Tax Tip 74: Selling a property that secures other loans

Example 5
Rob, Bob's neighbour seeks Terry's services

 

You should check you loan documents but it sounds like it may be secured against the ppor.

 

This is brilliant stuff @Terry_w
Only part I am unsure of is if buying PPOR first.

In your example this would not be possible as all the funds (we know of anyway) are secured against properties.

For this to work, aren't you going to need A LOT of equity.
For example say you buy a new PPOR first unless I'm missing something aren't you going to need 20% deposit, closing costs AND 260k additional equity to create the LOC?

On a 700k purchase your looking at 440k equity required which I'm sure most people do not have. Unless I am missing something with regards to creating the LOC split?

 

Which example Albanga?

Yes you will need some equity to do this. But you may be able to use parental loans, spousal loans, family pledge loans etc.

I can feel another strategy coming together...

 

Haha love it Terry.
I meant the example in this where they have a current PPOR worth 500k.
Mortgage remaining = 100k
LOC = 260k
That would mean only 40k useable equity towards the New PPOR.

There was no value given to the IPs but assuming no useable equity it would be impossible to purchase the new PPOR let alone setting up a split for the LOC.

 

$500k x 80% = $400k
less existing loans of $100k and $260k would mean only $40k extra equity which could be borrowed for the new PPOR.

So they would have to decide whether to:
1. use some of that offset cash,
2. pay LMI
3. parental/spousal/family pledge type loan, or
4. sell

 

Example 2 of a better way
Burt’s neighbour Fred is in the same predicament.

Fred seeks advice early on. He plans ahead. Fred realises he must keep the $130,000 x 2 loans intact so that he can still keep claiming the interest.

The first thing he does is ascertain the values of the 2 IPs. Luckily they have grown in value.

IP1 is now worth $700,000 and so is IP 2.

Fred applies to ANZ to increase the existing loan secured against IP 1 from $400,000 to $530,000. The extra $130,000 will be used to pay off the LOC used for this property. There is no need to keep the $130,000 as a separate split because both the $400,000 loan and the $130,000 loan relate to the same property.

Fred does the same with IP2 and makes sure ANZ do not cross collateralise the loans by using both properties as security for the one loan - which they may do with both applications going in at the same time.

Hi Terry,

Just a quick follow-up on Examples 2.
What happen if IP2 doesn't have enough equity but IP1 had plenty. Can someone use the extra in IP1 to cover the shortfall in IP2? or is it better to use what is available and wait for further growth in IP2 if time permit.

 

Yes, the security for the loan doesn't really matter so as long as it is not secured by the property being sold it should be right.

 

Haha love your story telling!

 

Best tax tip I can share is always seek tax advice BEFORE selling any property. So many little things can become evident. And if its basically evident what the issues are its likely to be fast and simple. In 90% of cases a little thought and planning is simple.

I have seen so many incorrect assumptions in my time - Both for and against a taxpayer. Worst case was a young guy who thought he was facing crippling financial issues having two IPs. In reality that wasnt the case. He had his loans at high P&I amounts which could easily have been changed. One +ve geared and other neg geared. He sold the wrong property !! The one he sold released equity but was relatively cashflow square. Triggered CGT and made things worse, not better. And it left little cash as the lender took proceeds and applied this to reduce the high leverage on the remaining property.

 

Hi Terry,

Using Example 3, (term deposit as temporary security for the investment loan) - Is there a restriction banks would place on how long this can be used as security?

I'm looking at renting for a year (possibly two), after selling the PPOR until I find the right property for a PPOR upgrade.

 

And just to add to that. If I had enough equity in the investment property, could I request to use that property as security for the loan?

 

I am not sure, but think you could just keep rolling over the term deposit. The bank should be happy borrowing from you at say 2% and lending out to you at 4%.

It would be better to use property as security as the cost is less, but if the property with equity is mortgaged to another bank, this might be difficult. It would be better to approach that bank and to ask for a new loan to pay out the other one.

 

Yes it is generally 3 to 6 months