Loan Tip: Borrowing to Buy a Property without Mortgaging it

Loan Tip: Borrowing to Buy a Property without Mortgaging it

It can be possible to borrow to buy a property without actually mortgaging the property being purchased.

Note there is a distinction between loans and mortgages – they are not the same things. A loan is borrowing money, a mortgage is the security for that loan.

The only way to buy a property without mortgaging it is to

a) Pay cash, or

b) Borrow against other property, or

c) Get an unsecured loan

Paying cash may not be ideal for tax reasons, see Tax Tip 62: Paying Cash for a property and then getting a loan Tax Tip 62: Paying Cash for a property and then getting a loan


The only way to borrow to buy a property without mortgaging it is to:

a) Borrow against other property to buy it, or

b) Get an unsecured loan



Example 1

Bart has a $500,000 main residence with about $100,000 owing on it.

He could potentially borrow up to $400,000 without needing to pay LMI. He has $100,000 owing so he would still have $300,000 in borrowing potential.

Bart borrows this under a different loan split to the $100,000.

Bart uses the $300,000 to pay for the property.

Bart has now borrowed to buy the new property and will be able to claim the interest on the $300,000 loan if the property is available for rent. The $300,000 loan is secured against Bart’s main residence and the investment property is unencumbered.


Example 2

Lisa has no money, no job and no hope of borrowing from a bank. But she has a job interview soon and expects to be working soon.

Her parents agree to use the redraw on their main residence loan and lend this to Lisa so she can borrow to pay for her property.

The parents are being charged 3% pa in interest by their bank so Lisa borrows from them at 3% under a written loan agreement, but the loan is unsecured.

Lisa can claim the interest on the loan if she rents out the property, which she soon does. The rent covers the interest and it pays itself off even though Lisa still hasn’t found that job.

And the property is not mortgaged even though Lisa borrowed to buy it.

 

This is how I bought my last property while unemployed. Everyone was confused about how I got a loan lol

 

Banks always want a return on and of their investment!

 

for this scenario, do the parents need to declare an income (and matching deduction on their own loan) or do they not need to do that? Say they had the cash and loaned it at a low percentage to their daughter, I presume they would need to declare the interest in that case?

Cheers,
Inertia.

 

The parents only need the cash they want to lend. if they will borrow to onlend they will themselves need to qualify for the loan unless they already have a facility in place.
Any interest the lender receives would be taxable income.

 

If parents borrow money and onlend to a adult child then :
- The parents will have assessable interest income and a offsetting interest deductible for the interest incurred. The two may match. Or there may be a differential.
- The child will incur a interest cost which may be deductible (or not)
- A loan agreement should exist and the loan advance settled to acquire the property
- The terms of the loan should be complied with on arms length basis.
- There should be an accounting for the loan transactions and balance
The ATO do accept that there can be instances when the borrower maintains the lenders own loan. But care must be taken.

Such a loan can be refinanced at a later date (eg child gets a job). The lender would likely want to determine if that loan was maintained well. I have seen some people try to avoid telling a lender and this wont work. Lenders will want to know why they are paying Mum & Dad. Mum & Dad is no different to refinancing a existing CBA loan. A refinance needs to discharge the old loan to be effective. You cant just borrow new loans and eventually this ends up with Mum & Dad.

Whether the loan is secured is a matter for the lender. I have seen unsecured loans intended to be short term. In other cases I have seen a unregistsred mortgage. The lender could lodge the mortgage charge on title later. This used to be a popular way to avoid or defer stamp duty which has been abolished.

Other forms of security can also be used eg Personal property security register : Personal Property Securities Register
Mum and dad could lend to assist buying a car and have an interest recorded. This may limit sale of the car.

 

Like example 1. I want to do that in the future