- Hi, it's Connie from Prosperity Finance.
I hope you're doing well.
And thank you for being here.
Today, I'm going to share with you a real application
that we did for a young couple.
Now, the reason I want to share this
is because a client came to us for upgrade home finance.
Now client has a good income and equity and deposits.
So it's actually a very straightforward,
simple transaction,
however, we added lots of value to that.
And I thought if I share this
and if you are in a similar situation,
you might get benefit from this as well.
So let's have a look what happened.
Now, this is a real case, as I mentioned,
however for privacy reason, I use fake names.
Let's say the couple, Eric and Sarah.
Eric and Sarah are a married couple.
Eric is IT professional, he's on 100K salary.
Sarah just got a degree in early childhood education.
And she recently got a new job from a daycare center.
Now Eric used to have a family home living in.
After meeting Sarah, they decided to upgrade home
and get into a better suburb, better location,
for their family.
So Eric doesn't want to sell their current property.
The property is currently,
the market value is around 680K and Eric owe BNZ, 400K.
They saw a property they really, really like,
and they want to buy,
they finally negotiate the price for 1.1.
they have 200K from their own savings and family gifting.
So they only need to borrow 900K.
Now, with a total loan amount of 1.3,
which is the existing 400K plus 900K new lending.
It should be no problem,
given Eric's and Sarah's income and equity deposits.
However, in this case, I saw Eric,
if he just applied 900K on top of existing loan
without any restructure,
he probably not get the benefits of restructure.
Why I say that?
I thought I use an example to illustrate
so that help me to explain.
So here, I'm going to share with you a file.
So in this case,
the property that they currently own
and they're looking to rent it out
they can rent it for 540 a week.
Now the total rental income per year
is going to be 28,000.
Now, for this kind of investment property business
they are going to have some fixed costs.
So let's say insurance, 1000
and council rates plus water, fixed charge about 2,700.
And we also allow $500 for maintenance repayments.
So the total cost about 4,200.
Now that leaves profit before interest and tax about 24,000.
So that means if they don't have any loans,
therefore there's no interest,
then they need to pay income tax on the $23,880.
However, they do have a loan.
As I mentioned earlier, Eric owe BNZ 400K.
So there'll be some interest costs.
But how much interest costs can be deducted,
so that they can minimize the profit,
so that they minimize the tax obligation?
Now let's firstly do a quick break even analysis.
So how it worked out is
let's say a client doesn't want to pay any tax,
therefore, the interest costs need to be $23,880.
Now let's use the current way one year rate, 2.39%.
So in order to cost them that amount of interest
then the minimum loan would be around a mil, okay?
But the clients only have 400K loan.
So that means, they definitely have to pay
a tax on the profit, right?
But the closer to this number, the better,
that means, you know, less profit to pay tax on.
Now, the maximum loan actually they can borrow
is actually the market value, which is 680K.
So even though this number is still lower
than the breakeven loan amount,
but hey, it's still better than the 400K
'cause they can borrow extra 280K,
therefore, they can generate additional interest costs
of $6,692.
Now remember Eric is on high income, he's on 100K.
So his tax rates, any additional income,
he has to pay 33% tax on it.
So that means every year,
Eric needs need to pay $2,200 every year
if they don't restructure.
So that's a huge cost.
Let's say over 10 years, that's going to be,
you know, 22,000.
So that's quite significant.
Now, if some situation, that loan is lower
and the market value is higher,
that saving could be much more.
So we see the trigger that the clients need to see
a good accountant, a tax accountant
to get professional advice
to see how they can restructure this property
so that we can get a benefit of borrow more
for the purpose of that rental property.
So in the end, clients came back to us and say,
I've got the advice.
So my accountant asked me to sell the current property,
the rental property into LTC company.
And then we transact, we sell that property
at the market value of 680K.
So then we use the sale proceeds to buy the home.
So this is how we structured the loan.
So the LTC going to have a sell purchase agreement
to purchase this rental property at 680K,
which is the market value.
Now we use bank A to borrow 80%.
This is at the time,
some banks are still allow 80% of borrowing
for your investment property.
So 80% of the purchase price, 680K is 544K.
Now. the remaining loan,
we're going to borrow from a different bank,
let's say bank B.
So that make up 680K loan,
right, now, Eric received sale proceeds
from selling the old property at 680K
and he needs to repay BNZ 400K
so that he got 280K as cash.
Now Eric and Sarah going to buy a new home
for 1.1 mill, part of the transaction settlements
is they're going to use the 280K sale proceeds
of selling the old home.
And they also have the family gifting
and their savings about 200K.
Therefore they have 480K cash.
They only need to borrow 620K from the bank,
also from bank B,
and that's for the purpose of buying new family home.
So the final loan structure is client borrow 544K
under the LTC, which is 80%.
And that loan is going to be interest only for five years.
Now, they approach bank B, through us,
have 130K, which is the remaining of the purchase,
still under LTC.
And then they also borrow 620K under their joint names,
it should be joint names here.
And the security they are going to offer
is their new family home.
The loan to value ratio, LVR, is less than 70%,
and this part of a loan,
because this is for family home purpose,
we structure as principal and interest only,
or sorry, principal and the interest,
and the 136K as interest only.
So the total loan is still 1.3 mil.
Now compared to without restructure, loan structure,
our client had a 400K existing loan with BNZ
and they're going to borrow 900K, so that's also 1.3,
but then we reallocate the loan, so that the 680K,
all for the purchase of existing home,
which is a future rental,
and only 620K is for buying a new family home.
So that way we can say,
actually there are 680K loan against that rental property.
So all the interest costs that generate
from the 680K can be treated as interest expense
to a lower the profit here.
Now, the benefit of this structure,
now, number one,
obviously we help the client to save over 2000 a year
by having this restructure of old home.
Also, as you can see,
we actually split the total loan, the 1.3 mil,
across two different banks.
And we only provide one property as security to one bank.
So the other bank has no control
over the other bank security.
So that gives clients maximum asset protection.
And also remember we structure
the investment property loan as interest only.
So that way the interest costs will be maxed out,
therefore, the profit is minimized,
therefore the tax is minimized.
And at the same time,
because client has more cash
'cause they don't pay principal on the rental.
They have more cash to pay off that family home.
So the family home can be paid off faster.
Now in terms of bank we used for bank A,
we used ANZ at the time,
because number one,
ANZ has good serviceability, so they can lend that amount,
but also ANZ has 80% LVR against investment property
so that we can max out client equity level.
Now for bank B, we use Westpac in this case,
because Westpac has a really good product
so that when you fast track your home loan repayments,
it doesn't necessarily reduce the loan term.
Therefore it doesn't really have an impact
for future borrowing capacity.
Compared to some other banks,
if you pay faster against your family home loan,
then it ultimately reduce the loan term.
Therefore, if you need to borrow more later on,
you actually reduce your borrowing capacity
because you're paying faster on the existing loan.
Whereas with Westpac
they treat repayment of the existing loan
separate from the loan term
so that you can have the best of the both worlds,
you can pay faster,
and the same time you don't compromise
the future borrowing capacity.
So there's quite a few benefits
that come out of this restructure.
So we thought it's really important that we share with you
so that if you are looking to upgrade home
in the near future,
and you're not going to sell your current home,
you want to keep it long term,
this structure might benefit you as well.
I hope this, you know, you find this helpful.
Obviously, everyone is different,
the principle is the same,
but if you are in a similar situation,
we recommend that you get in touch with us
and we provide a tailored structure for you.
Thank you so much for watching today.
I will see you next week.
Bye for now.