Loan Tip: Outgoing Lenders Deliberately Delaying Refinances

When a person refinances their loan from one lender to another the mortgage must be discharged with the outgoing lender – the one they are moving away from. This means a ‘mortgage discharge’ form needs to be signed and submitted to the outgoing lender.

In the old days faxes went missing and forms were never received and this allowed the outgoing lender to delay the settlement.

These days it seems forms still go missing even though they are emailed in. But recently we have had one where the client’s signature on the discharge form apparently did not match the signature on the banks records. The client had to go into a branch to show ID and prove it was them to submit the discharge form.

Another, actually the same lender, wanted the spouse to sign the discharge form too, but she was not on title and could not have given a mortgage, but she was a borrower.

In both cases it was the day of the proposed settlement that this happened.

Another non-bank lender – but under a company owned by the same bank above, they have developed their own special discharge form which is not available online. The client must ring them up to get the form sent to them. This allows the lender a last attempt at discouraging them from leaving by making further offers of discounts etc.

These tactics appear to be

a) delaying tactics to allow the outgoing banks to get more interest, and

b) making it hard to leave discourages people from leaving, and

c) it is a form of punishment for leaving

When refinancing where funds are needed for settlement of another property, I suggest you get in early, send the discharge form even before your new loan is approved.

If there are any delaying tactics ring the lender’s complaints section, and threaten reporting them to the AFCA Home – Australian Financial Complaints Authority (AFCA)

I should add one way around this is to use a ‘fast refi’ type process where the new loan settles without the discharge of the old mortgage. A few lenders offer this, and the first thing the old lender knows about it is the repayment of the loan by the new lender, then the discharge of mortgage.

See discussion at

https://www.propertychat.com.au/community/threads/loan-tip-outgoing-lenders-deliberately-delaying-refinances.41658/

Indefeasibility and the Torrens System

I don’t advise on property law, but this topic is relevant to asset protection.

The Torrens system of registration of title for real property was first introduced in the late 1800 and it has slowly been replacing the existing system since then. The existing system of title is known as ‘old system title’ and it was complex and cumbersome.

In old system title when a property was sold the ownership had to be proved by both the physical title and locating all the previous transfers relating to that title. Sometimes documents went missing and it was a real pain in the arse being both time consuming and costly.

Torrens was introduced as a system of registration to replace all of this. The name registered on title was the legal owner. This is enough proof.

Indefeasibility refers to the fact that what is registered on title is proof. So, a registered owner is proof of legal ownership. A registered mortgage is proof of the legal mortgage. It is said to be a ‘system of title by registration’.

But this doesn’t mean registered ownership takes priority in all cases.

An example is fraud. Where title to a property is fraudulently transferred to someone else then them being registered owner does not mean it is indefeasible. This can happen with mortgages too. There is a recent case where one spouse mortgaged a jointly owned property to borrow money by forging the signature of their spouse. Since this was fraudulent the lending bank could only recover half of their money.

Keep in mind that there are also unregistered or equitable interests. The legal owner may not be the beneficial owner of a property. This happens where they are acting as trustee under an express trust, such as a discretionary trust, or where a trust is implied such as a resulting trust. In these cases the courts will enforce transfer of title based on equitable grounds.

Then there claw back provisions in various legislation such as

  • S 37A of the Conveyancing Act NSW (and other state equivalents)
  • S 120 to s121 of the Bankruptcy Act
  • Family Law Act
  • Succession Acts

Title of a property might be held by person A but the courts can reverse this and transfer it to person B and then to creditors, spouses, missed out beneficiaries etc.

So, in summary, indefeasibility does not mean a property dealing cannot be attacked, but it is evidence of the current legal ownership of property.

Discuss at https://www.phttps://www.propertychat.com.au/community/threads/legal-tip-223-indefeasibility-and-the-torrens-system.40248/ ropertychat.com.au/community/threads/legal-tip-223-indefeasibility-and-the-torrens-system.40248/

5 Different ways to Fund Retirement

Retirement can be funded from 5 basic classes of income/assets, which are:

  1. Income
  2. Capital gains
  3. Capital
  4. Borrowing
  5. Government pension

Income is the obvious one. You invest in shares or property and receive dividends or rents. You could also work if you had to.

Capital gains is also relatively obvious, but often not considered by the ‘never sell’ type.

Capital gains are often better than income because they are taxed at half the rate of income (using the 50% CGT discount). Capital gains can be obtained by selling longer term held assets such as shares or property.

Capital, or Corpus, is not usually considered directly, but many financial planners and government websites assume you will eat into your assets so that on the day you die you will have $1 in the bank. This is similar to capital gains, but different because you are eating into the original cash you have contributed to the investment there is no tax payable.

This could be cash in offset accounts – which can be a great way to fund retirement as where the offset is attached to an investment loan the increased interest will be tax deductible.

It could also be from the proceeds of shares of property after they are sold.

Borrowing is still possible, but it will be very unlikely most people will be able to utilise this in their retirement. One way to possibly do it is to borrow as much as possible just before retirement and to slowly use these funds. Another way is the reverse mortgage products.

One method rarely considered though is borrowing from children to fund your retirement. This can benefit both parent and child because instead of selling that property and losing future growth, paying extra tax etc, the child could lend you some money on the expectation of inheriting the property at a later date.

The pension is the backup strategy for many– government will fund your retirement if all else fails. Some can also get a part pension combined with part from one or more of the other classes above.

Note that I didn’t include superannuation as a separate category above, as income from super wil be in one of the above forms anyway.

Discuss at

https://www.propertychat.com.au/community/threads/5-different-strategies-to-fund-retirement.39972/

Debt Recycling v Borrowing Extra to Invest

Strictly speaking borrowing to invest is a different strategy to debt recycling.

Borrowing to invest could incorporate debt recycling, but it is really about borrowing extra money to invest over and above what you have already borrowed.

Debt recycling, on the other hand, is about converting existing non-deductible debt into deductible debt. It doesn’t involve any additional borrowings.

Example

Bart has a home worth $1mil and an owner-occupied debt of $400,000. Bart borrows an extra $200,000 to invest in income producing shares.

Loan A           $400,000           Non-deductible

Changes to

Loan A $400,000      Non-deductible = still the same

Loan B $200,000           Deductible

$600,000 total Debt

Lisa on the other hand wants to debt recycle and she has a home worth $1mil with a loan of $400,000 which is non-deductible. She also has $150,000 in the offset account and wants to invest in shares.

Loan A $400,000      Non-deductible      with $150,000 in attached offset

Changes to

Loan A $300,000      Non-deductible with $50,000 in attached offset

Loan B $100,0000           deductible when drawn down to buy shares

$400,000 total Debt

Of course, borrowing to invest and debt recycling can be combined, and this is what Maggie does. She has a $1mil main residence with $400,000 owing on it and $150,000 in an offset account. She also wants to buy shares but wants $200,000 worth

Loan A $400,000      Non-deductible      with $150,000 in attached offset

Changes to

Loan A $300,000      Non-deductible with $50,000 in attached offset

Loan B $100,0000           deductible when drawn down to buy shares

Loan C $100,0000

$500,000 in total debt

Maggie has used $100,000 to debt recycle as well as borrowing another $100,000 on top for further investments. She could potentially even combine loans B and C above.

Discuss at

https://www.propertychat.com.au/community/threads/tax-tip-219-debt-recycling-v-borrowing-extra-to-invest.39792/

Strategy of Borrowing from a Testamentary Trust instead of Winding it Up

Testamentary Discretionary Trusts (TDT) are the best sort of trust out there, but someone has to die for them to come into existence. So, they are relatively rare. Also, the capital of the trust has to come from the deceased for the extra tax benefits to work (excepted trust income).

So, I cringe when clients approach me wanting to wind up a TDT that their parent has left them in control of.

Their idea usually goes something like this. I have a $1mil loan on my main residence and the trust holds $1mil worth of assets. If I wind up the trust, I can pay off my home loan and save interest.

It is a valid point, but once a TDT is closed it can’t be reopened again, and even if kept open new capital can be injected, but income generated from it would not qualify as except trust income and would not get the concessional tax treatment in the hands of children.

There is a simple way around this though, and that is to get the trustee to make you an interest free loan.

Example

Bart’s dad Homer dies and leaves $1mil to a trustee of a TDT set up under his will. Bart has a $1mil home loan so winds up the trust and pays off the loan.

Lisa is in the same position, but she controls a separate, but identical trust. Lisa gets the trustee to lend her $1mil interest free which she uses to pay off her loan. She has not no deductible debt now. So, she uses the $3,000 she was paying the bank each month to pay back the trust.

The trust now has money with which to invest. The income from these investments can go to Lisa’s children tax free – because they can each earn $20,000 pa tax free so it will be ages before the trust’s income is more than this.

Meanwhile Bart is making the same investments as Lisa, but he receives the income himself and is taxed at 47%

Over the next 15 years or so Lisa would have probably repaid the full $1mil back to the trust so it is now generating about $40,000 per year in income which comes out tax free to her kids.

Once the kids start working, she will have to reassess where the income goes, but until then there are huge savings.

Tip – Don’t wind up a testamentary trust without careful consideration and legal advice.

Note that this would also give great asset protection as well.

Discussion at:

https://www.propertychat.com.au/community/threads/legal-tip-115-strategy-of-borrowing-from-a-testamentary-trust-instead-of-winding-it-up.39662/

Loan Tip: Not everyone needs an Offset Account

Offset accounts are great and most people should have at least one offset account, but there are situations where an offset account is not necessary.

Three situations I can think of are

  1. Someone with low cash savings, and unlikely to have cash savings
  2. Where the interest rates are higher on offset loans
  3. Where there are large annual fees

Example

Example

Loan product with an offset account is 3.8% and without an offset account is 3.4%

Interest on $100,000 at 3.8% = $3,800
interest on $100,000 at 3.4% = $3,400

The question is at what point does 3.8% rate equal $3,400 and working backwards this seems to be $89,474. so this means $10,526 in an offset or more could result in savings

Therefore,
interest on $100,000 at 3.8% with $10,526 in an offset = $3,400
Interest on $100,000 at 3.4% with no offset =$3,400

So this means unless the borrower has $10,526 in the offset, or more, they would be better off without an offset account.

Also offset loans often have a $395 annual fee. So that might mean about $20,000 is needed to be ahead.

Another situation where an offset may not be needed is where a person intends to smash the loan down and has no intention of investing. But in these cases I would probably suggest an offset account because circumstances change unpredictably.

Discuss at

https://www.propertychat.com.au/community/threads/loan-tip-not-everyone-needs-an-offset-account.39612/

Claiming Interest after Sale of Asset at a Loss

Some investors end up selling a property or shares at a loss. They may have borrowed to acquire the property or shares but the sale proceeds may not be enough to pay out the loan – they probably would have used another property as security for at least part of the loan.

In certain circumstances it is possible to keep claiming the interest on the loan in these cases even when there is no income coming in.

Example

Bart bought a property in a mining town for $500,000 and he borrowed $400,000.

The property dropped in value to $300,000 and the bank has let him sell the property but to continue with an unsecured loan of $100,000 (it does happen).

Generally, the interest on Bart’s loan would continue to be deductible as long as he does not try to artificially increase his benefits by extending the loan term, increasing the loan etc. Also, Bart’s case would weaken if he happened to have $100,000 cash in a savings account.

If you are going to be selling at a loss seek tax advice well before hand so you can potentially set yourself up for much more in tax savings which could help you reduce the pain on the loss.

Seek tax advice well in advance of selling – from your tax agent or tax lawyer.

Discuss at

https://www.propertychat.com.au/community/threads/tax-tip-211-claiming-interest-after-sale-of-asset-at-a-loss.39521/

Helping an Elderly Parent Buy a new property

Get some legal advice before trying this.

Some people want to help their elderly parent(s) purchase property. This might be the parents moving to a more suitable property or the parents becoming owners instead of renting.

Helping the parents into a property can also help the children too, because they may potentially inherit the property at a later date and there can be great tax concessional along the way.

There are basically 3 main ways an adult child could help a parent into a property:

a. gift

b. loan – at interest or interest free

c. purchasing part of the property.

There are various estate planning consequences to each of these and also practical consequences.

Some things to consider:

  • if the parents own the home it might be 100% CGT and land tax exempt, if the child owns part it may not be completely exempt.
  • If one child made a gift and they have siblings and the parents die before they gift giver then the other siblings may also benefit from the gift.
  • if it was a gift and you died the next day after making the gift your family would potentially miss out
  • If it was an interest free loan and nothing done for 6 years it could become unenforceable
  • If they have incorporated a testamentary discretionary trust in their will and it the gift all came back to ‘you’ this could provide tax free income to your minor children for years to come.
  • If you gift it and parent A dies first parent B might remarry…

An example of how It could work

Bart and Lisa are adults with one parent left – Homer. Homer lost his house years ago and is renting. Bart and Lisa each have their own homes fully paid off and some cash in the offset accounts to their separately owned investment properties.

Bart finds a property with development potential. It is just around the corner from where Homer lives in his rented flat. Bart is going to purchase the property and is deciding what entity to put it in when he has an idea.

The property purchase price is $500,000. He has enough cash to pay for it so he could just buy it outright, but since his dad is not getting a main residence exemption for CGT Bart talks to Homer, his dad, and they decide to buy it in Homer’s name.

Homer signs the contract and Bart lends him the 10% deposit with a promise to lend him the rest for settlement.

Bart then realises that if Homer dies his sister Lisa will end up with half the property. So to make things fairer he talks to Lisa and gives her 2 options

  1. Lisa put in 50% of the purchase price at settlement, or
  2. Homer leaves the whole property to Bart and Lisa agrees not to challenge this if it happens.

Bart and Lisa decide to ‘go 50/50’ and each lend Homer $250,000 and Homer settles on the property. It is a 5 year interest free loan which they intend to renew each 5 years.

Bart arranges various approvals and the property is now worth $1mil when Homer dies 4 years later.

Under the terms of the will of Homer 50% of his assets would go into each of 2 testamentary discretionary trusts with one controlled by Bart and one controlled by Lisa.

They each now have 50% of an additional property which would be could be sold tax free or held onto with a cost base of $1mil. There has been no land tax along the way because this was Homer’s main residence and they have each gained further tax deductions by using cash in their offset accounts.

Furthermore, any income generated from the property from that point could be streamed to their minor children, as beneficiaries of the trust, with each child getting around $20,000 without having to pay tax.

Just before Homer’s death they also forgave the loans they made him – so this meant that an extra $500,000 was driven into the testamentary discretionary trust so they could generate even more tax free income.

Discuss at:

            Legal Tip 208: Helping an Elderly Parent Buy a new property            https://www.propertychat.com.au/community/threads/legal-tip-208-helping-an-elderly-parent-buy-a-new-property.39377/

Written by Terryw Lawyer at www.structuringlawyers.com.au

Moving out of the Main Residence – When can you claim Interest on loans?

There are 2 major issues when taxpayers want to claim the interest on a loan relating to a former main residence:

  1. Redrawn amounts
  2. Timing

Redrawn amounts and Mixed Loans

Interest is only deductible if the loan it is incurred on was used to purchase the property, or for improvements etc. Where any amounts have ever been redrawn from a loan the interest would need to be apportioned.

Example 1

Tyrell borrowed $500,000 to buy a main residence. Along the way she paid it down to $450,000 and then redrew $50,000 to buy a yacht (which is actually a small boat, but sounds better if he calls it a yatch).

This loan no longer relates solely to the property but is a mixed purpose loan so only 450/500 or 90% of any interest on the loan could be deductible once the property is available for rent.

Example 2

David used a LOC for his loan to purchase his main residence and borrowed $500,000 initially. Every week he deposited his salary and then redrew amounts to live on. The amount of the loan relating to the property will decrease each week and at the end of 5 years the loan would be extremely mixed.

He would have to spend hours to work out the portion of the loan relating to the property and might find that this might only be 10% of the loan amount.

(this is why you should never use a LOC as the main loan, but only to ‘access’ equity)

Timing

The other issue is timing. A person cannot start claiming interest until the property is available for rent. This is generally only after you have moved out and have advertised the property for rent at market rates. While you are living in the property and advertising it the property wouldn’t be available for rent, so you could not claim interest during this period.

There are also timing issues on when interest is incurred and debited to an account because interest is generally incurred daily but added monthly to the loan.

Example 3Let’s say someone moves out on the 30th and immediately advertises the property for rent and on 1st of the following month they are charged $1,000 in interest. Can they claim that interest? No, well not in full because interest is charged in arrears and added to the account monthly. So, 29 days of that interest related to the period you would living in the property. So, in the first month only 1/30th of that $1,000 should be claimed.

Loan Tip: Overcoming Cash out Restrictions When Buying Main Residence

This strategy is simple yet often overlooked.

Strategy: When buying a new main residence borrow 80% to acquire it, whether you need to or not.

Example

Bart has $400,000 cash and wants to buy a new main residence for $500,000. He plans to borrow $100,000 and then later set up a LOC to invest.

He borrows $100,000 and settles on the purchase. Then he asks for a $100,000 LOC and the bank starts asking questions. Eventually, after giving a DNA sample Bart is approved, but they want a statement of advice from a financial planner saying that Bart will invest in shares.

Lisa is in the exact same situation. Lisa gets some credit and tax advice and borrows $400,000 to buy her main residence. At application stage she splits the loan appropriately so that at settlement she can pay down 2 loan splits and is left with one split with $100,000 outstanding.

  • Lisa had no questions asked about future investment plans,
  • Lisa got the lower main residence rates for all of her splits (prob paying 1% less than Bart),
  • Lisa isn’t incurring any extra interest or costs, and won’t until she draws on the splits, and
  • Lisa has split the loans for tax purposes already.
  • Lisa has saved by not needing to pay a financial planner tosatisfy the lender.

In summary, Lisa has overcome the cash out restrictions and gotten a lower interest rate.