Ownership may be divided
The decision about who will own the property and in what proportion is typically based around individual incomes and marginal tax rates, to maximise rebates and to minimise tax obligations.
However, it’s also essential to consider the future. One party to the contract may be the lower-income earner now, but their future earning potential may be very different. Depending on the time horizon of the investment; they may need to sacrifice some rebates now to benefit from more significant returns in the future.
Exit strategies should also be considered. Capital Gains Tax obligations can be minimised by timing the exit in line with periods of lower-earning, planned absences from the workforce or retirement dates, and all may influence the ownership split nominated now.
Ownership splits of 99/1 to secure the vast majority of claims in the highest income earners name are now frowned upon by ASIC. They mandate that a borrower must stand to gain a ‘distinct benefit’ from being a co-borrower and 1% no longer amounts to that in their view.
To have a 1% interest and liability still means that borrower is jointly responsible for the entire debt and they must seek independent legal counsel before committing to such an arrangement. The accountancy fees for a 1% benefit is also unlikely to be justified by the small tax benefit.
The minimum is now a preferred 80/20 split.
In the case where a couple decides to have the property 100% in the higher income earners name, if the equity offered to secure the purchase is jointly owned, the other partner will be required to be a guarantor, and therefore is jointly responsible for the loan.
What one owns, the other does too, and what one owes, the other does also!
Deciding on the ownership split is a decision best made in conjunction with your accountant and mortgage broker.
A couple buying together will nominate whether they want to be:
- Joint tenants
Joint tenants hold the property equally between them and the income or loss from the property will also be split evenly. The property can only be disposed of wholly, not in parts and on death, ownership of the property passes to the surviving owner. Most committed couples would elect to have this setup.
2. Tenants in common
Shares in the property can be uneven (in line with the lending and regulator’s guidelines), and so the income and tax benefits are attributed according to percentage ownership. Tenants in Common can dispose of their share if they choose to. On death, the will of the deceased determines the outcome of the deceased’s share in the property.
ATO – Co-owners of a rental property
“Begin with the end in mind.”
Everyone needs to start somewhere.
The first property you buy will most likely require a cash contribution.
Having a deposit requires diligently saving over an extended time. Reaching a savings goal, such as a deposit for a property, no matter how modest is proof positive of your ability to exercise financial discipline and delay gratification.
Fortunately, lenders see it the same way!
If you can save consistently, it is reassuring to them that you will be able to do so when it comes to servicing your debt. This routine is especially promising if your rate of saving is commensurate with the anticipated mortgage payments.
The maximum LVR (currently) is 90% including Lenders Mortgage Insurance for investment purposes or 95% including LMI for a principal place of residence.
Other sources of cash for a deposit could be an inheritance or a gift. A gift must be authentically a gift and not expected to be repaid; otherwise, it would be considered a liability and reduce your borrowing capacity.
The lender will require a Statutory Declaration from the benefactor to officially renounce any expectation of the money being repaid in the future.
Parents can assist their children by providing access to their equity. They can guarantee a separate loan of 20% of the property’s bank appraised value plus costs, secured by the equity in their property.
The borrowers, however, must be able to meet 100% of the repayments required. Should they default, the parents are responsible for the separate loan and must make good the outstanding amount.
FIRST HOME BUYER GRANTS and STAMP DUTY CONCESSIONS
State governments from time to time offer grants and stamp duty concessions to assist first home buyers to enter the market. Questions arise about whether it makes more sense to buy a home to live in rather than invest and become ineligible for any grants or stamp duty concessions in the future. Once again, there is no simple or ‘one size fits all’ answer, but consider the following:
If borrowing capacity and employment allow a purchase in a location they are happy to live in, and they can comply with all of the qualifying guidelines, including the mandatory occupation conditions, then accessing the FHOG and stamp duty concessions may be an excellent approach for many young people.
However, if borrowing capacity limits the options, then rather than not be ‘on the ladder’ at all for an extended time, it’s probably a tactical move to invest where the budget allows and realise the gains of several years of tax concessions, rental income and possible capital appreciation, rather than holding off and doing nothing. (Remember the opportunity cost of not making a decision to invest)
Depending on the time involved, an investment property could be cashed in down the track to provide a deposit for a home or possibly provide equity to leverage off.
Grants and concessions are not permanent fixtures; they vary according to the size of the state and federal treasury’s coffers, the state of the economy, the property cycle, lending criteria and political climate. Delaying entering the market until you have a bigger deposit or the qualifying criteria relaxes, may mean missing out altogether if prices rise in the interim or the incentive payments are withdrawn.
Remember the value of time in the market – delays mean missing out on potential growth.
Many young people prefer to ‘rentvest’ – they cannot afford to buy where they prefer to live (remember the section on Locations and Infill vs Greenfield sites? Millenials tend to opt for proximity over the often more affordable space) and so rent to maintain lifestyle and access to employment and invest where they can afford.
Lenders will include the estimated rent (rental appraisal needs to be supplied) from the investment property as income, increasing the applicant’s borrowing capacity. (if the applicant is renting that’s a cost that needs to be included in their living expenses). In conservative times, lenders will count less than 100% of the rent to be received and 100% of the rent being currently paid!
Once again, the advice and support of an expert, up to date, specialist broker is crucial.
A group who have the opportunity to invest and build wealth for the future by virtue of some very distinct advantages they rightly enjoy in return for their dedication is our Defence Force personnel.
As the finance ‘goal posts’ constantly shift for most of us, their reliable and recession-proof income make them dependable finance applicants. Their access to subsidised housing and government-sponsored grants and concessions without the usual criteria imposed provides a golden opportunity to invest in property and reap the benefits of time in the market.
It pays to consider all your options and to think outside the square.