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Small Subdivision/Development Finance

Discussion in 'Property Finance' started by urbanista, 15th Jun, 2016.

  1. urbanista

    urbanista Member

    Joined:
    12th Apr, 2016
    Posts:
    9
    Location:
    Melbourne
    Bought an old house, settlement in about 2 months. Now need to decide how to structure the finance.

    The plan is to move in for 2 years while getting a DA approved by the council for two townhouses. TH1 will be the PPOR, TH2 will be sold or become an IP. To keep things simple, assume TH1 and TH2 have the same land and building costs.

    The title is in joint names.

    Is there any way to structure the loans that land holding costs for TH2 (while construction is in progress) are tax deductible? We have large amount of cash on hands from the sale of the other PPOR. Our initial plan was to just pay cash for the house, then borrow for construction. But now I am starting to think it is not the best way.

    So we can instead put 20% deposit and borrow 80%, and put cash into an offset. But then when we draw it for construction, can we capitalise 100% of the interest up to the value of TH2 or only 50%?

    For the sake of exercise, purchase price incl.stamp duty 1M, total construction cost for two TH 500K (250K+250K).

    Do we pay cash for the purchase or do we take 80% loan?

    Really appreciate your help, guys. Also, if anyone could recommend a mortgage broker in Melbourne, that would be great.
     
  2. tobe

    tobe Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    883
    Location:
    Melbourne
    Take 80% for the purchase. When you have plans and or subdivision, get 80% on the completed value of each property, and draw down as progress payments.

    If you have excess cash, put it in the offset.

    You would need advice about holding costs being deductible, from a finance perspective it's possible up to 80% of the value.
     
  3. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,764
    Location:
    Perth WA
    The finance is the easy part, it's the claimability that's the issue.

    If you subdivide it first, that would be fine I imagine, but if you're constructing on one title, I'm not sure.
     
  4. urbanista

    urbanista Member

    Joined:
    12th Apr, 2016
    Posts:
    9
    Location:
    Melbourne
    Thanks, tobe & Terry

    So tobe, what you are saying is, get 80% of the purchase price now, then after DA is approved, refinance and increase the loan by up to 80% of combined land + building costs. All cash goes into an offset account. Makes sense.

    I am reading Tax Tip 27: Borrowing to knock down PPOR and build duplex and rent one. Super helpful.