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

Probably not possible because if you could consolidate it right after settlement you would just incorporate it into the main loan. If you buying an undermarket and can get the valuation up right after settlement it may work.

 

Would it be right to say this strategy (borrowing 105% even though you have the deposit in cash) is essentially the investor paying a price to get flexibility? ie, the additional interest paid for borrowing more in return for have their cash free to use if needed.

If so, if in 3 years time the property has increased in value, couldn't the investor at that time just get a revaluation and pull out equity to free his/her cash?

 

Important to note that if you're securing the deposit with cash, these funds are not free to use if needed.

 

If done correctly the initialy loan, the small one, could be refinanced with deductibility of interest maintained.

If you just borrow money the interest may or may not be deductible depending on the circumstances.

 

questions, if i actually were to borrow 20% deposit (cash) from my parents, and pay them 8-10% p.a for the money can i claim this as an investment expense?

another scenario if i pay my sister to clean a property that i have which is a short term rental, can i claim this?

both scenarios they don't have an abn

Cheers, Elives

 

Yes you can borrow from family and claim the interest. But you should seek legal and tax advice.

You can also contract with your sister. If she doesn't have an ABN you might have to withhold tax.

 

when the cash is in the term deposit isn't there a shortfall? etc he's paying 5% interest but the term deposit is only making 4% so he's loosing 1% on 25%, is this correct?

 

Yes

 

in that case...

"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."

you say the pro is $2,312 p.a extra cash in his pocket.

but if it's common for TD to be 1% less then the interest rate he's loosing $1,250 p.a from get go. i suppose working off 37% margin he gets to claim back $462.5 so really the real loss would be $787.5 p.a from get go. is this right?

Cheers, Elives

 

There would be a loss until the term deposit can be released as security. Then there would be years of tax savings.

 

Terry if using parental guarantee for 105% does this limit the amount the bank will loan you. I.e They will loan 500 with the guarantee but if you had a 50k deposit they would still only loan you 500? Effectively only moving your purchase price up by 50k?

 

Of course there are many reasons why investors should seek to NOT invest 100%+ in property.

ie : - Those with no compelling tax issues
- Those who have liquidity and chase income

A old retired person being a great example Achieving neg gearing beyond income doesnt help. In fact achieving neg gearing lower than $21500 approx may be of no use and just increase cash outflows.

I see a day coming when people will start to measure and preserve existing tax losses rather than just jumping in to maximise them. Thats my biggest concern about media proposals to limit neg gearing...What will they do to prevent avoidance by maintaining existing debt artificially ? I reckon if they do one they will have to consider something...Thats why UK did what they did.

ie : Could IO loans for IPs be a tainted loan or subject to a form of preservation ? eg : Banks told that IO loans must end for investors in "X" years. ?

 

It will be based on serviceability

 

Borrowing 105% for IP makes perfect sense, but may be difficult to do everytime.

Take this example.You want to buy $800k IP. Bank will lend you $700k. So, you need to contribute the remaining $140k in cash ($40k for stamps). You have $140k cash in bank, so can complete the deal, but would prefer to borrow 105% to max deductible debt.

What are the options to borrow the remaining $140k to end up with $840k of deductible IP debt?

1) You cannot borrow the additional $140k from the original bank as you are maxed on servicability with them.

2) You cannot just approach another bank and borrow $140k, as this would be another loan application, credit file hit, and may impact the pre-approval on the $700k with original bank (even if you lodged $140 in cash as security for loan).

3) You could lend or gift $140k to trust, and borrow it back, but that seems raises a range of tricky tax issues given you are the source of $140k.

Any ideas?

 

Equity from another IP

 

That would certainly work if you could access the equity through a simple redraw. If you need to access equity by submitting another loan application, that is problematic, as may impact pre-approval you have for the $700k (using my example) with your primary bank.

 

The only option may be a relative

 

I am keen on this! Anyone testify if this still works in COVID-19 times and used it themselves/for clients recently ? Much appreciated. Cheers.

 

which part?

We are going one at the moment - 100% LVR for the first property

 

Borrowing 105% with cash secured term deposit part.

Was it 100% LVR on first property as in no Equity from PPOR or parental guarantee ?

I have spoke to 3 brokers so far in the possibility of using cash secured term deposit as down payment and they don't seem to have a slightest clue what I am talking about.

I have the 20% down but would like to borrow all the purchase price ,plus costs .Its my first property as well and will be an IP.
Thankyou for replying Terry.