Loan Tip: Borrowing to Buy a Property without a Mortgaging it

Discussion in 'Loans & Mortgage Brokers' started by Terry_w, 1st Jan, 2022.

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  1. Terry_w

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

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    It seems many get confused over the terms ‘mortgage’ and ‘loan’ which 2 different meanings but are sometimes related to each other. The mortgage is the security for the loan and the loan is the borrowing of money.


    So how do you borrow to buy a property without actually mortgaging that property?

    2 ways:

    a) Borrow against other property, or

    b) Borrow from a related entity


    Example

    Homer has a home loan of $800,000 on his $1mil property.

    He has $800,000 cash from somewhere (if doesn’t matter where).

    He wants to buy a $400,000 investment property

    Homer could use the cash to buy the investment property – which may not be a good idea.

    Or he could debt recycle and pay his loan down, in full, and redraw $400,000 to buy the property. If he does this there is no need to mortgage the investment property – it will be unencumbered. But he has still borrowed to buy it.


    Example 2

    Bart wants to buy a $400,000 property and he notices his dad has $400,000 left in redraw. Bart can enter into a written loan agreement with Homer and borrow that $400,000 to buy a $400,000 investment property. Homer doesn’t want any security for the loan (which is probably a bad idea) so Bart’s investment property is unencumbered. There is not mortgage on it, but it has been acquired with borrowed money.