Using home as security to get 100% Loan - is this a bad idea?

Hey, someone mentioned the above to me recently and I didn't even think it was possible..

In short, what is better:

#1 Borrowing 80% against a new property and putting 20% of your own money...

Result 80% Loan deductibility

#2 Borrowing 100% against a new property by putting say your home as security or another investment property

Result 100% Loan deductibility

This is the first time I heard about the above strategy, some may argue that they don't want to cross collateralise and others may argue that if you hold assets in your name worse comes to worse the bank can still come after your assets regardless if they are being held as security.

Thoughts? Apologies if I am missing something here...

 

Either of these options can be cross collateralized. Its correct the bank can come after all your assets, however there are loads more reasons why not to 'xcoll'. What happens when you want to sell one? What happens when you want to extract more equity to buy again? What happens if your details change and the bank says no? etc

 

Can borrow 100% of a new property and avoid the costs of x-coll.

1. Borrow the 20% deposit from your PPOR (or another IP) in a separate split loan, secured only by that property. This assumes you've got equity available.

2. Then use that 20%(+) deposit to purchase another IP. Get an 80% loan secured by that IP.

Result: You've borrowed 100%(+) of your costs, and avoided x-coll.

Most investors with multiple properties would grow their portfolios this way - its very difficult to continually come up with 20% cash deposits without seriously large incomes.

Cheers,
Redom

 

You can borrow 100% plus costs for an IP and avoid cross coll.

Personally - I'd prefer to use borrowed funds rather than cash to invest.

Cheers

Jamie

 

Thanks

@Redom If you borrow 20% against your PPoR then doesn't that mean that that 20% is not tax deductible?

@Jamie Moore If you borrow 100% plus costs that would essentially mean you have to pay LMI right?

With the above mention strategy, (using other property as security) apparently you don't pay LMI and 100% of the loan will be tax deductible.

 

It's deductible b/c it's the purpose of the funds that determines deductibility, not the security.

If you contribute 20% from another property, you don't pay lmi.

So yes - 100% deductible, no lmi, no xcoll.

 

LMI isn't a bad thing its tax deductible over 5 hears but much harder to get in current APRA conditions

 

Nope.

Here's a common scenario.

Clients has a PPOR and wants to buy an IP.

PPOR
Loan 1: Current loan they have
Loan 2: Equity release to cover 20% deposit and costs on their IP

IP
Loan 3: 80% loan against IP

Loans 2 and 3 are deductible.

Cheers

Jamie

 

The answer to how to structure properly for the 20% deposit, costs and full tax destructibility has already been explained. Here's some really good reasons why you should avoid cross collateralisation:

https://propertychat.com.au/community/threads/cross-collateralisation-10-reasons-to-avoid.153/

 

Thanks guys, awesome guidance and explanation.

Further to my original question, if I got say Loan 2 against PPoR to finance a granny flat on an IP that would be tax deductible right?

And I assume that Loan 2 would have to be with the same bank as PPoR and it shouldn't matter if I have money sitting in the PPoR offset account...

 

If and when the granny flat produces assessable income, then yes the loan for it becomes tax deductible. Yes, banks don't share, each property, or security can only be held by one lender at a time.

 

I use this approach too @JMica. Both my current properties were purchased (including purchase costs and stamp duty) with borrowed money. I don't currently have any of my own cash invested in residential property. Also, you don't need to cross collateralise to achieve this, as @Jamie Moore has stated above. I can confirm this is correct from real life experience.

 

I haven't read the replies, but I assume someone mentioned
3. Borrow against other property and use this without crossing.

And the 4th option
4. Borrow from a related party - spouse, family, trust etc

If set up carefully the interest could be deductible and the related party loan refinanced into the main loan once some equity builds up

 

Right, so I am assuming that this is as simple as calculating the interest amount on the loan from when the granny flat is complete and rented out.

 

The granny flat loan should be set up as a separate loan account. At that point it's simply determining the amount of interest paid on that account.

 

Thanks @Peter_Tersteeg so I can start claiming deductions on the GF loan as soon as I start using the funds, regardless if the GF is not yet completed and rented out?

 

That's really a question for the accountants, but my understanding is that if the intention of a construction loan was always to rent the property out once completed, it's probably tax deductible right from the start.

I'd tread carefully on a Granny Flat especially if it's on the site of your own home (a non deductible property). Definitely discuss this with your accountant before claiming the pre-completion interest.

 

I did for 5 IP's and then a business.

What's the prob?

As the experts have said; use the PPoR for the deposits and costs, and the rest of the loan secured by the new purchase...preferably different lenders for the loans.

One of these fabulous MB's here on PC will sort you out.

 

Thanks everyone I'm clearly on the learning curve !!

 

We've done it with every IP we've bought .

LOC on PPOR and use that for deposits .

Cliff