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Question on behalf of my mum, she is 78 and still very active. She is looking at buying a house and land package near Goulburn for $450,000 as an investment. Mum owns her own home valued at $1.2M and an investment property valued at $1.6M and she lives off her super. Apart from the super she has around $200k in savings and would use $150,000 to purchase the property. With a strong net asset position would she be able to get a loan of $300K and what lenders would look at a loan like this?
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Without wanting to sound rude, the question I would put up as an accountant is along the lines of estate planning.
What will happen to this property in the event of your mother passing? Would you/your sibling(s) be looking to keep the property or sell it off?
Regardless of Capital Gains Tax (a nice problem) the buying and selling costs can be significant. If the property was to be sold to clear the debt, then weighing up those costs against the return on investment, compared to other investments, would be worth considering.
If your mother lives on for 10-20 years or longer, then this isn't such an issue.
Sorry, but we like to play devils advocate to make sure all issues have been considered.
Hi Jack,
Sounds like your mum is in a sound financial position. Continuing with what Todd has discussed I'd encourage you think about the purpose of making this investment:
- Is it buying something for the sake of just buying something? From what you have described it doesn't sound like your mum needs the risk (buying any type of investment involves a level of risk) for the hope of having more money later on
- Is it your mum's intention that you or any brothers/sisters take over the property (ie is she buying an investment now that is ultimately intended for?) If this is the case you should work through the estate planning implications, perhaps your mum buying it in her name may not be the best outcome
Regardless of the intention, the banks will want to understand how this loan is going to be paid back. You will need to be able to build a case for the exit strategy - given your mum's age this may be easier said than done. I'll leave it for the mortgage brokers on here to help with if borrowing is even possible.
All the best.
James
Hi Jack,
Could she do it? Yes! Possibly. The lender would be assessing your mums ability to make the repayments and what the purpose and the exit strategy would be. They would look at a whole range of variables that would be very specific to your mum and these could include the expected rate of return the type and location of the property, the ongoing income from Super and other investments and her actual living expenses.
Just because it ‘could’ be done, doesn’t mean it should.
Get lots of professional advice!
Best of luck
Scott
Hi Jack,
I'm actually helping clients at the moment who are in an almost identical position.
There are a number of questions to be answered before a lender would help your mum however the short answer is yes.
What I would really like to know is "who is she doing this for" & "why is she doing this"?
Is it for herself, or is there someone else benefiting from this?
She obviously doesn't need to do it for the money.
I'm guessing that between the super and rental income from the existing investment property, she would be living comfortably.
If she would like to talk to someone, I'm available for a chat.
Have a look at the entry and exit fees for acquiring and disposing the property.
lets guess this for now:
stamp duty: 16000
legals 3000
agents fees to sell 15000
legals 3000
so your mum has over $35k of dead money involved in this project. Is she (or her estate) going to recoup this in between now and when the estate is wound up???? thats the million dollar question........
I hope you can steer your mother towards someone who can look at the big picture, because the short term objective of buying a house is not the only consideration she needs to consider
good luck
bc
The accountant will have to look after this desire she has at this stage of her life, a big job indeed.
Good luck
Hi James, mum's strategy is to sell the property within the first 6 months. With the market in Goulburn she is hoping to make about $40-50,000 - thanks for taking the time, Jack
In that case Jack, it would be prudent to speak to the financial planner. Might be easier options getting funds out of super to cover the balance as the banks could be hesitant for such a short term (or up the rates/fees to make it worthwhile).
Hi Jack, selling in six months? Lets look at some of the numbers:
Based on the value of your mum's existing investment property I'd say she's in the 32.5% tax bracket, so:
Capital gain = $50K
Tax would be about $17K (the gain would likely push her into 37% tax bracket)
Stamp duty on purchase would be about $16K
Agent fee to sell (assume 2%) = $10,000
Legals to buy and sell = $2K
Profit after all said and done = $5,000 if you're lucky
Hardly seems worth it to me
If it is a house and land package would mum only be paying stamp duty on the vacant land which is $162,000 - is that right?
Possibly, you'd have to check with whoever is doing your conveyancing work.
So the stamp duty cost may be a little less. The profit may go up to $10-15K. In the scheme of things, relative to your mum's asset position still hardly seem worth the risk.
Remember, this is based on your thinking you can sell for $50K more than what the purchase price is. What happens if you can't?