about loan products when I bought the house).

Expected loan balance Dec 2017: $750,000

Expected lump sum Dec 2017: $100,000

My income: >$1800,000 per annual (top bracket tax), my wife income: $0.

My goal is to buy the first IP of around $500,000. I’d like to structure my loan to allow me to buy the next IP in the next 1 or 2 years and invest sustainably.

My questions:

1) Should I deposit the lump sum of $100,000 to my HL account?
Doing so reduces my loan to $650,000 which will lower the non-deductible interest. My dilemma though is that my accessible equity would only be 0.8 * $895,000 - $650,000 = $58k, which is not enough for the deposits of the IP at $500,000 purchase price.

If I don’t put the lump sum in HL account, then I lose the saving in non-deductible interest. But then I have the assured amount for deposit to purchase the next IPs.

2) What is the best loan structure for the IPs?

This is the question of when to get the tax deductions benefit? If I borrow most of the loan under my name, I can claim the benefit now to improve my cash flow and accumulate deposit for the next purchase faster. But of course I pay most of CGT. If I hold the property in a family trust, I can minimise future CGT at the cost of having tighter cash flow. This may delays my next purchase. I read from the Property Puzzle that hybrid trust may be the best option here but want to get your opinions on this.

Thanks
Trung

 

From a tax and loan structuring point of view see my old
Terryw’s Ideal Loan Structure https://propertychat.com.au/community/threads/terryws-ideal-loan-structure.6016/

Slight modification for today would be to have the main loan PI.

2. Never heard of that book you mention, but you should probably avoid hybrid trusts. See a lawyer for the structuring question. Structure for ownership will depend on your personal situation now and in the future plus the location and type of property. And Just because the loan is in your name doesn't mean you can claim the interest.

 

"The Property Puzzle" was written at a time when you could still effectively lend through a Hybrid Trust. You really can't any more, it will restrict your investing significantly. The market has moved on significantly since this book was written.

You could restructure your loan slightly to be more accommodating of the $100k you've got available. Properly set up you can do some debt recycling (making part of your existing home loan tax deductible) and have funds for a deposit. Ideally $100k is a little short for a $500k purchase, but it can still be done.

 

Who is your current loan with, it may still be possible to do a top-up back to 90% with a small LMI adjustment.

Let's assume it is possible then 650 loan after paying 100k back into loan and let's assume only minor growth in the property, say it's now worth 900k. Their would be 160k in available equity.

 

I am with Westpac. So you're saying: pay 100k into the loan, then borrow 160k in equity + pay LMI for 90% LVR as a separate loan?

 

Outdated information seems to be the case with a lot of the books that I read lately lol. Even in the book Stuart did caution against using Hybrid trust.

Can you elaborate on what kind of restructuring? is it similar to Terry's strategy?

 

Thanks very much Terry. It looks applicable to my case so will study it in great details.

 

Both the lending marketplace and the tax environment is always changing and quite quickly right now. Reading a book published a few years ago will have good concepts and ideas, but don't assume the technical details are still accurate.

When Stuart wrote the book HDTs were already identified as risky for a number or reasons. Today they're virtually extinct because they're almost useless as a structure to borrow money through.

For structure, essentially what Terry is describing. Split your existing loan. One part is the balance of the deposit you've got available, the other part is the balance. Recycle the funds through the first part then use the money for investment and that portion of your loans become tax deductible.

It's essentially the same as paying off the loan to create equity, then borrowing against the equity. This process takes the 'borrowing against equity' risk out of the equation.

It's not difficult, but it does have to be done properly to turn your cash into tax deductible debit.

 

Cashout above 80% for IO is pretty much a dead duck now, but cashing out above 80% for P&I is still definitely achievable with Westpac.

When you pay LMI initially you pay a premium for it. Given your current LVR you had originally paid some LMI. It is possible to leverage back of this premium and pay what is known as an adjustment. It may be only say $1,000.

 

I just got an email from one lender, who i have never used:
Hi Terry,

Did you know...

AFM can still consider 95% LVR for interest only loans for investors.

 

Regarding structuring, is it better to use discretionary trust or personal names? I'm thinking to use personal names for the first one or two IPs to have good cash flow and use trust for properties further down the track. Is it a good trade-off?

 

That is a very complex question and something you need specific legal advice on.

 

And you know who the funder is for that mortgage managers product?

 

No, I have never used them, but just seem to be on their mailing list.

 

Pepper Purchases only.

 

Also resimac. Maybe for refi's in the right scenario.

 

Mortgage managers have some good niches. While they are 'just' rebranding the same lenders we already have access to, thru a mortgage manger policies are diferent. Pepper fund 80+lvr loans thru managers, and construction (think of another lender who does subprime construction?) for instance. Advantedge (nab) and other lenders products can go thru either mortgage insurer thru a mortgage manger. This can make a big difference to certain niches.