Here's My Loan Structure, It's A Bit Different To Most - Please Tear Me To Shreds!

Discussion in 'Loans & Mortgage Brokers' started by DCO90, 11th Jun, 2017.

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  1. DCO90

    DCO90 Well-Known Member

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    Hi, so I'm hoping people can critique my thinking! Be MEAN! I've also put a few questions, in bold.

    So I'm finally moving out of my parents home at 26 with four IPs. All in QLD (where I live). All <$250k purchases.

    To move out, I just bought a PPOR (my 5th property) for ~350k. It will settle early July. I'm getting engaged soon so I bought it with my partner. She has a 99% share, I have a 1% (structured as 'tenants in common'). I did this so I only paid 1% stamp duty (she has never owned property).

    1. Can someone point out where to find out more about the tax implications of being married? All the IPs are in my name, but it might be better to deduct from her income? We earn roughly the same and want do my own tax, even if I have to spend hours learning.

    All of my lending is with NAB. Two are fixed at 3.99% (one year). Two are variable at 4.1%. I've yet to finalise the rate for the PPOR. All are principle and interest! Being with NAB means I've actually built-up solid relationships with my branch manager, which has proven very getting finance creatively and quickly.

    2. I've read on propertychat about 'splitting' PPOR loans. Why is this useful? Should I do this?

    3. Are my rates OK? I'm at 86% LVR, so keep that in mind.


    All of my investments are +'ly geared on P&I (when you factor the tax benefits).I believe P&I will ultimately save me money in the long run. Paying principle off is 'paying myself'; I gain equity and ultimately pay less interest as I pay down the loan. I can always borrow against this equity so I can still build the portfolio just as fast as IO. I don't embrace IO loans; I think they are shortsighted as I plan to keep my IPs for a long time. I've also been able to negotiate a further reduction on interest rates going P&I.

    4. Can someone point out why this logic on P&I is not sound? If it is as smart as I believe it to be, why isn't it more common?

    I'm not sure if I've 'crossed collateralised' my loans, as I am not completely sure what this is, but I believe I have, as they are all separate loans and I've alway relied on equity to purchase further properties. My LVR across the portfolio with the new property purcase will be at 86%, and I'm only putting $12k (3.3% of the purchase price) physical cash into it. Yet, I only had to pay just over $1k LMI. How? All the LMI I've paid to date with NAB (over 19k now) is considered when getting new finance.

    5. Why are other investors not doing the same? Running their portfolios at <80% LVR to build them faster? Sure, I could wait until equity increases, or I could put in more cash, but 1k in mortgage insurance is not much to pay to build it up faster than waiting to get under 80%. LMI is tax deductible too... Sure it's more risk, but remember all properties at +'vly geared and P&I. I can always change to IO if the worst happens....

    Thanks for taking the time to read about my situation! I hope reading about it provided you with some benefit too :)
     
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  2. DCO90

    DCO90 Well-Known Member

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    Oh! one last question.

    6. My PPOR purchase is a 800m2 block in Logan City (QLD). The council has min lot size 350m2, but needs an average of 500m2 or I will have to submit an 'Impact Assessment'. Is it worth a try? What should I be aware of before attempting a 'splitter'?
     
  3. Johnny Cashflow

    Johnny Cashflow Well-Known Member

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    5 property is pretty good so well done on that!

    As for the missus, if you live in the same house for 2 years and then break up she is entitled to 50% of your possessions

    Rates sound good.

    Not sure if you have x collaterised you need to look on loan account info if one loan is securing more than one property if it is then you have. It's preferable not to do this for a few reason but sometimes it can help you borrow more.

    LMI is a good tool to use nothing wrong with it a lot of investors do that.
     
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  4. Foxdan

    Foxdan Well-Known Member

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    Why did you structure it so you only own 1%? What was the logic behind that?
     
  5. 158

    158 Well-Known Member

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    Moving out of home and getting married is your biggest mistake. Why would you give up the freeloading status and single life?

    The rest can be fixed with less heartache!

    pinkboy
     
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  6. Hodor

    Hodor Well-Known Member

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    Because you can do the same with an offset with more flexibility. Look up differences between offset and redraw, they are not the same.

    Better cashflow.

    You would now have more tax deductible debt than you do post PPoR and you continue to make this worse! Huge savings to be made

    Why give money back to the bank if you are still accumulating more debt?

    Given rates are now quite different for IO loans you might need to consider this vs the above.

    You are doing awesome for a 26yo
     
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  7. Hodor

    Hodor Well-Known Member

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    Why would you do this?
     
  8. Trainee

    Trainee Well-Known Member

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    The only way lmi could be that low is if youre crossed.

    Does the qld stamp duty concession cover spouse / de facto as it does for nsw?
     
  9. Bris Jay

    Bris Jay Well-Known Member

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    I was about to post that you can't purchase with someone else if they already own a property and still get the FHB concession but I've just looked at the info page on the concession and it appears to be different from what it stated a year ago.

    Used to say that all persons purchasing the property need to eligible but now it's changed to simply say that each person pays their applicable stamp duty based on their own % and eligibility.

    Seems like the 99% in her name will work but I would definitely look to change that before settlement and just put it 100% in her name and both go on the finance to get the loan. It just seems messy. The only benefit is that she can't sell it without your signature. If you're getting engaged soon then things will already be messy if she wants to make your life difficult...
     
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  10. Terry_w

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

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    a) 99/1% ownership – see my views here:

    Legal Tip 68: Avoid 99%/1% ownership of property

    https://propertychat.com.au/community/threads/legal-tip-68-avoid-99-1-ownership-of-property.3237/



    1) No tax implications really except you can only claim one main residence between you. You cannot claim her expenses and she cannot claim yours. You are still separate legal entities.

    2) Splitting is useful for a number of reasons, some tax and some loan related. If your loans have different purposes it would be best to split as it is easier to keep track. If you want to fix part of the loan and keep part variable you would need to split.

    3) Is your main residence paid off? Keep in mind paying PI on investment loans is diverting funds from the paying off of the main residence. This is costing you more in non-deductible interest and it means you are paying more tax. You have to work out if this extra tax is more than the interest savings. See this old post of mine from when the rates on I) v PI were the same:

    Tax Tip 25: Only Use Interest Only Loans To Acquire Investment Properties

    https://propertychat.com.au/communi...-loans-to-acquire-investment-properties.3144/

    4) Cross collateralising securities happens when one loan is secured by 2 properties.

    5) Many would be doing the same, but many have plenty of equity with some having more equity than borrowing power. In these situations paying LMI would be a waste of money:

    Strategy: Avoid LMI where your Servicing is Limited (and you have the cash)

    https://www.propertychat.com.au/community/threads/strategy-avoid-lmi-where-your-servicing-is-limited.18960/

    6)

    You probably won’t be able to change to IO when your serviceability begins to tap out and you certainly won’t be able to change when the worst happens.
     
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  11. JasonC

    JasonC Well-Known Member

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    Deductibility is determined by who's name is on the title - as they are all in your name, then any loss (after income) for the IP's will be against your name. Only way to change it would be to do a spousal sale, or sale to a trust which would possibly trigger stamp duty, CGT etc and other expenses.

    This is useful to keep track of loans that relate to different purposes. ie. You could have:

    Security (PPOR)
    Loan 1a - PPOR (non deductible) paying P&I
    Loan 1b - Deposit IP1 (paying IO)
    Loan 1c - Deposit IP2 (paying IO)
    Loan 1d - Shares (paying IO)

    Security (IP1)
    Loan 2 - IP1 (paying IO)

    Security (IP2)
    Loan 3 - IP2 (paying IO)

    And then the funds are all clearly separated.

    As mentioned - if instead of paying P&I you had been paying IO and saving the extra in a offset account you would have a lot more flexibility (and potential tax savings). eg. Now you are buying a PPOR you could have transferred the money from the offset accounts into a offset account attached to the new PPOR loan and then effectively this portion of debt becomes tax deductible.

    Too late now. I'd sack your tax advisor. Maybe find a new one and talk to them about debt recycling?

    Note now there is growing different in rates available between P&I and IO - so it may be worthwhile to do your own calculations.

    I'm sure lots of investors have been using LMI to grow their portfolio. My impression is that previously it has been a worthwhile (if somewhat aggressive) strategy.

    What's the definition worst happens? Lose job? That's precisely the time you can't change to IO as you wouldn't meet serviceability. Also serviceability could be worse on IO than P&I (as the bank calculates servicability from the end of the IO period - eg. get a 30 year loan, 5 year IO, then 25 year P&I - the servicing requirement when it switches to P&I will be higher than if it was 30 years P&I).

    You've done very well, however you would have really benefitted from talking to a tax advisor or a savvy mortgage broker before you set up your loans.

    Regards,

    Jason
     
  12. God_of_money

    God_of_money Well-Known Member

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    I cant see the benefit of 99/1 split. You are still liable for land tax in QLD as a whole entity. Liable for the whole mortgage. You can lodge a caveat against the property if you are worried untoward circumstances
     
  13. Terry_w

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

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    see s22 Land Tax Act QLD
     
  14. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    all with NAB ........... Stands for

    Need another bank a while I ago I suspect.

    Doing "anything" with NAB like an IO change or a loan split requires a full new loan app each time...........

    ta
    rolf
     
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  15. tobe

    tobe Well-Known Member

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    What Rolf said. Your creative bank manager relationship is only there because you keep going back, and you still pass the nabs calculator. The bank manager hasn't done anything special.
    Next time, or the time after, it'll be a different story. 5 with one lender sounds risky to me.
    Great place to be/problem to have at your age though.
     
  16. DCO90

    DCO90 Well-Known Member

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    Thanks so much for the responses! Great stuff :) Really helpful.

    A few things to reply to (since some are similar, I'll just quote 1 each time)

    First:
    True love, I guess ;)

    Second:
    I did it to save about $3.6k on stamp duty. She's never bought a home so can get the FHB concession. If I go 100%, we can't get the concession. If we go 100% her, we can't access my equity. Seemed the best way to go.

    Though some have expressed concerns. I can trust her 110% so I am dismissing 'she-wolf' warnings, but what is concerning is the land tax implications raised.

    Is this possible to do? Is this legal? So once we've signed fiance, with a 1% and 99% split, I just get my solicitor to put it 100% in her name? Can anyone confirm or elaborate? :)

    Third:
    What tax advisor? Haha. Yea.... You've gotta have one before you can sack one.... I'm self-taught... gulp... I'll console myself by hoping that the money I've lost in bad structure is negated by the money I've saved in fees..... lol.

    Fourth:
    Good point, thanks. So it's all to do with flexibility and bookkeeping? I'll see what NAB can do. Though, it sounds like NAB is the anti-Christ of banks from the comments... I'm a stuck with NAB right now due to what I've paid in LMI. Gotta get the portfolio down to under 80% LVR until I'm in a position to negotiate/allow my eyes to wander...

    Fifth:
    Since I'll almost certainly be married at some point during the next financial year, is it worth looking into trusts/setting one up to spread tax deductions and mitigate personal risk? My four investments are only worth about $1mill, my PPOR another $350k. I am looking at doing SMSF property stuff soon too. I've only got $50k super, but I'd like to buy <$250k properties so that 20% of the purchase price :) Can anyone point me in the right direction to find out more about this?

    Sixth:
    Ahhh... I see the light! I guess it didn't matter to me before because I was living with my parents. It matters now though, since I have a PPOR. The problem is though, even if I can secure an identical rate, can I trust myself not to spend that cash. I also have another addition in addition to the property.. travel....

    Again, thanks for your support :)
     
  17. Bris Jay

    Bris Jay Well-Known Member

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    I can assure you that you can access your equity and give it to her as a deposit for the property. I can't comment on how LMI is affected but that could be your only issue. Perhaps they are spreading the LMI across your properties so you need to have an interest in this one too?

    Ideally, you use your equity to pay the 20% deposit and she borrows the balance in her name. The bank will register their interest in the property in only her name. In a perfect situation, you "loan" her the deposit and then if you ever move out of that place, it becomes a IP for her with 100% financed for negative gearing. You have to declare the income from the loan to her and she can claim it. If you pass the rate onto her then for the time that you are living in the house, it's cost neutral and there will not be a tax bill.
     
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  18. Terry_w

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

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    You can always settle at 99/1% owners, get the grant, wait the appropriate time - probably 6 months at least and then she can purchase your 1% from you and you can come off the loan. This will help your serviceability.
     
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  19. DCO90

    DCO90 Well-Known Member

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    Ahh.. that's a good idea :) What will the cost of this be? It's not a grant by the way, it's just a way to pay less stamp duty. I guess that could be called a grant?
     
  20. Terry_w

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

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    Well the cost will probably be around what you save in stamp duty in the first place.
    Conveyacing
    discharge mortgage and new mortgage
    new loan fees (if any)
    stamp duty on 1% of the property (buyer)
    CGT on 1% of the property (seller).

    But it may still be worth doing because it would get you off the loan.