Purchasing Another Home. Stuck on Deposit to Vendor, Need Advice

tebbybabes on 03/04/2018 - 20:44
Last edited 04/04/2018 - 11:49 by 1 other user

Good PM. Before I begin, I completely realise that I need the services of a financial adviser and am now actually on the hunt for one. That being said, I figured it wouldn't hurt if I ask the good folks here to further my admittedly VERY MEAGER knowledge. Please bear with me if what I'm asking turns out confusing as I'm only telling it like I understood it.

Background
- We own our townhouse outright.
- We were thinking of getting a bigger place to live in.
- We thought it would be great to buy a bigger place and rent-out our existing townhouse.
- Prior to looking around for houses last year, we asked a bank how much we could borrow because we honestly didn't have the slightest idea. Ultimately, they came back with a 950k figure.

Now
- Easter Saturday, during an open house, we fell in love with a property and made an offer under 900k. Let's call this House B and my existing townhouse House A.
- The vendors want a 10% deposit that I am short maybe 10-15k.
- The finance broker doesn't see any problems securing a loan for us for the purchase. But he is stuck on the 10% deposit.
- Finance broker is suggesting I take out a mortgage on my existing townhouse and use that to pay for the deposit as well as reducing the total loan being applied for in House B.
- Real estate agent is saying that while that is doable, it might not put me in the best financial position because I'd end up being geared "the wrong way"
- Real estate agent is also saying that he spoke to the vendors and that they've agreed to slightly lower deposit that I can probably make but render my liquid assets paper thin.

My options as I understand it:
- scrounge up the slightly lower than 10% deposit from my existing liquid assets while stretching it painfully thin.

or

  • take a mortgage on my existing full equity property.

I am also unclear as to being "geared the wrong way"

If anyone could offer any advice or explanations, it would be much much appreciated. Again, I fully recognise that this is an anonymous bargain site on the internet and probably not the best avenue, but anything shared will certainly help me learn more.

Thanks.

UPDATE as of 11AM 04-04-18
We have decided to not acquire additional funds just to satisfy the vendor's deposit at 10%. We'll just scrape together enough to get to the roughly 8% the vendor agreed to. We tried to get it down to 5% but after some back and forth the REA says for some reason or another the vendor is unwilling.

Financial

Comments

  • Realsteel on 03/04/2018 - 20:56
    +13

    Basically, people take out investment properties for tax deductions (associated with depreciation and interest and other out goings in holding property) whilst hoping for capital growth. "Geared the wrong way" would mean that the townhouse you intend to rent out does not have a loan against it so more or less no tax deductions. The house you(intend to buy) and live in will have a mortgage and the interest costs are not tax deductible hence the comment "geared the wrong way"…

    • tebbybabes on 03/04/2018 - 21:22

      Thanks for replying. It did sound like that when he was telling me. He mentioned something along the lines of the townhouse will be earning rent and the government will be taxing that income and that practically the only thing I can get a tax deduction on it is the interest on the proposed loan on it (the loan to help cover the cost of the deposit for property B)

      • MrHyde on 03/04/2018 - 21:28
        +19

        That is wrong. Interest on a loan is tax deductible if the purpose of a loan is investment. If you take a loan on your existing townhouse to cover the deposit of a new residential house, then the purpose of the loan is not an investment - hence any interest on that loan will not be tax deductible.

        • tebbybabes on 03/04/2018 - 21:30

          ahh… thanks for that. But wouldn't me trying to hold on to the property A as an investment because I'm moving to property B to live in automatically make property A an investment?

        • MrHyde on 03/04/2018 - 21:51
          +11

          @tebbybabes:

          Yes, property A is an investment - but it is fully paid out. What is the reason to take loan with Property A as collateral - to buy Property B which is not an investment. So, the loan is not to buy an investment property and hence not tax deductible.

        • tebbybabes on 03/04/2018 - 22:07

          @MrHyde:

          Got it, thanks.

        • Other on 04/04/2018 - 08:25
          +2

          If your broker is advising you tebbybabes on tax (or does he have CTA or any qualifications with tax?) - get a new broker, as MrHyde is correct.

        • BartholemewH on 04/04/2018 - 10:04
          +2

          @TheMostHated:
          There are bankers out there that will advise it is possible to take out a loan for 100% of A and put it against B. They are incorrect. But it doesn't stop people doing it (against my advice).

        • Other on 04/04/2018 - 10:06

          @BartholemewH: Bank staff are literally the worse for tax advice, as all they are trained to do is sell bank product. At least a mortgage broker may of heard of it.

        • BartholemewH on 04/04/2018 - 10:13

          @TheMostHated:
          Yes in the instance I am referring to, my best friend of many years (with a B.Commerce!) has done this to fix his gearing situation. Risky business imo.

        • tebbybabes on 04/04/2018 - 11:24

          @TheMostHated:
          Thanks. Have decided to get the services of a Tax accountant.

        • Scrooge McDuck on 04/04/2018 - 13:37
          +1

          @tebbybabes:

          Do you own a car worth $30k or more which you can part with temporarily?

          If so, I can lend you $15k cash with the funds in your hands by Friday. Let me know, my inbox is open.

        • Scrooge McDuck on 04/04/2018 - 13:45
          -1

          @MrHyde:

          As a hypothetical, if stamp duty and other costs were ignored, would it be beneficial to sell the PPoR to a trusted partner and rebuy it as an investment property once the move to the new PPoR is complete?

          Or are there wash sale laws which apply to properties?

        • Mango Madness on 05/04/2018 - 11:05

          @Scrooge McDuck:

          Good thinking Scrooge McDuck. It could achieve the goal of acquiring the Townhouse (Property A) with a loan secured again. Potentially you would also incur transaction costs (ie. Stamp Duty / Titles Registration / Legal… unless you really trust this friend).

          With the ATO, they consider the nature and objective of the transaction. So if you sold a property to a friend for $500,000, then bought it back from them for the same amount at $500,000, AND you came out with a deductible loan secured against the property… then this method of "tax minimisation" could be construed by the ATO to be "tax avoidance".

        • Apue on 05/04/2018 - 15:35
          +1

          Not necessarily true!
          If the OP had put the money on the OFFSET account and then withdraw and claim the interest charge against the taxable income is legal.

        • MrHyde on 05/04/2018 - 15:39

          @Apue:

          Yes, but the OP did not use an offset account - so that option is not available to them. Thats what I do - never ever pay off an investment loan - keep the money in an offset account till the bank gets annoyed and closes the account for you - I still keep about $1000 left on a loan so the bank gets a little bit less annoyed. :)

          Now, the question - stamp duty on a $500K sell and buy back would be far too high for it to be on any benefit whatsoever. However, if ignoring stamp duty - then it could work. I would change the amounts - not have the same amount for buy and sell price.

      • cameldownunder on 04/04/2018 - 10:09

        Banks also have another offer, instead of having 4% on each of the mortgages, they can offer you 3.5% on the one you live in, and 4.5% on the investment, increasing your negative gearing.

        • tebbybabes on 04/04/2018 - 11:23
          -1

          Thank you for that additional information. At this point in time, we have decided not to apply for another loan against the existing property just to satisfy the vendors request for the deposit.

        • Kunalk222 on 06/04/2018 - 08:24

          @tebbybabes: you should check with property advisor as LMI will also cost you 10-20k. By using Property A as gaurantee on Property B you can use it for 20% deposit which will save you (15-20k in LMI) and add this with your 10% deposit you can bargain with more banks for cheaper rates.

        • tebbybabes on 06/04/2018 - 15:47

          @Kunalk222:
          Thank you, Kunalk222.

          So far, that's exactly where we're heading. Crossing fingers.

  • p1 ama on 03/04/2018 - 21:08
    -7

    Again, I fully recognise that this is an anonymous bargain site on the internet and probably not the best avenue, but anything shared will certainly help me learn more.

    I have a degree in Finance, even though I don't dole out financial advice for a living. As always, what I say is of a general nature and might or might not be helpful…etc. You know the deal.

    The deposit is up to you to negotiate with the buyer. If they're happy to accept a lower deposit then that is all good. You might also want to have a look into other avenues such as deposit bonds and the like, but they're not very popular in Australia. The rest of the deposit needs to be paid upon settlement, so you'll need to make sure that you have enough to cover the rest of the deposit then as well.

    Overall, you have to borrow as much as possible on your investment property. Look at it this way, at the end of the day, you have to borrow on either your PPOR (primary place of residence) or on your investment property. You might pay a slightly higher rate on investment properties, but you have to remember that those interest payments are tax deductible, whereas they are not on your PPOR. So my advice is to take out as large a mortgage as possible on your townhouse (property A) so that you minimise the amount you borrow for property B.

    • tebbybabes on 03/04/2018 - 21:27
      +1

      Really appreciate you taking the time.

      Yep, the mortgage broker was working on the assumption of getting me a deposit bond, but the vendor didn't like it. When you say upon settlement, does that mean at the end of the six weeks? If so, isn't that when the bank's finance kicks in?

      Borrowing against the investment property is exactly what mortgage broker gave as an option. He did mention that he would structure it so that the loan on the townhouse is bigger than property B which is going to be the PPOR. Precisely to take advantage of the tax deductible nature of the interest payments.

      • skinner on 03/04/2018 - 21:34
        +12

        Unfortunately either way you structure the loans your repayments will not be tax deductible. Mr taxman only looks at what the funds were used for not what security is attached. It doesn't matter if you say "I used it for investment purposes," in this scenario you are using the funds to buy House B which will be your PPR, therefore not tax deductible. Best speak to an accountant ASAP.

        • tebbybabes on 03/04/2018 - 21:36

          Thank you. Am currently searching now.

    • MrHyde on 03/04/2018 - 21:29
      +20

      That is incorrect advice. Even if you borrow with your investment property as the collateral; the purpose of the loan is not an investment and hence not tax deductible.

      • tebbybabes on 03/04/2018 - 21:33

        Got it. Thanks for the clarification

      • p1 ama on 03/04/2018 - 22:02
        +2

        Really? Well I'll eat my words then. I was always under the impression that if a loan is taken out on an investment property then interest payments are tax deductible. Anyway, apologies.

        • Realsteel on 03/04/2018 - 22:36
          +12

          MrHyde is correct! Think of it this way. I have a house, which i am renting and fully paid off. Then i take out a mortgage against the house and buy a boat, a car and take 3 month holiday. All of a sudden, there is a loan against the investment property! If this interest was allowed as a tax deduction, you can imagine what everyone would be doing….Mr Taxman looks at what the funds are used for. Now if you used to same funds to invest in shares, that interest would be tax deductible.

        • [Deactivated] on 04/04/2018 - 08:40
          +1

          @Realsteel:

          perfect example and technically correct.

      • ATangk on 04/04/2018 - 08:40

        So if I was in OP’s situation, sold the townhouse, bought the second property and bought back the townhouse with a loan, I WOULD be able to claim tax deductions on the townhouse?

        • [Deactivated] on 04/04/2018 - 08:43

          if the stamp duty and other associated costs are worth it, may be yes.

          but the taxman has a law called Part IVA which catches any sort of tax avoidance scheme.

          buy a different townhouse or even next door to it, problem solved :)

        • ATangk on 04/04/2018 - 08:44
          +3

          @signherepls123:
          Ah yes just trade townhouses with your neighbour…

  • Donaldhump on 03/04/2018 - 21:17
    +6

    I hope all your coin is in your offset account and not actually paid off the townhouse. That way you can move it without tax implications.

    • tebbybabes on 03/04/2018 - 21:28

      Thanks for replying. Up until recently, I didn't even know what an offset account is.

      At any rate, nope, it's not an offset account. Property A is owned outright.

      • dcep on 03/04/2018 - 21:56
        +2

        follow lamnotcheap advice below, sell your townhouse.

        remember to get homeloan with offset account for your new home , in case in future you want to move out and turn that into investment property (same situation as now)

        as for the deposit, tell the seller 'take it or leave it, that's all you got' .. they'll proceed with whatever deposit you have now.

        • tebbybabes on 03/04/2018 - 22:05

          Ahhhh. I didn't even know the "take it or leave it" was an option.

        • Iamnotcheap on 03/04/2018 - 22:06
          +1

          I think OP will find it challenging to get a second loan if the first one isn’t paid off. An offset account does not give the banks comfort that tomorrow you won’t withdraw and flip, thus not being able to service the debt obligations. With the recent/ongoing lending inquiries, they getting really tight on certain structures.

          However with the above said, it really depends on OPs financial position / income etc. which we don’t know.

          In respect to the deposit - perhaps I have misread, but is the deposit for the owners? If so, like that mentioned above, kept it minimal. There is a risk your loan is rejected even with the collateral of your previous house (I.e. new house is not worth x or y), thus limiting the amount the bank will loan you. Which means you may be in for a short fall, which is post any deposit you’ve just given away to the owner. Further your deposit is likely lost/non refundable if it’s not built in to the lending agreement.

        • tebbybabes on 03/04/2018 - 22:17

          @Iamnotcheap:

          Yep, as I understand it, it's the deposit for the owners. I'm under the impression that in NSW, the standard contract is 10%.

          To be honest, I hadn't thought of the possibility of having the loan rejected. Probably because one bank mentioned 950k even without a property in mind. (this was when we were toying with the idea of getting a bigger place and had no idea how much our budget could reach) And the agreed upon price is 880k.

        • Iamnotcheap on 03/04/2018 - 22:31
          +1

          @tebbybabes:

          I would recommend you seek clarity in that deposit. In essence you are coming up with 20% deposit for the purchase then, and you’d in substance require 30% to avoid any additional insurances, despite you having ability to service the loan.

          Also banks don’t just give money away / you have to be committing the funds to a business or asset. (Of which different loans attract different rates and assessed by different departments, so I am assuming the idea toyed with must have been a house?)… They will see the asset at the agreed payment amount at weigh up against that value. Your house is just collateral to ensure the funds are protected, does not mean the loan will be approved when they assess what the money is required for.

          A “how much can I borrow” calculator or general table advise at the counter is not something to take seriously. The only way you will know the amount is when you have submitted an pre approved home loan.

        • dcep on 03/04/2018 - 22:43
          +1

          @tebbybabes:

          i threw 1000 cash as deposit last time … hahahahahaha , even though the seller originally wanted 10%

          just play hardball and the REA will work his magic on the seller as the REA only wants the sale to proceed, coz he gets the same amount of commission regardless of how many deposit paid upfront.

        • tebbybabes on 03/04/2018 - 22:44

          @Iamnotcheap:
          You're absolutely right, we asked them how much we could borrow for buying a house. One of the friendly bank people, in fact the same person I opened our first account with many years ago, then proceeded to take statements of income and listed down assets and liabilities and plugged them into her computer. A day later she gave us that figure.

          I am definitely going to clear this up deposit thing up. Thank you.

        • Iamnotcheap on 03/04/2018 - 22:53
          +2

          @tebbybabes:

          Go with the $1k deposit, just to ensure you safeguard yourself with the bank. The more cash deposit you can offer the bank stands more favourable than just a reduction in purchase price because you gave the seller cash in hand.

          Sounds as if the person just did a lending calculator. A pre approval is effectively an approval subject to certain conditions and has formalised credit checks undertaken (however can still be revoked upon inspection of the property), and requires consent / formal docs. I would not have taken that amount to seriously tbh.

        • dcep on 03/04/2018 - 22:54
          +2

          @tebbybabes:

          just remember to put 'subject to own finance approval' clause on the contract of sale

          your deposit is safe & refundable up until the finance date before contract went unconditional

          Eg, finance date = 21 days from contract date ( you can pull out and get your deposit back if you have your lawyer/conveyancer to notify the seller that you've failed to obtain finance - even on the 20th day)

        • tebbybabes on 03/04/2018 - 22:58

          @Iamnotcheap:
          I think there was a credit check done. I had to consent to it, I think.

          I'm sorry, I am a bit confused about the … "cash deposit I can offer the bank?" When I apply for a loan at the bank, I have to give the bank cash? I thought the property would become the surety against which the loan is applied?

        • tebbybabes on 03/04/2018 - 23:00

          @phunkydude:
          Very very good to know, phunkydude. Especially at this stage. Thanks. I have certainly taken note of it now.

        • Iamnotcheap on 03/04/2018 - 23:05
          +3

          @tebbybabes:

          Oh no! I am afraid you should as a priority speak to the bank. I would not be putting in an offer if you do not understand your loan structure. Are you taking out a new loan or are you borrowing as second mortgage (mortgage redraw)? I am going to assume that as the house is already paid it would have to be a new loan. Commonly you will need a deposit, and likely minimum 5% depending on bank. 20% is the threshold to avoid mortgage insurance, hence maximising the amount you can cough up.

          Again, do not confuse the assets used to guarantee the amount for the loan. There is a significant difference to an asset under loan vs loan guaranteed by asset.

          Potentially they doing a bridge loan, however this practice is shady. As you will effectively have two loans on the go, and commonly used for when you selling a property rather than require additional funds for cash deposit in the new loan.

          Please check thoroughly before you do anything crazy (and waste money).

        • tebbybabes on 03/04/2018 - 23:15

          @Iamnotcheap:
          Doing a lot of reading now. Yep, I think I understand where I was confused. I'm a lot clearer now on the deposit for the loan. I have no idea what the mortgage broker is planning but he seemed awfully confident he could arrange for me to avoid LMI.

          Anyway, will continue with research and discuss this 'deposit' with the Real estate agent.

        • Iamnotcheap on 03/04/2018 - 23:20
          +1

          @tebbybabes:

          See above I just did an edit. Could be trying to do a bridge loan…

          I.e firstly borrow $100k on existing property.

          Move cash over as deposit on new property, and asses the loan as $780k ($880 purchase less deposit), avoiding the LMI).

          However you stuck paying two loans, albeit in the same position you would have started with. I would assume the $100k would have a higher interest rate though.

        • WTF on 03/04/2018 - 23:26
          +3

          @Iamnotcheap: "I am afraid you should as a priority speak to the bank. I would not be putting in an offer if you do not understand your loan structure"

          Imho best piece of advice do far.

        • tebbybabes on 03/04/2018 - 23:31

          @WTF:
          Everything's been excellent. But yes, I need to dig quite a lot more.

        • WTF on 03/04/2018 - 23:35
          +1

          @tebbybabes: What did you put down as your settlement date? Make sure you put down as max as possible (90 days if you can) to give yourself as much time to sort these things out well.

        • tebbybabes on 03/04/2018 - 23:39

          @WTF:

          The proposed settlement was six weeks. Today was the first business day so the ball got rolling today. I realise now how woefully underprepped we are, but darn it, we're going to do our best.

        • Mango Madness on 05/04/2018 - 11:23
          +1

          @tebbybabes:

          OP. You are correct. Standard deposits on residential property contracts is 10%. These contracts are "standard", so they are a balance between the best interests between the vendor (seller) and vendee (buyer, ie. you). While these terms are "standard", there is always room to negotiate.

          Typically, things people negotiate on, are:

          • Price (which I assume you've haggled on).
          • Deposit (10%, or less. Rare to have people pay more than 10% deposit).
          • Settlement Date (date to which you acquire the property, and transfer full payment for the property).
          • T&C's of the contract (any conditions to which will allow you to pull out of the purchase). These include… Finance Date (date to which you have to check with your lender that you will be able to acquire the property). Additional things you might want are Building report and pest report, to help you protect your investment and new home (no surprise expenses or outlays). Prior to placing a bid, some people actually have the property valued by a certified property valuer.

          OP, I don't know what State you're in. But in QLD, your finance clause is 14 days from the date you signed the contract.

        • tebbybabes on 05/04/2018 - 20:53

          @aph:
          Thanks for sharing.

          At this point, yes, we've haggled on the price prior to all this stress. :)
          Deposit is down to effectively 7%
          Settlement date is 2nd week of May.
          I've already sorted out the pest and building report and they've come back even better than I expected.

          I'll have to check with my conveyancer, who seems very much on the ball, when the finance clause is or if there is indeed one.

          Also, if it helps any, I'm in NSW.

  • Iamnotcheap on 03/04/2018 - 21:45
    +3

    As most have said the loan is non-deductable.

    See an accountant, however assume the advice will follow this… disclaimer I am an accountant, however below is just a discussion points for you to have to at least assist with research rather than advice directly for you.

    Buy new house, then
    Sell old house, then
    Use cash to pay off the debt in your “new” primary residence.
    Find new investment property, that is newer to maximise depreciation and take out investment loan for the interest on loan to be now deductible.

    • tebbybabes on 03/04/2018 - 21:58

      Thanks for taking the time to reply. It's much appreciated.

      If you don't mind, may I ask something? We weren't really thinking about having an investment property… it was more along the lines of since we already have this place and the bank was willing to lend us X amount and that amount was enough to buy property B, our thoughts were "why not just hold on to this and earn money from it." Tax deductibility never even entered our minds…

      Anyway, to finish the actual question - does tax deductibility on a new investment property make a huge difference financially?

      One more thing, and this is a general question not about the issue in my post… If I find an accountant well versed in these things, how do I engage his/her services? Is this a one time consultation or will I have to be a client forever? The only experience I have with accountants is the kind that files our tax return.

      • Iamnotcheap on 03/04/2018 - 22:19
        +1

        If you weren’t thinking about it, then see a financial advisor and not an accountant as they can offer alternatives to creating wealth in other areas including home investment vehicles. I should be more specific, what you want is a tax accountant in this case to help you assess your overall tax position. You can engage however you like - one time consult or on going. Readily available, but not everyone is good at it (or does not give the best advice) - so shop around and speak to friends at work.

        To answer your question and thoughts overall;

        Whilst the thought is great, the execution is not - to maximise any investment return, you want to minimise the tax obligations that are associated. We won’t get into negative gearing here, but for ease / apples for apples, the same take home after tax income on your old property would likely be less than that of a new property given the deductibility that goes with it for non-cash items, like depreciation, which is commonly lower the older the house / unless it’s recenty renovated.

        House A = $100 rent with no deductions = $100 for tax purposes = $65 take home after tax
        New House =$100 rent / likely have $10 worth of Depn, as such for tax reasons your tax amount is only $90 therefore instead of $35 tax you only pay $30. Take home = $70.

        • tebbybabes on 03/04/2018 - 22:26

          Whoa, I took a long time reading that over and over. Damn that CAN add up in a big way! Definitely a LOT to think about now.

          Thanks heaps!

        • Iamnotcheap on 03/04/2018 - 22:40
          +2

          @tebbybabes:

          Yep so your current scenario you should be looking specifically for a tax accountant/advisor

          A financial advisor will consult you on various investment vehicles - property, superannuation, bussines equity investments - all alternatives to buying a house (and potentially offering higher returns).

          You want to think about what you really want and seek that professional.

          The profession overall has lots of people servicing - we are a dime a dozen; the cost of the advice generally will be the quality of your return advice in each. So don’t take the old $49 special, but at the same time do not go for a $2000 all lux style consult. Often they will entertain a first 15 min consult for free to see if they can help, and give you some highlights/information to think about before engaging.

          Whilst the example above is fairly basic, it points out why you want to minimise your tax - however do it with non cash deductions and avoid as much cash deduction as possible (although it will always be unavoidable- I.e interest on a loan, repairs etc).

        • tebbybabes on 03/04/2018 - 22:50

          @Iamnotcheap:
          Can't thank you enough for all the explaining! Much much obliged!

        • Iamnotcheap on 03/04/2018 - 22:57
          +2

          @tebbybabes:

          You’re welcome. Good luck!

        • tebbybabes on 03/04/2018 - 23:02

          @Iamnotcheap:
          +1000 ^

        • kingmw on 05/04/2018 - 22:39

          @tebbybabes: This can be applied when borrowing to buy any investments (not just property) e.g. shares, businesses, commercial property.

          I would recommend selling your old place unless you are really attached to it or want to leave it for capital gains (probably not going to happen for the next few years). Then you can purchase the new one with a small loan and pay it off (unless you are planning to move again and make it into an investment property).

          The major tax savings you get is no capital gains tax on your principal place of residence which is far more valuable than negative gearing. In 2016 alone, this exemption is estimated to cost the government >$50 billion in lost tax/revenue.

          http://www.abc.net.au/news/2016-01-29/tax-concessions-for-su…

  • barbarella on 03/04/2018 - 21:48
    +1

    Without reading the previous answers, I suggest just paying the lower deposit amount from your available funds - extra charges would apply if you take out a mortgage on your current townhouse = a waste of money. Have you asked if they will lower the deposit further? … some ppl are just happy to have their house sold and are willing to accept a lower deposit if it is a certainty that the sale will go through..

    • tebbybabes on 03/04/2018 - 22:00

      Thanks for your reply! At this point, I'm leaning towards that option.

  • SmiTTy on 03/04/2018 - 21:58
    +1

    Not advice nor am I advocating this option, but just to give u another avenue to consider based on your own personal circumstances.

    You could sell your town house, use the funds to pay down your PPOR and then purchase a new investment property.

    Since I assume you lived in the town house from day 1 u shouldn't have to pay CGT. Yes you will need to pay stamp duty buying a new IP and there are significant are entry and exit costs when it comes to property, but it does maximise your tax deductions which may (or may not) be worthwhile in the longer term.

    In the short term it doesn't change your position. U still need a deposit. But perhaps it becomes a bridging loan.

    (u could sell it within 6 yrs without having to pay CGT)

    • tebbybabes on 03/04/2018 - 22:03

      Thanks @SmiTTy.

      That not having to pay for CGT if I sell within 6 years is one of the few things that I'm happy to say I was aware of. :) The rest of what we're discussing, I'm just muddying about.

      • jinroh on 04/04/2018 - 10:48

        (u could sell it within 6 yrs without having to pay CGT)

        I think this is only the case if during that 6 years, you don't own another PPOR (Principal Place of Residence), which you will, since you are immediately buying a new house to live in.

        Eg. if you move out from Townhouse A and live in a rental (or moving overseas), then yes you can delay selling Townhouse A for 6 years and avoid CGT.

        Disclaimer: NOT a tax accountant

        • tebbybabes on 04/04/2018 - 11:25

          Hmmmm, food for thought. Another question I will have to ask my future tax accountant.

        • BartholemewH on 04/04/2018 - 18:51

          Correct, you cannot have a second PPOR, (hence the term Principal) . The CGT concession is meant to be used in circumstances where you temporarily cannot live in your PPOR.

  • WTF on 03/04/2018 - 23:08
    +7

    Here are some thoughts.

    First, congratulations! Its a substantial achievement to own a house without a mortgage for most people so you have done well and you are in a good financial position.

    Vendor deposits are very much negotiable. Usually this is 5% (sometimes i have offered 2% and had it accepted). Tell them you will offer 5%. Its a buyers market at the moment and its in the vendors best intrest to keep a potential buyer so I suspect they will agree.

    Dont ever compromise your financial flexibility. Always keep a reasonable amount of cash in hand. Avoid putting all your cash as a deposite. You never know what will happen tomorrow.

    There are plenty of good houses. You will fall in love with another one even if you have to reluctantly walk away from this one. Better to walk away than stretch uourself.

    Now might not be a good time to buy a house. Cannot comment on specific areas but generally the market is flatlining or trending down. You might be best to sit tight and save for a bigger deposit.

    • tebbybabes on 03/04/2018 - 23:10
      +1

      Thanks for the input.

      Everyone's been so helpful… I have so much to think about and a whole heap to research!

      • WTF on 03/04/2018 - 23:14
        +3

        No problem. Buying a house is always stressful. Dont rush into it - the market is not moving up anytime soon so you are not going to missout. Good luck.

        • HardQuiz on 06/04/2018 - 14:00

          Indeed it's a buyers market, I reckon the RE bubble is ready to burst and the economy as whole is entering a tense period, not to mention the global trade war.

  • TheBilly on 03/04/2018 - 23:43
    +2

    Firstly, make sure you have a formal written approval from your lender that you are "unconditionally" approved for that property. If this is not in place, stop there and take a step back, because you are potentially contracting into a sale that you cannot back out of and will be legally be obligated to proceed even if your finance falls through. Dont take anybodies word dven your broker, get it in writing. This almost happened to me and to say it is stressful is an understatement. The alternative is to make an offer and sign the contract but put in a condition "subject to finance approval". This condition will allow you to pull out if your finance falls through giving you a safety net outside of your cooling off period.

    Secondly, you are able to utilise (in Sydney) a system called "deposit bonds" if the vendor accepts this. Deposit bonds are effectively a written guarantee from a financial institution for the amount of 10% of the sale. Typically vendors will not accept this unless (1. the property they are purchasing after selling theirs allows this, 2. they do not need to buy anything after) as the deposit bond is literslly just that a written guarantee and not cash.

    I would not go down the deposit bond route if you do not have a written formal approval from the lender for that property, because if you default on your contract, the vendor can cash this in and you willed be chased by the guarantor (bank or insurance company) for the 10%.

    • tebbybabes on 03/04/2018 - 23:48

      Thanks for taking the time.

      Yep, we tried the deposit bond route, but the vendor didn't want to accept it. The REA described them as somewhat "old school" and said they didn't feel comfortable about it. I bear no hard feelings about their decision.

      Yep, thanks for the advice, will await for this unconditional approval.

    • TheBilly on 03/04/2018 - 23:51
      +1

      Also everybody guiding you will follow the path of least resistance. Example; my conveyancer said, dont put in the subject to finance condition you have 10 days cooling off so you're sweet it doesn't matter, in hindsight because it was easier for them to not request it and have to negotiate with the vendors solicitor. Unfortunatelt my finance situation lagged longer than anticipated and before you know it Im $3000 out of pocket the bank is causing issues with the finance and cooling off is expiring in 1 day. I then gave the conveyancer some lip, because their advice pushed me into that situation, had I forced them to negotiate the condition then I would've been sweet.

      • tebbybabes on 03/04/2018 - 23:54
        +1

        Well I'm certainly glad I posted and asked for advice.

        Everyone's input has been gold! I'm much more forwarned and forarmed now.

        I'm also glad you mentioned "almost" in your case. I can only imagine the stress!

  • Thor Bargain God on 04/04/2018 - 03:31
    -4

    I would advise possibly dealing with a proper banker rather than a broker if you want to better understand your borrowing options for a start. Remember a banker, broker or real estate agent are not qualified to provide direct advice that can be relied upon regarding tax/ legal matters etc. and you should do your own due diligence or go to someone who is licensed to actually provide qualified advice if you are not sure. I'm taking a guess but I would think that it would be possible for the bank to establish the loan facility that could be drawn down to pay the deposit initially, followed by the final settlement. Bridging finance is also a possibility. I think the deposit is the least of your worries though and the tax position could be a big problem if your borrowings are predominantly against your main residence, rather than the investment property. It makes a lot of sense for some people to rent out their homes if they still owe a decent amount on them because they can still claim the interest payments, depreciation etc. on that home, plus you have 6 years to sell a home that was your primary residence capital gains tax free. In your situation, you will still enjoy the same CGT provisions, which is great if you think the home is going to enjoy strong near term growth, but you wont be able to claim the interest costs which will be against your new main residence. Property experts I've read normally recommend that you sell the home you are in to contribute 100% of the equity to your new home, then use that as collateral for a new loan to invest in another property with good investment fundamentals and a new capital base. If you hold onto the place longer than 6 years though, you lose the CGT exemption, which could be costly. My understanding is that you also can't refinance an investment to borrow additional funds and claim the interest on those additional borrowings because you're likely to have borrowed that money for a purpose of a personal nature and other than the investment itself. I have met a number of people in banking, real estate etc. who don't know of or understand these rules and are incapable of providing reliable advice. Many also don't regard their role as being advisory in nature and just supply the financial product or service in line with your request/ wishes. Professionals have also been told in the last couple of years that they are not allowed to practice and advise in certain fields of expertise without the right license and designation. For instance a chartered accountant is now not supposed to provide investment advice, when history has proven that they're often the best and most educated people to ask about these matters. Remember the educational and training requirements around becoming a general retail bank lender, real estate agent or mortgage broker can be very low and I have met many who wouldn't know or see any need to know anything about this stuff. All of this may mean that you need to back out of this property deal or restructure it. You may be able to exercise cooling off rights, which differ from state to state. I might not be reading your notes correctly, but is not clear whether the vendor has accepted your offer to establish a binding contract. If they have not, you can withdraw your offer immediately without any further obligation. If you have entered the contract, you would still lose or owe a smallish portion of your deposit under the cooling off rules (only if the REA and vendor chose to fully exercise their rights). Just check this out because many agents try to charge "holding deposits" of say $2k just to make an offer, which is actually an illegal stand-over tactic, before taking the remainder 10% deposit when the contract is fully executed and exchanged. I don't profess to be an expert and I may be wrong occasionally but I wouldn't put forward any of this info if I wasn't fairly sure and confident. When I initially read your problem I only saw one issue but now realise there are likely to be a few things to work through relating to income tax, capital gains, financial products and borrowing structure, contract law and real estate legislation. Get some professional advice if needed but don't discount your ability to conduct your own research, and don't let unqualified people pull the wool over your eyes and push you around, or assume they are acting in your best interest. Sorry if I've rambled a bit but I hope I've helped a little to point you in the right direction for further research and enquiry to corroborate what I've said.

    • WTF on 04/04/2018 - 04:03
      +8

      Geeze i nearly fell asleep about half way through!!

      Btw i have used brokers and banks. Both will try to rip you off if you are naive and ill informed. Best option is to do your homework and make sure you are well informed.

      • garetz on 04/04/2018 - 06:54
        +2

        Thats true for pretty much everything in life.

    • tebbybabes on 04/04/2018 - 08:06

      Thanks for taking the time to share.

      It does feel like I'm in over my head, but your input as well as everyone else's is going a long way to showing me where I need to brush up on..

    • Other on 04/04/2018 - 09:59
      +2

      I would advise possibly dealing with a proper banker rather than a broker if you want to better understand your borrowing options for a start. Remember a banker, broker or real estate agent are not qualified to provide direct advice that can be relied upon regarding tax/ legal matters etc

      A bank employee can only recommend their own product, they can't even tell you the best rate on the market.
      Most don't even know the difference between redraw and offset for tax purposes.

      Find a broker who is a cta (Chartered Tax Adviser) and they can advise on it (or find a cpa).

  • SeVeN11 on 04/04/2018 - 05:50
    +1

    You are one brave person to trust the banks/broker to tell you how much you can afford given the findings on the banking royal commission. They have found banks/brokers under-state living expenses so that customers can borrow money(even though doing so will put customers in financial stress)

    In addition I suspect they added rental income (which you do not have yet) to your serviceability so that you can borrow more.

    You are the prime example of exactly what is going wrong in the financial industry. ie. Being taken for a ride and not knowing about it.

    Assuming bought 900k house and borrow 80% ie. 810k loan @4% your mortgage will be 3800pm (880pw) ~600pw will be interest.

    If interest rate increase to a modest 5% your mortgage will be 4300pm (990pw) ~780pw will be interest.

    If interest rate. ncrease the historical average of say 6% your mortgage will be 4800pm (1100pw) ~930pw will be interest.

    This is assuming you don't pay any extra off for the next 30 years!

    You obviously earn a lot and must be smart enough to have done something right, but it's so sad to see that you haven't spent anytime educating. Please read some financial blogs etc. And learn how a mortgage repayment is calculated (it's called an annuity)

    Do a spreadsheet with your incoem, taxes and expenses etc and figure out how much you think you can afford comfortably.

    If you can't bother doing this, I don't think you should get into this sort of debt.

    Good luck.

    • knasty on 04/04/2018 - 07:30
      +1

      This. Never trust someone else to tell you what you can afford when they have a vested interest in the result. Work out yourself what you can afford based on prior history as well as a buffer based on expected and unexpected changes in life. Then compare this against what an institution/broker says from a place of knowledge rather than ignorance.

      By the way there are a very small number of fully independent, no commission, fee for service mortgage brokers in the market who will rebate any commissions paid to them back to you. Hence no conflict of interest. That's the only way I will finance now. Similarly fully independent fee only financial advisers.

    • tebbybabes on 04/04/2018 - 08:14

      Thank you for taking the time. At least that's one thing we did right. We computed how much we could afford to pay. So far, all computations for repayments are still coming in under doable. HOWEVER, I haven't computed until 6% though. I Will firm up my loan position throughout the day. At least now, I have a much better idea of other things to ask.

      • Therage on 05/04/2018 - 15:59

        Also just keep in mind that interest rates could go up. 7 years ago when we bought our house rates were at 7%. Realistically over the course of your loan they will return or even surpass this.

  • darkchoc on 04/04/2018 - 09:32

    Here's an alternative option:

    Take a Mortgage on your existing home (home A) to pay for the deposit for new home (home b).

    You will have two loans.

    Now consider renting out the new home (home b) and treat it as an investment for a few years from day 1. Then both your loan for your deposit ("which you took out to find the investment purchase") and your mortgage for home b ("investment property") will be tax deductible whilst the new home is an investment.

    Effectively, 100% of the value of the new home, plus other borrowing costs will be tax deductible. This is a huge financial advantage and how negative gearing works. Effectively say interest on 900k will be offset against any income you have at your marginal tax rate which could be 33% on average (so approx 4% X 900k X 33% = $12k p.a.).

    But the downside is, you have to live in your old home (home a). If you moved to New home b, no tax deductions can be claimed for renting out your old home. So you would be missing out on approx $12k p.a. take home income purely from tax benefits

    And that's why it's important to speak to a tax advisor.

    • tebbybabes on 04/04/2018 - 11:31

      Thank you for the alternative option you mentioned. Uhm, at this point, probably not realistic for us, as the wife really fell in love with the new place and the whole point of hunting for a property was to get a bigger space, not really as an investment. But yes, I agree, what you suggested makes sounds fiscal sense. :)

    • kiitos on 04/04/2018 - 20:16

      And another downside of this suggestion is that Home B will now have a CGT liability on it when you eventually sell it.

  • jtc13 on 04/04/2018 - 11:05

    Can you possibly re-draw on existing home loan? We never finalised our home loan for that reason. Essentially paid off but can theoretically re-draw the loan amount if we needed to.

    • tebbybabes on 04/04/2018 - 11:33

      Nah, not in this case, but thanks for the input. At any rate, we have decided to not acquire additional funds just to satisfy vendor's deposit request.

      I should probably update the post.

  • viperxz on 04/04/2018 - 12:26

    Just be careful, you still may need to find the remainder of the 10% deposit in cash prior to settlement.

    Most banks typically lend at 80% of the value of the property (assuming that you paid fair market value, this will usually be the purchase price) without requiring LMI (Lenders Mortgage Insurance), a bank will usually stretch to a higher percentage (say 90%) with LMI however they may be unwilling to stump up > 90% or you may find yourself with limited choices in terms of lenders. If the bank is only willing to lend 90% of the value on the property, then you will still need to find the remaining portion in order to settle on the house.

    If you need to sell your existing property to find this cash, then this may have to get to get a bridging loan to cover the short fall usually which may have a higher interest rate attached.

    Another option is to possibly look at getting an equity release on your current property (as an offset loan) and use that cash to assist with any short fall between the loan and the purchase price (this could potentially reduce the Loan Value ratio on the new property to 80%, allowing you to avoid LMI).

    Note that this will not increase your borrowing capacity (i.e. The total $950k which you can borrow), but it will allow you to effectively have the property paid with 100% finance instead of cash (i.e. 80% on a new loan, and 20% paid with the equity release).

    You will still have two loans which you will need to support up until you sell your existing property, at which point you can pay off the equity release and (if you setup your new loan as an offset account), offset the loan on the new property with the surplus cash from the sale.

    I would advise getting a good mortgage broker, they will assist you in structuring your finances in a way that should reduce your interest and avoid paying unnecessary costs like LMI.

    • tebbybabes on 04/04/2018 - 16:04
      +1

      Hello and thanks for sharing… I just got off the phone with the mortgage broker and it's exactly what he said.

      Whichever lender he has lined up, he feels confident it will get approved, but if the the LVR is higher than 90% then we will definitely get slugged with LMI.

      • viperxz on 04/04/2018 - 18:25

        One last thing, don't forget you will need extra cash at settlement to pay your stamp duty, conveyancing fees, etc.

        On a $900k established property in NSW, expect to pay around $36k in stamp duty alone.

        Buyers focus so heavily on the deposit that the cost of stamp duty is often forgotten, and is an additional cost which must be paid on settlement.

        Congrats on the new house and best of luck getting all of this sorted out :)

        • tebbybabes on 04/04/2018 - 19:40
          +1

          yep, we've factored in those fees as well. In fact, that was one reason I was so leery of covering the whole deposit because I knew there were other expenses coming up as well.

          Thanks for the advice and well wishes!

  • redfox1200 on 04/04/2018 - 12:33
    -1

    get PPOR loan for your current house to 80% then use the money for what ever you want, then refinance the loan into a Investment loan?

  • GC1 on 04/04/2018 - 16:01
    -1

    Just buy a deposit bond - no big deal. That way, you do not have to have 2 x mortgages. notwithstanding the good advice from @viperxz above.

    • tebbybabes on 04/04/2018 - 19:41

      That was the initial route we were going to take, unfortunately the vendor didn't agree to it. Notwithstanding, we have decided on less than 10% deposit for the vendor.

      • GC1 on 05/04/2018 - 02:25

        If you were paying cash, they could not ask for certain serial numbers on the bills while rejecting others.

        There are plenty of things vendors have a choice over. I never thought that accepting or rejecting a deposit bond would be one of them. I would call BS on them.

        But cheers to you on your journey - I love the way you are working through your choices and overcoming your problems.

        I hope you have a successful and cheap path to Real Estate Bliss:-)

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