Home Loan Advice, Q&A with Lisa Montgomery

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Home Loan Advice & Tips - resi

Lisa Montgomery, CEO, Resi home loans, has over 25 years lending experience and is here to answer your mortgage questions.

Need answers to those niggling home loan questions? If you have an unusual situation, need some home loan advice or just want to ask that burning question, this is your chance! Just email Lisa Montgomery at asklisa@resi.com.au with your question and they will be answered and posted here.

Please note, that these home loan help questions, with their answers can be printed in Your Mortgage Magazine at the discretion of Resi.

Q: 50/50

Question:

Hi Lisa,

Just wondering if you could offer advice on my situation at the moment. I am looking at buying land and building with my partner 50/50. He does not need a loan as has the money from inheritance. I have around $100,000 saved and no debts, currently living with my parents. I only need to borrow at most probably $200,000.

When I spoke to one of the banks with this new plan (originally I was going to buy by myself) I was told we would both need to be on the mortgage. However, I have heard that it is possible to have a contract agreement with the bank that states that 50% of the property is my partners and only have me on the mortgage. So that if I did default on the mortgage it would be agreed that the property was sold and my partner automatically gets his 50%.

Can you offer any light on this? Do you think it is a good idea? Or it is easier to just have us both on the loan and I make the repayments? Any advice is greatly appreciated.

Regards,

Caitlin.

Answer:

Hi Catlin,

Thank you for your note!

When purchasing a property as joint tenants both parties are responsible for the servicing of the facility and therefore, should one party default on their obligations it would mean both parties will be affected.

Now if the property is to be purchased as tenants in common, there are loan facilities available that recognise the ownership of each share individually. This means that in your scenario you would be responsible for the loan solely as your partner has the funds to complete his half of the transaction. Should you default on the loan and action be taken to recover the funds this will not affect your partner’s credit rating.

Furthermore, should the matter escalate to the point of re-possession, your partner would be given the opportunity to make amends in relation to the arrears moneys and/or to purchase your share of the property. I would recommend that you also speak to a solicitor who would be better able to advise you on the legalities of both your loan and property contract.

Good luck with your decision! All the best for the future... Lisa

Q: CAPITAL GAINS AND RENTAL INCOME

Question:

Hi Lisa,

I just wanted to ask about the above. I have heard so many different things about Capital Gains Tax from different people.

Firstly let me tell you my situation...

I built a home in Ellenbrook approx 5 years ago and I lived in the house for about 3 years (primary residence) I then moved out and I am currently renting with a friend (living closer to the city), so I have for approx the last 2 years been renting out my house in Ellenbrook. As I have been enjoying living closer to the city (as I work and play there) I have purchased an off the plan apartment in West Perth (this will be completed approx the end of 2011, fingers crossed), my intention is to sell my Ellenbrook property (because my income will not allow me to finance both properties). Will I be able to see this property and not pay Capital Gains Tax.

What I have been told...

As long as you don’t rent the property out for more than 6 years Capital Gains Tax is not applied!

As long as you don’ t rent the property out for more than 6 years but move back in to the property prior to selling Capital Gains Tax is not applied!

Please advise.

Secondary Question: My current income is 75K I would love to be able to keep the above property (continue renting it out) and also keep the apartment (as my primary residence), do they take in to account that the property is rented out when working out your borrowing capacity or do they assume worst case scenario and that you could be in a situation where you have to cover both mortgages (long term).

Your advice is appreciated and I thank you in advance.

Regards,

Shane.

Answer:

Hi Shane,

Your advice on the Capital Gains component of your email sounds correct – however I am always apprehensive about providing people with tax advice – so please verify with a CPA or the ATO before proceeding.

With regard to serviceability, most lenders will take into consideration any rental income received from investment properties as well as apply the tax benefits from any negative gearing affect the property might offer.

With this in mind you may very well be able to keep both properties - but to be sure - put the proposal forward to your lender of choice so they can assess your individual situation.

I hope this helps Shane – good luck with the future! Lisa

Q: PERMANENT RESIDENCY LOANS WITH ASSETS OVERSEAS

Q: EFFICIENTLY USING CURRENT EQUITY TO PURCHASE A NEW HOME

Q: IMPLICATIONS OF PURCHASING PROPERTY WITH FAMILY

Question:

Hello Lisa,

My brother and I are both interested in property investment, and we’re considering pooling our resources and purchasing a property together. Can you give us an indication of the benefits of drawbacks of doing it this way? Will it cost more in legal fees or are they the same?

Cheers, Stacey

Answer:

Hi Stacey,

I am actually getting this question quite frequently at the moment – so I will provide you with some of the information I have given our other readers on this subject.

With the First Home Owner Bonus being very attractive to first time buyers, buying with friends has become increasingly popular. Before we get into the detail, it’s important for you to really consider the implications of buying with family.

Without attempting to discourage you from embarking on this journey – its important to understand the long term implications of this very important decision. Getting into the property market is an excellent way to create equity and build wealth – and the foundation you put in place to build from needs to be strong and uncomplicated. The last thing you need is to embark on this long term contract only to find that some way down the track it’s just not working. From a practical perspective – most lenders cater for these types of arrangements these days making it easy to keep each person’s debt separate from the other – and allowing each individual to pay the loan off at their own pace. If as you say – you are serious about this venture – you need to sit down and discuss all of the issues and contingencies surrounding the purchase. Some siblings buying together opt to engage legal representation to draw up an agreement outlining all of the possible events and the course of action that needs to be taken. If both of you choose to live in the property as your primary residence, this can be more problematic than renting the property out. From a personality perspective problems can arise, one of you may want to bring a partner into the home, and the list goes on. Some things to consider include:

What happens if one party cannot pay their loan?
What happens if one party wants to sell?
Who will maintain the property?
Can one party buy the other out?

With this type of arrangement – most purchasers opt to purchase the property as Tenants in Common - this way of owning a property is popular with owners who don’t want their share to necessarily all go to the other owners. Their share of the property can be directed as part of their will.

There is a lot more to consider as part of this arrangement Stacey – and I would suggest that you seek appropriate financial and legal advice before making a move. I wish you luck with your purchase – hope it goes well! Lisa

Q: THE BEST LOAN STRUCTURE FOR YOUR BORROWING NEEDS

Question:

Hello Lisa,

My wife and I are currently looking to purchase a home in Sydney for ourselves to live in or invest. At current we have the following:

$250,000 Savings
Income of $473,000+ for this financial year
Car loan of $546/mth
Credit Card limit of $5000 and $3000 respectively
We have 4 investment properties but do not want to draw on any of the equity from them as it has been a while since they have been valued. We estimate that we put $7000 a month into those investments.
We are trying to find out how much we are able to borrow as our bank has suggested that we if we look to borrow over $1,000,000 we need 30% deposit.

If the property was for our home we would be looking at an offset account so that we can deposit large funds of money into each month as the income we receive fluctuates greatly.

How much can we borrow? What's the best loan and structure to take?

Answer:

Hi,

Thank you for providing so much detail relating to your personal situation. This information really helps to build a picture of what you are trying to achieve. Having said that - more information would be needed before we could accurately assess and measure your borrowing capacity. To do this – we would need to view your tax returns, reviewing full assessment income and liabilities. The level of income you have indicated is quite high, however historical data (income from previous year) may have an effect on how much of that income can be used to calculate servicing. It is our estimation that you should be able to obtain a loan equal to 80% of the valuation of the property for loans up to 1.5m – but you may have to shop around – as not all lenders will be able to provide this level of borrowing.

Your approach and loan structure will vary depending on whether you choose to purchase and investment or owner occupier property. Should you choose the investment property option – and given your financial position – you may want to consider more than one property to add to your portfolio. The qualities you may look for in an owner occupied property are likely to differ to those a good investment option may possess.

In relation to offset account and loan structure, if you purchase an owner occupier property you could choose either offset or redraw as a vehicle for extra payments. For investment – offset is certainly a better option.

Obviously interest rate is important as well as fees, features and flexibility – so approaching one of your current lenders to identify the options could possibly be your first step. There are some excellent deals out there at the moment, some with honeymoon rates, no ongoing fees and limited or no upfront fees – your research will help you find the deal that’s right for you! Lisa

Q: FIRST HOME BUYERS WITH LOW INCOMES

Q: HOME LOAN EQUITY

Q: HELP WITH UPGRADING AND KEEPING EXISTING HOME AS INVESTMENT (SCENARIO 2)

Question:

Hello Lisa,

My partner and i purchased our property about 3.5 years ago.We bought it for $435k and still owing $375k, we would like to know if it is possible to use this home as an investment property,as we would like to upgrade to a bigger home to accommadate my partner and i and our four kids My partners salary is $99k per year, while my salary is 20k per year. We do not have any other commitments as our cars are paid off .Should we see a financial advisor as we have been told they are the people to see! The property we are interested in purchasing is $599k. We are just abit confused of what to do or who to see or if this is possible for us to do? Rachel

Answer:

Hi Rachel,

I see where you are going with your plan here – and it certainly has merit!

There are a couple of things that will need consideration prior to you moving forward.

In theory it would be great to keep your current home as an investment property and purchase the new one for you all to live in – you will need to ensure that the commitment of both loans will be comfortable for you to handle over the long term. To understand the repayments you will need to talk to a lender to gauge whether you will qualify for the repayments – keep in mind also that rates are at the bottom of their cycle and will most certainly increase over the next couple of years – so you need to factor in a rise of at least two percentage points. The other thing you need to be comfortable with is managing any time when you don’t have rent coming in – you need to ensure you have a buffer in place to cover you if need be.

The other thing that concerns me – is the deposit you will need for your next purchase – you have approximately 14% equity in your current home if we work off your purchase price. Your ability to use that equity will be determined by the property’s value now – it may be more or it may be the same. The amount of equity you have in your existing home will determine whether this plan is possible or not. It may be a good idea to have a local real estate agent provide you with an assessment of the market value of your current property – this will be a good indication.

I would suggest that you talk to a lending specialist first to determine the viability – you have given me some detail – but there are other factors that will need to be taken into account before you can move forward.

I hope this helps Rachel – good luck with your plan! Lisa

Q: CONTAINED ITNEREST DEDUCTIBILITY FOR PORTING LOANS WHEN PROPERTY CHANGES FROM INVESTMENT TO OWNER OCCUPUIED STATUS

Question:

Hello Lisa,

Background:
I am an Australian citizen currently based overseas and have purchased two investment properties in Australia whilst I have been based overseas. The two properties have always been for investment purposes and never been lived in (by me). Property 1 - I had paid down the existing loan by half before realising that it was more tax efficient not to and refinanced to interest only. Property 2 was purchased later and mortgaged 90% LVR with interest only loan. I am now looking to refinance but maintain maximum Australian tax efficiency for the future if I return to Australia and move into one of the properties. I am planning to make sure the loans are fully portable on both properties when refinancing.

Question:
Since both loans original purpose were for investment purposes I am wondering if I was to move into Property 2 on returning from overseas could I either:

a) port the loan from it over to Property 1 and still retain the interest deductibility? (assume for simplicity the loan value means I could do this in full)?; and/or

b) split the loan when refinancing on Property 2 now and move part of the loan currently using Property 2 as the security over to Property 1 and still retain full interest deductibility both now (whilst Property 2 remains an investment) and in the future if I was to move into Property 2 at a later point? Hoping you can help, David

Answer:

Hi David,

Your question is quite complicated indeed. I cannot unfortunately advise you specifically around the areas of tax efficiency – as it is more for a ruling by the tax department.

What determines tax deductibility is the purpose of the funds, not the security used for the loan. Unfortunately if you move into property no 2 which has the largest amount owing - that loan purpose will become owner occupied therefore no tax benefit will be forthcoming regardless of how you structure it.

There have been instances of borrowers shifting loans from one property to another to claim the maximum tax deduction possible and these being picked up in ATO audits – and these have resulted in some pretty severe penalties.

The best piece of advice I can give you is to obtain an ATO ruling for anything you do – prior to doing it. This will provide you with peace of mind going forward. Also – there may be some ruling around you being based OS that could have a bearing on their ruling – you never know!

Sorry I cannot help you further – its best to get the right advice from the ATO…Lisa

Q: IS YOUR LOAN TAKING TOO LONG TO BE FINALISED?

Q: WHAT ARE YOUR OPTIONS IF YOU FORGET TO DECLARE CREDIT CARD DEFAULT

Q: IS IT WORTH THE FEES TO BREAK A FIXED LOAN WHEN RATES ARE LOW?

Question:

Hello Lisa,

I'm currently holding a 3-year fixed loan at 8.68%. I have 1 year and 9 months to go before I can refix or switch to variable. I want to break my loan now because of the low rates available, but I'm worried I could end up wasting money on exit fees, etc. What shall I do? Shall I sit it out or bite the bullet and switch now? Robyn

Answer:

Hi Robyn,

This is such a common question at the moment…

With variable rates dropping to around 5.25% borrowers just like you are wondering which way to turn. Currently you are paying almost three and a half per cent over and above the going variable rate. The first thing you need to do is to consult your contract and look at the terms and conditions of your loan – as your lender what your options are and if they will be flexible. Not only to you need to review the detail around the break costs, you need to find out if you can pay more on the loan without penalty and if there is any other flexible components that will help you down the track – more about this later. The big question however is whether it is worth it to break the loan now and opt for a standard variable loan? The first thing you need to do is to find out what the break cost is for you loan. Financial institutions calculate this differently – be prepared that they may not be able to tell you this on the spot, and that the calculation may only be valid for a certain time period and could change. You have not supplied us with the balance of your loan – so advising you specifically is not possible – but the principles are the same. Upon review the break cost may be just too high to justify the spend, as is often the case. You will also need to take into consideration that rates are low now – but many economists are predicting a rise in the official cash rate of approximately two percentage points over the next couple of years. When rates will begin to rise is anyone’s guess – but it is a factor that may place less pressure on your fixed rate. You also need to take into consideration that if you break your loan now – you could be paying a lot extra on top of the minimum payment – given you are paying your loan at a much higher rate now – and this will provide you with additional interest savings. If you decide to stay with your fixed rate Robyn – find out if you can make lump sum additional repayments without cost – as this will help you reduce the interest on your loan. It’s a tough decision – but weigh up the facts – take into consideration the things you cant control like rates rising - and look for some flexibility in your current loan arrangement that may suit your circumstances!

Good luck! Lisa

Q: GETTING THE FIRST HOMEOWNERS GRANT IF YOU ALREADY OWN AN INVESTMENT PROPERTY

Q: FIXED, VARIABLE OR A COMBINATION OF BOTH?

Q: BUYING OFF THE PLAN AND LOAN APPROVALS

Q: FEES INVOLVED IN KEEPING THE SAME LOAN FOR THE PURCHASE OF A NEW PROPERTY

Question:

Hello Lisa,

I currently own a unit and am thinking of moving to a different location and buying a house. I owe $293k on my mortgage (taken out 3 years ago for 30 year term). I also owe $3500 on my credit card and a further $10500 on a bank loan. I expect to receive approximately $350-$360k for my unit, and expect to buy a house for approximately $330k. I have contacted my lender and they say that I can keep my same loan and port it across to the new property. What I would like to know is, what additional fees will I be charged when buying and selling? Given I'm sticking with the same lender and mortgage, will I still have to pay mortgage insurance and stamp duty on the new property? Also, if my new property costs less than what I receive from the sale of my unit, does this mean I would have money left over that I could use to pay off my other debts? Sean

Answer:

Hi Sean,

Thanks for your enquiry….

Now because each lender is different you really need to verify with them what fees they will charge, however the standard costs for a security substitution include: Valuation fee, loan variation fee, mortgage registration and discharge costs. As for stamp duty, well that applies to all purchases and is charged by the state government – so no avoiding that one!

You need also to enquire about lenders mortgage insurance, so long as the loan size and the Loan to Valuation Ratio remain the same or lower, there shouldn’t be any additional premium payable. You should find out from your lender the maximum loan size your loan can reach without incurring an additional mortgage insurance premium. Once you know all the detail of the sale and purchase you can work out whether you will have sufficient funds to clear your other debts.

If at the end there are not sufficient funds to clear your other debts, then ask what the Mortgage Insurance premium would be to do so….it may only be minimal and worth your while to roll all your debts into one.

Remember – if you do roll your short term debt into your home loan over 25 or 30 years – you will end up paying more interest over that long term if you pay the minimum payment only – so if you choose this strategy make sure you pay more than the standard payment to make a real difference to the interest you pay overall…

Good luck with your sale and purchase!! Lisa

Q: MOVING HOUSES WITH A FIXED LOAN

Question:

Hello Lisa,

Given the number of borrowers with fixed rate loans and spiralling break fees, is it possible for customers with fixed rate "portable" loans to substituate an unencumbered parents property as security, whilst they sell their existing home - and subsequently purchase a new home.

Assuming all the loan to valuation ratios were ok and no personal relationships were affected, the fixed rate loan would then be ported back to the new residence, but would avoid the usual loan discharge and hence the break fee (that would occur outside of a simultaneous settlement). Chris

Answer:

Hi Chris,

This situation is quite a tricky one and the processes and procedures for portability will vary from lender to lender. The best I can do for you today is to illustrate our process to perhaps give you a better understanding of the mechanics and assist you with your approach to your bank.

The simplest method of maintaining a fixed rate loan upon sale of security property is to put in place a Deed of Set-off.

In a nutshell the funder/bank will retain sufficient funds to cover the loan balance plus any redraw, early repayment fees, fixed rate break costs and usually 1 month’s interest from the proceeds of the sale. These funds are place in an “at call” account and the loan is secured against this funds deposit.

The duration of a Deed of Set-off is usually up to 90 days from the sale of your property which should provide ample time in which to locate a suitable new home. Some funders will allow this to be extended if a property has been located within the initial timeframe but with settlement post expiry of the Deed. Repayments are still expected to be maintained during this period.

Once a property is located the security is replaced to this new property and funds withheld by bank are released and made available for settlement. Please note that you should be entitled to interest on the funds whilst they are being used as security for the loan but be aware that this will not be at the same level as a normal savings account/term deposit.

I hope this helps you with a way forward – I wish you all the best with the transaction… Lisa

Q: BUYING PROPERTY WITH FRIENDS

Question:

Hello Lisa,

My two friends and I are seriously thinking of buying our first property together but don't know where to start. Please advice what we need to do first? What are our legal rights and responsibilities as co buyers or co owners? Best regards, Adam

Answer:

Hi Adam,

With the First Home Owner Bonus being very attractive to first time buyers, buying with friends has become increasingly popular. Before we get into the detail, it’s important for you to really consider the implications of buying with friends. Without attempting to discourage you from embarking on this journey – its important to understand the long term implications of this very important decision. Getting into the property market is an excellent way to create equity and build wealth – and the foundation you put in place to build from needs to be strong and uncomplicated. The last thing you need is to embark on this long term relationship only to find that some way down the track it’s just not working.

From a practical perspective – most lenders cater for these types of arrangements these days making it easy to keep each person’s debt separate from the other – and allowing each individual to pay the loan off at their own pace. If as you say – you are serious about this venture – you need to sit down and discuss all of the issues and contingencies surrounding the purchase. Some friends buying with friends opt to engage legal representation to draw up an agreement outlining all of the possible events and the course of action that needs to be taken. If the three of you choose to live in the property as your primary residence, this can be more problematic than renting the property out.

From a personality perspective problems can arise, one or more of you may want to bring a partner into the home, and the list goes on. Some things to consider include:

What happens if one party cannot pay their loan?
What happens if one party wants to sell?
Who will maintain the property?
Can one party buy the other out?

With the friend’s buying with friend’s arrangement – most purchasers opt to purchase the property as Tenants in Common - this way of owning a property is popular with owners who don’t want their share to necessarily all go to the other owners. Their share of the property can be directed as part of their will.

There is a lot more to consider as part of this arrangement Adam – and I would suggest that you seek appropriate financial and legal advice before making a move. I wish you luck with your purchase – hope it goes well! Lisa

Q: WHAT'S GOING TO HAPPEN TO INTEREST RATES IN THE NEXT 3 YEARS

Q: REDRAW VS. LOW INTEREST RATE FOR FIRST HOME BUYERS

Question:

Hello Lisa,

We are first homebuyers and about to take the plunge! We are both relatively young (24 and 26 years old) and we feel comfortable making the purchase but there is one thing we are not agreeing on, my boyfriend really wants to take out a low rate loan that doesn’t have redraw and allow us to make extra payments – his argument is that the low rate is what matters, but I think we should have a loan with these things, am I right? Erica

Answer:

Hi Erica,

There is so much information out there about the different types of home loans these days, even our friends and families are ‘experts’ and the information they tell us will influence our decision. In this case, you are both right! A low interest rate is obviously important, but so are features, flexibility, low fees and of course service. Low interest rate home loans that have minimal features are known as basic rate loans – and are popular with first home buyers because of the low interest rate. I think it’s important for you to choose the right lender and the right home loan from the start – as switching loan providers every couple of years can be costly and can divert your focus from the primary objective which is to pay your loan off quickly, and with the least amount of interest paid over the term. There are some competitive interest rates available at the moment that come with all the bells and whistles like extra payments, redraw, portability, 24/7 access and low fees. You may even want to choose a loan which has a low introductory rate for 12 or 24 months. These loans can be great for easing you into regular monthly repayments, but make sure you get one that allows extra payments in that initial introductory period, as this is a great time to get ahead. Also make sure that when it reverts to the variable interest rate that the rate is competitive. The best way to do this is to check out the comparison rate – this rate indicates the true cost of the loan including fees and interest rate – so the lower the comparison rate the lower the overall cost is to you. In summary, my suggestion is for you to look for a loan that has a competitive rate AND those features and benefits you need to operate your loan easily and effectively. Lisa

Q: FORECASTING SAVINGS FROM EXTRA WEEKLY MORTGAGE REPAYMENTS

Q: CHANGING A FIXED LOAN

Q: FIRST HOME BUYER MOVING OVERSEAS

Q: FINANCING A DEPOSIT FOR OUR FIRST HOME

Question:

Hi Lisa,

My wife and I have permanent jobs getting us $5,500net every month. We are interested in buying a property in regional Victoria (Kilmore). The house is worth $245,000 and is currently being built by some builders. We have spoken to our Bank and the bank is only providing us 90% of the value of this property. This leaves short by $24,500. We have savings of $7,000 and would be eligible for First home buyers grant + state grant + regional area grant. Could you suggest any other possible ways in which we can structure our loan so that we can cover this shortfall of $24,500 and thus get our foot into this property as soon as possible. Thanks, Manu

Answer:

Hi Manu,

Yes, unfortunately in rural areas you are restricted when it comes to the amount you can borrow. Now the property purchase will cost approximately $254,000 in total funds to complete ($245k Purchase price + approx. $9k in stamp duty costs etc).

The loan amount on offer to you should be in the vicinity of $220,500 which means you require a total of $34,500 to complete.

With your $7,000 in savings, $14,000 first home owners grant, $7,000 new home bonus from Federal Government, plus the Victorian government provides an additional $3k first Bonus grant and $2k for regional area purchase - your total available funds are $33,000 which means you need to realise an additional $1,500 to complete - minimum.

Keep in mind also that a loan of 90% will attract a Lenders Mortgage Insurance premium that can in most cases be added to the top of the loan. You will need to check with your lender as to whether this is the case with your property being located in a rural location.

With mortgage insurance and the shortfall of $1,500, one option may be to check with your lender as to whether they will accept a ‘gift’ of the balance of the costs from a family member - if that may be an option.

Manu, also keep in mind that when purchasing your first home, there can be other costs that wont be budgeted for, like moving costs, insurance and if it’s a new property, there may be essential things such as a clothesline, letter box, and other items that really add up. so please consider ALL the costs before you commit. Good luck! Lis

Q: HELP WITH UPGRADING HOME AND KEEPING EXISTING HOME AS INVESTMENT

Question:

Hello Lisa,

I bought my first home two years ago now. One year into the loan, I decided to split the loan so now $100,000 is fixed for 5 years and $120,000 is variable. This property is in my name only and is worth about $450,000. Since then my partner and I have had a child with another one on the way. We want to purchase a larger home and turn our current home into an investment property.

I have been told that because the original loan was set up as an owner occupied I will need to refinance it to turn it into an investment property otherwise I will have tax problems when we try to claim the negative gearing benefits. Is this correct? We are concerned about the break costs if I need to refinance the fixed loan. (The fixed rate is very high now at 8.44% with a long way to go still). We need to use both our incomes to service the new purchase.

How can we make it so that the maximum amount is borrowed against the investment (our current home). Can we cross collateralize if 1 property is in just my name and the other is in both names or do both properties have to be in both names to cross collateralize them? If we do this will it cause break fees?

The current loan is portable so I was wondering if I could transfer it to the new purchase and then take out a separate loan against the investment property together with John. The new property we purchase will be around $500,000 and we would like to keep it below the 80%. Even if I were to just switch the security I would need to borrow more to finalize the purchase, which I couldn't do just on my income of $40,000.

John is self employed so doesn't show a very high income at $25,000.

Basically need to know can we do this and stay good with the tax department and avoid fixed break costs?

Very confused sorry, Mary.

Answer:

Hi Mary,

Yes I can see that you would be confused. The first step would probably be to sit down with a lending specialist and talk this through, as it is complicated and you need peace of mind on a way forward. In the meantime however, I will try and give you an outline of your options.

Firstly, you can change your loan from an owner occupier loan to an investment without refinancing. You simply begin to claim expenses on the property from the first day it’s rented. You may however, wish to convert the loan to interest only for tax purposes. Break costs will only occur if you wish to change lenders or convert to a variable rate before the fixed rate expires.

In terms of cross collateralizing two properties – this is not an issue as long as you appear on the title of the new one as well. Again, use of a security does not attract any break costs unless you refinance the loan.

For tax deductibility, ATO allows deductions based on what the funds were borrowed for and hence only the interest on the funds remaining on the investment property loan would be deductible. However, longer term, if your loans are set up well with offset accounts, this can be avoided. Alternately, it may be worth selling the existing house, transferring the new security to the existing loan and then using the equity to purchase a new investment property.

Now all this being said, for any scenario to work, you need to ensure that your ability to service any existing and new debt is satisfactory. You have a reasonable amount of equity in your existing property, and it may be tempting to maximise that equity – but with a growing family you need to be prudent when it comes to amount you borrow.

Mary, you need all the advice and support of a solicitor and accountant before you make any move, and don’t forget to ask about any capital gains tax implications before you make the final decision. Lisa

Q: HOW TO AVOID THE COSTS OF BREAKING A FIXED RATE LOAN

Q: LENDERS MORTGAGE INSURANCE

Q: BORROWING WITHOUT A DEPOSIT

Q: 100% LOAN FOR PURCHASING OFF THE PLAN

Q: USING FHOG AS PART OF THE LOAN DEPOSIT

Q: COMING UP SHORT

Question:

Hi Lisa,

I have just done a calculation of the costs involved for the purchase of a $400 000+ property in Melbourne, a move which will be necessitated by me changing jobs in a few months time. I have a 5 per cent deposit (just) and can cover some of the fees such as conveyancing and mortgage applications fees, however I am horrified at the amount of stamp duty payable (in excess of $20K) plus mortgage insurance. I have had two mortgages previously (both properties sold) and each time the lender has included the cost of mortgage insurance in the loan.

Since I haven't factored this $20 000 stamp duty bill into my calculations, how likely is it that I will find a lender who will still approve such a mortgage? What usually happens in these circumstances? Will the lender want me to take out a personal loan to cover the costs or is there a means of having it included in my mortgage? My partner and I are both professionals with steady incomes with a combined salary of more than $170 000 pa. I have no debt and my partner has less than $20 000 of personal debt. Are we just pipe dreaming?

Answer:

Hi There,

It appears that you will need a loan at 95% of the property value. Over the past few months lenders have reduced the level of borrowing for housing in most cases to a maximum of 90% due mainly to the GFC. Some lenders still offer 95% lending to existing customers, so contact the institutions you have bank accounts and credit cards with and find out if they can assist. In relation to the mortgage insurance, it is possible to include this amount into the loan however it is at the lender’s discretion whether they will do so. As for the stamp duty, this will need to be paid up front. As your combined income is quite substantial you may have the capacity to service a personal loan as well as the mortgage so taking out a personal loan for this purpose could be an option. What you need to remember is that due to your limited deposit/savings, even if you are able to locate a lender who can help with your situation, your product/lender options are greatly reduced and you may pay a premium to secure your funding. So ensure you review the terms of the loan offered to you very carefully. Lisa

Q: HOME LOANS FOR TEMPORARY VISA HOLDERS

Q: TIMING ISSUES

Q: 100% OFFSET VERSUS LINE OF CREDIT

Question:

Hi Lisa,

I While I am familiar with the ins and outs of 100% offset home loans, I have also heard a bit about line of credit home loans.

My question relates to each type of loan’s ability to reduce the amount of interest payable by offsetting the balance of surplus funds against the principal of the home loan prior to interest being charged. I am unsure as to whether the line of credit loans have anything over the 100% offset loans, given the same interest reducing mechanism seems to be a feature of both. Could you please help clarify this for me?

Answer:

Hi There,

Both an offset and a line of credit facility will reduce the interest paid on your loan in much the same manner however the difference between the 2 is as follows:

• Line of credit – you are pooling all of your available funds into the loan thus reducing the balance on which the interest is calculated

• Offset – the interest is calculated on your loan balance less the funds held in your linked savings account

The benefit of an offset account over the line of credit is particularly beneficial when the loan is for an investment property. As the loan balance doesn’t actually reduce the debt’s tax deductibility remains at its peak whilst taking advantage of reduced interest liability. It also allows the borrower to keep cash separate to use for other purposes.

With the line of credit, because there is an actual reduction of the loan balance, some of the tax deductible benefit from the facility may be lost as the tax department may view any reduction of the loan balance as permanent regardless of whether the funds have been redrawn.

There is a third option available for customers where tax deductibility is not a concern and that is a standard loan facility with a redraw feature. Often you will pay a premium for facilities such as lines of credit and offsets and you would have to have considerable cash reserves before the difference in interest would be recouped. With a redraw you still get the interest liability reduction benefit without paying the premium rate.

It is also important to remember that standard principal and interest facilities require standard instalments each month prescribing an amount that needs to be paid to achieve repayment over a defined time (25 years). Line of Credit facilities require far more discipline as you may have a limit that your facility can fluctuate beneath, ensure you have a clear plan with this type of loan as you could end up paying more money in interest than with a regular principal and interest facility... Lisa

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