Scenario Questions - Two Properties in Sydney

Hi all,

First post as I've just stumbled onto this forum and seems to be full of people with decent ideas about property and investing!

My questions are along the lines of:

We have exchanged contracts for OTP vacant land/ subdivision site out in NW Sydney. Registration and settlement expected mid-late 2017. We would then build a house on it, occupy it as PPOR mid 2018.

Between now and then we are planning on putting a deposit down on a OTP apartment for settlement late 2018/ early 2019 then making that our PPOR.

How does a bank view that when it comes to applying for a loan for the block of land and subsequently the build loan on the same property? Does the future OTP apartment purchase affect the assessment for the earlier home loan?

I'd think it won't due to the fact that the assessment for the future apartment purchase loan should be done at that future point. Variables such as turning the PPOR into an investment if possible (unaccounted cash flow) or selling said PPOR and moving into the apartment obviously would be difficult to account for this early. I've been wrong many times before (lucky its never cost me a 10% deposit!), so wouldn't be surprised if I've got the idea all wrong either.

Ideally, we would like to keep both but if necessary when going for the second loan, could sell our PPOR and pick up a single loan for the new apartment so not worried about that. Just don't want to be caught out when applying for this first loan coming.

Just after some clarification/ guidance if anyone has done anything similar or has an idea how things like the above generally work out.

Thanks,

Jae

 

Yep. The lender will need to account for the servicing of both the Otp and house. That could be by renting out either one, together with your payg income.
Selling isn't a strategy they will accept if you can service both however. And bridging won't work until the house is built.

 

Thanks for the response tobe.

Do you mean they will consider the servicing for both the house/ land and the OTP as part of my first loan application even if the OTP Apartment is 18 months + down the track?

What do you mean by selling is a strategy they won't accept? That would be the easiest route no? In order to get approval for the OTP Apartment loan that is.

But yes the goal is ultimately it will be as you described, payg + rent.

 

Agree with Tobe - the lender will want to see that you can service both debts as you're committed to both purchases.

Purchasing off the plan comes with risk - and purchasing two amplifies that risk. In order to mitigate it to some extent - aim to have a large deposit for each (in case there's issues with the valuation or security type). Hopefully your borrowing capacity is reasonably strong too.

Cheers

Jamie

 

Thanks for the info Jamie.

We have 20% for the Riverstone property, 10% currently for the Lane Cove one and will have the next 10% by 18 months.

Servicing is not an issue from what I can see but will speak the bank again for clarification.

 

Lenders will want to know your debts. Debts are loans already taken out. If you haven't taken out a loan yet you have no debt. If you haven't settled you can't count the property as an asset either.

But you should make sure you can service both and also assume servicing will tighten up.

One off the plan commitment is dangerous. Two is twice as dangerous.

 

Thanks Terry, that makes sense.

We haven't taken out a loan for either yet and subsequently, never considered either an asset.

Definitely understand that OTP is considered more risky than buying an existing property and not denying that.

Riverstone land is nearing completion and due for rego in the next few months then we chuck a house on it soon after. House and land around are going 100k more than what we have allocated to land and building cost inclusive of buffer.

Lane Cove will be the riskier of the two however will cross that bridge in 18 months (albeit doing calcs/ forecasts now and confident we could service both even if values went down).

 

FYI, our bank got back to me. They advised they would review purchases separately and hence, the apartment OTP will not be considered a debt when going for finance on the land and house.

 

I have it in writing (e-mail confirmation), spelled out the scenario too!

 

I've had clients with this exact scenario previously. Although the assessor won't approve both loans, to get the first one over the line you need to be able to show, generally at least, service on the 2nd.

To @Terry_w , although it's not yet a current debt my experience/interpretation is it's covered under 'any future changes' question under nccp compliance stuff, so needs to be disclosed on the first app.

Selling isn't a strategy because you can't usually onsell Otp, (until after settlement) and residential finance is generally long term, 30 years so asking them to approve a long term loan that your going to sell in the short term means they say no or refer you to commercial.

 

Good clarification there tobe.

What you say makes good sense. Its interesting that you mention the 'experience/ interpretation' component. Maybe that is the route the bank has gone.

 

I'd say it's just sales to the person you spoke to at the branch. Speak to their manager or compliance person and you will get a response similar to mine.

 

Can we address another point here. Why is the OP taking this risk? It is just not worth it with where we are in the cycle IMO.

As to whether it should be included in the application. Hmmm. My take is you would have a duty of care to ensure servicing was evident based on holding both properties (even if not disclosed in loan application) so a calculation and notes recorded in your preliminary assessment I think. .

I'm dealing with a similar situation at the moment where a client has bought 2 off the plan properties. Their thinking was they would be able to sell the 1st land and house package before the vacant land ( 2nd property) was due to settle. Problem! We are now only 3/4 through construction (6 months late) and the other property is just about to register (3 month earlier than anticipated).

Servicing is ridiculously tight (using future rental income on an incomplete property) and the balance of funds to complete are being "gifted" by parents. Really not ideal and if declined may be looking at losing the 10% deposit.

 

Eek. Not many lenders apart from the one that's doing the build will look at potential rent in that scenario.

Best of luck with it.