Purchase outright first before taking out mortgage

Discussion in 'Loans & Mortgage Brokers' started by Jacko, 1st Apr, 2020.

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  1. Jacko

    Jacko Well-Known Member

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    Gday all,

    Hope everybody is staying safe amid the COVID-19 situation.

    Got a question about mortgages. I was wondering it is possible to purchase a property with my own cash and then subsequently take out a mortgage? Is this possible and, if so, would the interest be deductible?

    Appreciate any feedback, cheers.
     
  2. Terry_w

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

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    Yes possible
    and no interest would not be deductible unless you used the borrowed money to purchase an income producing asset.
     
  3. Peter_Tersteeg

    Peter_Tersteeg Well-Known Member Business Member

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    It is possible, but in most circumstances you'd be better off taking the loan when you purchase. A couple of reasons...

    1. If you want to borrow a significant amount of money and borrow after purchase, you're going to be asking for a lot of cash. Lenders may be reluctant to do this and will want to understand the reason why. If you borrow at the same time as you purchase, they'll have no problem with it.

    2. If you're buying an investment and you want to use the cash later for a non-deductible purpose (such as wine, women & song, or other fun stuff), the loan probably won't be tax deductible. However if you borrow when you purchase, the loan will be tax deductible because you borrowed to buy an investment property (which is usually a deductible purpose).

    If you're buying the property as a PPOR and want the cash for a later tax deductible purpose, borrow upfront because you can debt recycle it later anyway.


    In essence, borrowing up front gives you a lot more options than borrowing later.

    The only reason I can easily see why you'd pay cash now and borrow later is if you need a really fast settlement or you don't have the borrowing capacity right now (but will later).
     
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  4. Jacko

    Jacko Well-Known Member

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    Thanks all. Sorry I should have been more clear. I'm considering buying an investment property but have heard that securing finance may be difficult under the current circumstances. Plus, I thought may be if I can offer a quick settlement without being subject to finance I would be able to get a better deal.

    Agree with you that ideally I should purchase with finance but just want to confirm though that if I take out a mortgage against the IP later, the interest would still be deductible?

    Cheers
     
  5. Terry_w

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

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    When you say cash do you mean cash?

    Not taking out of a loc or redraw?
     
  6. Peter_Tersteeg

    Peter_Tersteeg Well-Known Member Business Member

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    Deductibility would probably depend on what you later use the money for.

    A loan set up after settlement wasn't used to purchase the IP, you used your own cash for that purpose. If you use the money from the loan to buy a car or your own home, these (usually) aren't deductible purposes, so the loan wouldn't be deductible even though the security is an IP.
     
  7. Jacko

    Jacko Well-Known Member

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    So I guess what you are saying is I can't make the argument to the ATO that the mortgage is actually towards the IP and that I paid cash upfront simply to secure a better deal then.
     
  8. Terry_w

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

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    That is right. U cannot borrow to buy an asset you already own.

    But think outside the square
     
  9. Jacko

    Jacko Well-Known Member

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    Unfortunately I'm severely lacking in the thinking arena...any tips?
     
  10. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member

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    nah, Biz as usual for normalish borrowers with secure income at 80 % lvr

    ta
    rolf
     
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  11. Terry_w

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

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    Lol

    Who owns the money? If you and you defived it you could lend to a spouse who buys. This loan could be refinanced with a bank later.

    Seek legal and tax advice
     
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  12. Jacko

    Jacko Well-Known Member

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    So this is what it feels like to think outside! I didn't think such a maneuver was possible. Thank you.
     
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  13. Shazz@

    [email protected] Well-Known Member

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    ‘Borrow’ off a family member.
     
  14. Terry_w

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

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    But keep in mind if it is or was your money the ATO will deny any interest deductions.
     
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  15. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    A round robin scheme won't be deductible.
     
  16. Shazz@

    [email protected] Well-Known Member

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    Could the cash itself be used as security, draw a LOC against this, and convert this into a loan later?
    Once all of this is done, swap security to release the cash?
     
    Last edited: 3rd Apr, 2020
  17. Terry_w

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

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    Yes but if you have time to arrange that you might as well mortgage the property
     
  18. Peter_Tersteeg

    Peter_Tersteeg Well-Known Member Business Member

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    A line of credit is just a loan with a few features. The qualification criteria are the same as a regular variable or fixed loan (actually the qualification is higher, because a LOC is more expensive).

    If you can qualify for a LOC, you can qualify for a regular loan.
     
  19. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member

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    ESP seeing many LOCs are calulcated with repaymenst over 20 years

    ta
    rolf