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Tax Tip 61: How to borrow 105% on your first purchase

Discussion in 'Accounting & Tax' started by Terry_w, 19th Oct, 2015.

  1. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    To increase future tax deductions it is important to borrow as much as you can for investment purchases. Ideally you would borrow 105% of every purchase, including the first. See here to find out why:
    Tax Tip 60: Never use cash to invest
    https://propertychat.com.au/community/threads/tax-tip-60-never-use-cash-to-invest.4883/


    But this can be difficult where the first property will be an investment property. However it is not impossible as I can think of 3 strategies to allow you to achieve this.


    1. Borrow from parents
    This is the easiest way to do it. If you don’t have parents who can lend you can borrow or other family members or friends. This loan should be clearly documented and tax advice obtained as it will be refinanced later into the main loan.

    2. Use parents property as security
    For your loan of 105% of the purchase price of the new property you will have 2 forms of security - both your parent’s property and your new property itself. this involves cross collateralising properties. Different lenders do thing differently but your parents are putting their property directly at risk in doing this.

    3. Use Cash as Security
    You can also deposit a sum of money, say 25% of the purchase price, with the bank that is lending you the money to purchase. The bank can then take this term deposit as security and lend you 105% of the purchase price.

    example on the 3rd option.
    Tom buys a $500,000 property with $25,000 stamp duty and costs. Tom has $125,000 in cash.
    1. His mate tells him to take out an 80% loan so he can avoid LMI.

    2. HIs accountant says no, borrow 90% and LMI so you can maximise deductions.

    3. I say borrow 105% to avoid LMI and maximise deductions even more.

    Differences

    1. Borrows $400,000, interest is $20,000 pa at 5%

    2. Borrows $450,000, interest is $25,000 pa at 5%. LMI is about $10,000 too

    3. Borrows $525,000, interest is $26,250 pa at 5%.

    After 3 years the property is worth $660,000.


    Tom decides to move out of his mum and dad’s place and buy a main residence of his own. The effect would be:

    1. He used up all his cash on the investment property. He therefore has to borrow 105% of the new purchase price of the new property. He has $125,000 tied up in this property. He can still access it by borrowing against it, but it will cost him $125,000 x 5% $6,250 more per year in interest and this is not deductible

    2. Similar to a, except the extra interest will be just $85,000 x 5% is $4,250 per year. Plus the one of payment of $10k

    3. He would release the cash from being used as securty and the use it as deposit on the new property. This would mean he has $125,000 less borrowings for the main residence and $125,000 more borrowings for the investment property. That means $6,250 in extra tax deductions per year. At 37% marginal tax rate that is $2,312 per year extra cash in his pocket at 5% interest rate. Over 30 years or more (life of the property ownership) this could amount to a small fortune.
     
  2. neK

    neK Well-Known Member

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    Interesting strategy. Very creative!

    @Terry_w , if Tom puts $125k into a Term Deposit with the bank to use as security, wouldn't his total security be $625k ($125k + $500k)?

    Therefore $525,000/625,000 = 84%, therefore LMI is still payable (unless its an institution where they allow up to 85% no LMI?)

    Also, do the cash flow numbers stack up for this strategy in the initial years?
     
    Last edited: 19th Oct, 2015
  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    I think the bank would allow 100% LVR on the cash component and 80% against the property.

    Cashflow would be worse off in the early years, but longer term he should be ahead.

    The parental loan would be much cheaper!
     
  4. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    Or a combo of 2&3? Not many first time buyers have a 20% deposit for their first purchase.
     
  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Combo sounds good Jess.

    But this is not just relevant for first home owners, but could be also for those that decide to rent for a while between houses etc.
     
  6. neK

    neK Well-Known Member

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    When did you come up with this strategy anyway?
    Don't think I've seen you mention it before!

    And i think you're definitely right about the 100% on the Term Deposit.
    I did something similar when i sold my place several years ago and I had a fixed loan on it. I took the money and put it on a TD and the bank secured the fixed rate part of the loan against the TD so i wouldn't have to cop the break costs.... ended up copping the break costs in the end because i didn't find a property to buy within the 6 months.
     
  7. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Its been growing in my mind for a while. I had one client approach me who had 3 or so properties purchased while he was living at home with parents. Placing deposits down. Then he wanted to buy a main residence but had used up $hundreds of thousands of his cash and it was going to cost him thousands extra per year because of his poor structuring..
     
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  8. bonanzawealth

    bonanzawealth Well-Known Member

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    on example 3 if Tom decides to further purchase IP2 for $500k again instead of PPR, obviously he can repeat the process of the original TD of $125k again as long as he can service the debt right?
     
  9. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Yep - as long as he thinks the long term benefits will outweigh the costs.

    But he might have enough property to secure the loan at this stage.
     
  10. Blacky

    Blacky Well-Known Member

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    Thanks for the kudos :rolleyes::(:D:p

    https://propertychat.com.au/communi...mbursing-yourself-impossible.1737/#post-65499

    Blacky
     
  11. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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  12. Blacky

    Blacky Well-Known Member

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    I was just so proud I could introduce something new to you - I didn't want my thunder stolen :p

    Not everyday you get to teach The Guru something new :D

    Blacky
     
  13. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Another thing to consider is to use a deposit bond - as a temporary measure. e.g. going to auction you will need to pay 10% on the day. This could be funded via a deposit bond and then later settle with the full amount borrowed. It won't be practical to set up a term deposit and borrow against that for the 10% deposit.

    You could also negotiate the terms of the deposit to a lower amount - say $1000.
     
  14. Marg4000

    Marg4000 Well-Known Member

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    And here, in a single post, the main value of this forum (and Somersoft) is clearly demonstrated.

    No matter how knowledgeable or experienced, we can always learn new strategies.
    Marg
     
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  15. vjsingh

    vjsingh Member

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    Would this still be worth considering when buying a new PPOR, if it's possible it may become an IP in future? If there's not enough equity in other properties to access to pay deposit and costs, would putting cash into a TD as security and borrowing more on PPOR using TD as partial security possibly be worthwhile to keep the cash available for other things and perhaps maximise deductibility down the track if converting PPOR to IP? Will banks do this?
     
  16. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Yes, yes and yes.
     
  17. vjsingh

    vjsingh Member

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    Thanks Terry. Now to work out if we can wear the extra repayments for a while ...
     
  18. Elives

    Elives Well-Known Member

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    while it's in the term deposit you would be getting a lower interest rate? i think term deposits are 2-2.5% while ips are low 4's

    Saying that. i do think it'd a great strategy and have had it on my mind for a while to use for a family member when they buy soon. is it quite straight forward to release the deposit? when a higher valuation comes in? (equity pull).
     
  19. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Yes there would be a loss - so not for the faint hearted!
    Borrowing at 4% yet getting 2% for example.
     
  20. House

    House Well-Known Member Premium Member

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    Would it be possible to get a personal loan for something like half the deposit and closing ($25k) and then once approved consolidate it into the mortgage for the lower IR? How much of an impact would borrowing this money have on your borrowing power/servicibilty if you got the mortgage with the same bank?