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Help needed - loan structure

Discussion in 'Property Finance' started by Fortune Favors the Bold, 3rd May, 2016.

  1. Fortune Favors the Bold

    Fortune Favors the Bold Well-Known Member

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    Hi folks,

    I need some help figuring out the ideal loan structure for my situation.

    Here's my specific situation, with which some of you will already be familiar:

    My partner and I are currently living overseas in south-east Asia. She's Australian and I'm a US citizen, pending permanent residency in Australia. She's currently working for the Australian government (earning AUD) and I'm working for an international organization, earning income in foreign currency. We intend to remain overseas for at least one year, and then return to Australia.

    Because of my US citizen and pending permanent residency in Australia, we've thus far been advised that any property purchase should be in her name, so that she can take advantage of both negative gearing and CGT exemptions and so we can avoid any additional fees (e.g. additional stamp duty) or restrictions resulting from my nationality/residency.

    In addition to our earned income, I also have a shares portfolio in the US, the income from which we intend to use to help pay our mortgage, though with recent changes most if not all lenders are no longer willing to consider overseas shares income as part of their serviceability calculation.

    After significant struggle (due mainly to my nationality, residency, and foreign income), we've managed to receive approval in principle from two lenders - Bankwest and ANZ - and now they're asking what loan structure we want for the actual application. This is where we're currently a bit stuck and have been unable to receive clear advice, despite having consulted a range of sources.

    Our plan is to buy a house while we are overseas - in my partner's name - and rent it out for at least the period during which we are overseas. Very likely we will continue to rent it out in the mid to long term, while renting cheaper accommodation for ourselves elsewhere, to continue to take advantage of the negative gearing (against my partner's income).

    Unfortunately it seems that we will be unable to establish it from the get-go as a principle place of residence, so for now it will have to be classified as an investment property both for loan and tax purposes, and we'll have to figure out a way to establish it as a PPOR some time in the future so we can qualify for CGT exemptions - for instance by renting it out for a year, then moving in for six months, and then renting it out again (we had initially planned to buy, live in for a short time to establish as a PPOR, move out, rent out, take advantage of 6 year rule for PPOR/CGT, and negatively gear).

    So, with all of this in mind, the lenders are now asking us what loan structure we want. We're stuck with taking an investment loan for now - because we can't establish as a PPOR. But how do we go about deciding about P&I vs IO, fixed vs variable vs split, etc?

    The lenders are suggesting an initial IO period of 10 years, followed by P&I. Is there any reason why we ought to be considering a shorter IO period?

    The lenders are also suggesting that we split the loan - with the majority fixed interest and the minority variable. Is this a reasonable approach? What are the arguments in favor of fixed, variable, and split?

    I know that is complex and somewhat vague, but I'm grateful for any clarifying input.

    Thanks!

    P.S. - Bankwest vs ANZ? ANZ will have higher rates...
     
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    The loan structuring is the simple part as this is pretty straight forward.
    80% LVR IO loan with a 100% offset.

    You lend her the 25% deposit (assuming you keep finances separate). After getting legal and tax advice.

    = 105% borrowings.

    later on she refinances your loan with the bank and pays you back.

    Being a non resident raises some tax issues, but this sounds like it may be temporary.
    Tax Tip 37: Withhold tax on interest you pay to overseas entities


    If you intend to invest further I suggest multiple splits like
    Tax Tip 13: Simple Loan Structuring Strategy
     
  3. Fortune Favors the Bold

    Fortune Favors the Bold Well-Known Member

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    Thanks so much Terry.

    Three questions:

    1) What are our options if she has already paid the initial 10% at purchase from her own account? Can we write up a loan document between the two of us, backdate it, and have it work retroactively?

    2) With the remaining 15% (10% remaining deposit + 5% stamp duty), if I "loan" her the money what the should the loan document look like, what rate should I loan at, can we prepare the document ourselves, etc? What evidence do we need to provide that I actually loaned it to her and that she's paying it back?

    Yes - I think the tax issues for me will be temporary. Hopefully I'll get my PR soon.

    Regarding fixed vs variable vs split - any thoughts?
     
  4. Fortune Favors the Bold

    Fortune Favors the Bold Well-Known Member

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    Also, any thoughts on fixed vs variable vs split loans at this point?
     
  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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  6. Fortune Favors the Bold

    Fortune Favors the Bold Well-Known Member

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  7. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    if you remain mainly variable at this time you will have lots options to split out later with most lenders, so that you can look at a debt recycling strategy when the debt becomes non deductible.

    Lenders love fixed............... you arent likely to refinance

    ta
    rolf
     
  8. Fortune Favors the Bold

    Fortune Favors the Bold Well-Known Member

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    So go 100% variable for now, anticipating the option to fix in the future?

    With ANZ we'd be on their Breakfree package - so I think we can move to a split loan after settlement without fee. Does that sound right?

    Also, why are fixed-rate loans currently cheaper than variable rate? Is this normal?
     
  9. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Only you, or your wife in this case, can decide on whether to fix or not - you need your crystal ball
     
  10. Fortune Favors the Bold

    Fortune Favors the Bold Well-Known Member

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    Terry - can my wife also borrow ongoing loan repayments from me?
     
  11. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    She can, but there are various consequences.
     
  12. Fortune Favors the Bold

    Fortune Favors the Bold Well-Known Member

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    So Bankwest is offering 5 years IO, variable or split (our choice). ANZ is offering 10 years IO, variable or split (our choice).

    Bankwest's rates (through a Broker) are much better than ANZ (through a "mobile lender").

    What are some compelling reasons why we should choose ANZ over Bankwest?
     
  13. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    For ANZ
    An extra 5 years IO.
    Good valuation system for increases
    Good LOC product
    Generous extra discounts (at times)
    branches
    a more professional organisation