how to strcuture the loan

Hiya

It's hard to provide a detailed response without knowing the finer details of your situation.

If there's a chance that the property may become an IP down the track then it might be best to pay a bit of LMI and borrow more from the bank. That way, when it becomes an IP you'll have a larger loan to claim on and you might also be able to claim back some of the LMI costs (depending on how long you've had the loan for).

However, you also need to consider your tolerance to risk. Some people take comfort in having a lower LVR.

What are your IP plans over the next 10 years or so?

Cheers

Jamie

Hi Smartcube.

As Jamie mentioned it does depend on your risk tolerance and future goal, so planning is key and knowing what each "purchase" would do to your cash flow and savings is helpful. 

Really need to know your personal situation to comment but giving you a general idea…

Say you did use a 20% deposit – on an $540,000 purchase the outlay would be $108,000 for deposit + ~$20,000 for Stamp duty = $128,000…all good, you still have $72k in cash if you wanted to buy other IP in 2 years time; also to avoid LMI you will have to find other $128,000 ( presuming same price)  so around $56,000 to save in 2 years OR you could pay for LMI on your 2nd purchase. 

^ Sounds all good…now this is where it can get a bit messy and complex…Your future borrowing capacity.

1. getting your 1st loan would be easy as you have so much cash and im presuming no major debt ….Getting your 2nd loan "may" be a bit harder as you would now have a home loan debt from your 1st purchase and less cash and as life goes on more responsibilities, accidents, more lialbiltes etc…

2. Borrowing capacity tend to drop off as you buy more ( a very general statement as there are some expections  ) so getting your 2nd loan may be tricker and much harder especially with LMI involved

3. So if you find out that your personal borrowing capacity drops off dramatically after your 1st purchase than…. max out your LMI exposure early if your planning on buying again in a short period of time…leave the "Easy loans/ 20 % deposit loans " till much later when everything becomes more complex and  harder to approve/afford…

4. Yes you can claim LMI back over 5 years, if it's used as an IP.

5. You may want to buy your PPOR next and it may be > $540,000 were you gonna find the 20% deposit now?? always better to pay for LMI on your IP compared to your PPOR.( lower loan for your PPOR VS your IP)

Go speak to your banker or broker regarding

1. Current borrowing capacity

2. Future borrowing capacity AFTER you bought your 1st property ( ie 2nd future borrowing capacity)

3. Future borrowing capacity with standard rates 1.5% higher than current rate  AFTER you bought your 1st property ( ie 2nd future borrowing capacity)

4. Re do number 2 and 3 based on a 90% and 80% LVR borrowing. 

Plan plan plan.

Cheers

Depends

Say it is a $540,000 property with $40,000 in stamp duty and costs. You have $200k cash.

Since you are going to rent the property out in the future you would want to borrow 104% of the purchase price. This may be hard to do without other security, but thinking outside the square there are a few strategies.

Imagine if you you could borrow $580,000. After a while you could move out, rent the place and have the interest on the $580,000 loan fully deductible. You will have access to $200,000 cash for your new PPOR.

So how do you do it?

You should seek legal advice about gifting $200,000 to an appropriately set up discretionary trust which you can control. You then borrow 20% deposit from the trust and obtain the other 80% from a major bank. The trust has lent you money so it could take a mortgage over the property after the bank. This will be good asset protection.

In addition, the trust can lend you the money on a, say, 10 year term with an interest rate of zero percent for the 1st 2 years while you are living there – subject to being allowed in the deed, Once you move out and rent the property the interest rate could be then at commercial rates of around 8% or so – speak to your accountant about how much.

By the time you move out hopefully the property would have increased in value. Say the value is $725,000. This would enable you to apply for a loan of $580,000 with a major bank  This new loan could be used to pay out the loan to the trust. Refinancing one loan with out doesn't change deductibility of interest so the interest on the new loan should be deductible in full – if set up right.

Net result is 104% loan. Asset Protection. No extra interest and more tax deductions once you move out.

Just make sure you get proper advice on this as there are many legal and taxation issues to consider.