Join Australia's most dynamic and respected property investment community

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

Discussion in 'Property Finance' started by JMica, 15th Sep, 2015.

  1. JMica

    JMica Well-Known Member

    Joined:
    20th Jun, 2015
    Posts:
    58
    Location:
    Sydney
    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...
     
  2. tobe

    tobe Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    897
    Location:
    Melbourne
    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
     
    JMica likes this.
  3. Redom

    Redom Mortgage Broker Business Member

    Joined:
    18th Jun, 2015
    Posts:
    863
    Location:
    Sydney (West) and Canberra
    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
     
    2FAST4U, chylld, Brian84 and 2 others like this.
  4. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,159
    Location:
    Canberra and Sydney
    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
     
  5. JMica

    JMica Well-Known Member

    Joined:
    20th Jun, 2015
    Posts:
    58
    Location:
    Sydney
    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.
     
  6. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,781
    Location:
    Perth WA
    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.
     
    cal, JMica and MJS1034 like this.
  7. Tony Fleming

    Tony Fleming Well-Known Member Business Member

    Joined:
    18th Jun, 2015
    Posts:
    546
    Location:
    Sydney
    LMI isn't a bad thing its tax deductible over 5 hears but much harder to get in current APRA conditions
     
  8. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,159
    Location:
    Canberra and Sydney
    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
     
    Brian84 likes this.
  9. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,107
    Location:
    Melbourne, Nationwide
  10. JMica

    JMica Well-Known Member

    Joined:
    20th Jun, 2015
    Posts:
    58
    Location:
    Sydney
    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...
     
  11. tobe

    tobe Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    897
    Location:
    Melbourne
    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.
     
  12. Perthguy

    Perthguy Well-Known Member

    Joined:
    23rd Jun, 2015
    Posts:
    4,780
    Location:
    Perth
    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.
     
    JMica likes this.
  13. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    9,033
    Location:
    Sydney
    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
     
  14. JMica

    JMica Well-Known Member

    Joined:
    20th Jun, 2015
    Posts:
    58
    Location:
    Sydney

    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.
     
  15. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,107
    Location:
    Melbourne, Nationwide
    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.
     
  16. JMica

    JMica Well-Known Member

    Joined:
    20th Jun, 2015
    Posts:
    58
    Location:
    Sydney
    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?
     
  17. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,107
    Location:
    Melbourne, Nationwide
    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.
     
  18. Bayview

    Bayview Well-Known Member

    Joined:
    22nd Jun, 2015
    Posts:
    2,716
    Location:
    Mornington Peninsula
    I did for 5 IP's and then a business.

    What's the prob? :p

    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.
     
    JMica likes this.
  19. JMica

    JMica Well-Known Member

    Joined:
    20th Jun, 2015
    Posts:
    58
    Location:
    Sydney
    Thanks everyone I'm clearly on the learning curve !!
     
  20. See Change

    See Change Timing Lord Premium Member

    Joined:
    18th Jun, 2015
    Posts:
    2,146
    Location:
    Sydney
    We've done it with every IP we've bought .

    LOC on PPOR and use that for deposits .

    Cliff
     
    JMica likes this.