Purchasing Another Home. Stuck on Deposit to Vendor, Need Advice

tebbybabes on 03/04/2018 - 20:44
Last edited 04/04/2018 - 11:49 by 1 other user

Good PM. Before I begin, I completely realise that I need the services of a financial adviser and am now actually on the hunt for one. That being said, I figured it wouldn't hurt if I ask the good folks here to further my admittedly VERY MEAGER knowledge. Please bear with me if what I'm asking turns out confusing as I'm only telling it like I understood it.

Background
- We own our townhouse outright.
- We were thinking of getting a bigger place to live in.
- We thought it would be great to buy a bigger place and rent-out our existing townhouse.
- Prior to looking around for houses last year, we asked a bank how much we could borrow because we honestly didn't have the slightest idea. Ultimately, they came back with a 950k figure.

Now
- Easter Saturday, during an open house, we fell in love with a property and made an offer under 900k. Let's call this House B and my existing townhouse House A.
- The vendors want a 10% deposit that I am short maybe 10-15k.
- The finance broker doesn't see any problems securing a loan for us for the purchase. But he is stuck on the 10% deposit.
- Finance broker is suggesting I take out a mortgage on my existing townhouse and use that to pay for the deposit as well as reducing the total loan being applied for in House B.
- Real estate agent is saying that while that is doable, it might not put me in the best financial position because I'd end up being geared "the wrong way"
- Real estate agent is also saying that he spoke to the vendors and that they've agreed to slightly lower deposit that I can probably make but render my liquid assets paper thin.

My options as I understand it:
- scrounge up the slightly lower than 10% deposit from my existing liquid assets while stretching it painfully thin.

or

  • take a mortgage on my existing full equity property.

I am also unclear as to being "geared the wrong way"

If anyone could offer any advice or explanations, it would be much much appreciated. Again, I fully recognise that this is an anonymous bargain site on the internet and probably not the best avenue, but anything shared will certainly help me learn more.

Thanks.

UPDATE as of 11AM 04-04-18
We have decided to not acquire additional funds just to satisfy the vendor's deposit at 10%. We'll just scrape together enough to get to the roughly 8% the vendor agreed to. We tried to get it down to 5% but after some back and forth the REA says for some reason or another the vendor is unwilling.

Financial

Comments

  • diceman99 on 04/04/2018 - 18:28
    -1

    Get a "line of credit " against your existing town house. You can use this line of credit as a gigantic credit card. Use a portion of it as your 10% or whatever percentage you require for your deposit on 2nd residence

  • tebbybabes on 04/04/2018 - 19:39

    Just wanted to say that Ozb has limited my plus votes in a 24 hour period. That's why I haven't been able to upvote. But really really appreciate everyone chiming in!

  • SpaceNinja on 04/04/2018 - 22:46

    Don't forget stamp duty, conveyancing and moving expenses.

  • TheMindsetTraveller on 05/04/2018 - 08:39
    +1
    1. Skip dealing with the real estate agent immediately.
    2. I assume your lawyer has reviewed the contract. Ask you lawyer to write to the vendor's lawyer for a reduced deposit, 5% is generally quite acceptable these days (given that properties are now easily over a million dollars).
    3. The vendor's lawyer must then ask the vendor that they have received a request for a reduced deposit, and if they are willing to accept it.
    4. If yes, great for you.

    5. If no, be prepared to walk away. It's the vendor's loss really as at the end of the day they still get the same $$$ anyway (the only real benefit for the vendor is they might want to use your deposit between exchange and settlement (which again you can also ask your lawyer to vary to in the contract).

    6. I would not mortgage my home to secure a few % deposit. Firstly, it's a lot of effort. But from your tax point of view, it becomes a little bit messy for you.

    7. Good luck and GetDrunkOnTheGoodLife

  • Melong on 05/04/2018 - 12:18
    +1

    Step1: Refinance Property A down to 20%,
    Step2: Use that cash to buy property B (and borrow the remaining if necessary), can now negatively gear property A, as it is now the investment property.
    Step3: Profit

    • Skramit on 05/04/2018 - 19:05

      Finally somebody nails it.

    • kingmw on 05/04/2018 - 22:23

      Read above and you would know that you can not negatively gear Property A this way. The ATO would definitely be auditing you for years if you did this.

  • bizarredeal on 05/04/2018 - 14:33

    Great knowledge share in this thread.
    Seems like paying off your home is not a smart move…

    • Skramit on 05/04/2018 - 19:05
      +1

      It’s a great move as it allows you to convert your PPOR to an investment property and make it tax deductible when you buy a bigger place.

      • bizarredeal on 06/04/2018 - 07:30

        Interest on a loan is the biggest tax deduction. The next is depreciation. And depreciation is now getting curbed. Only new IP can claim depreciation.
        So by paying off there is not much you can tax deduct?

    • kingmw on 05/04/2018 - 22:25
      +1

      It is a smart move if you upgrade your house because you don't have to pay capital gains tax.

      If you are planning to change it to an IP then don't pay it off (just use your offset).

  • Skramit on 05/04/2018 - 19:01

    I can’t believe all the stupid answers in here. So much bad advice. Melong nails it above. People do this ALL THE TIME. Why you’re not drawing the funds out of property A is beyond me. The day you move in to house B the loan on house A becomes 100% tax deductible as it’s now your investment property.

    Talk to a broker who isn’t a halfwit. Seriously whoever you’re using is a moron. Also speak to an accountant, preferably a CA themselves not their underlings so they can explain how to do this effectively.

    What’s more annoying on page 1 of the comments there’s people saying exactly the same thing getting negged. Lol, just because you don’t understand, don’t neg the right answer.

  • dreamscene on 05/04/2018 - 19:58
    -1

    Don't buy a house, buy Litecoin or Bitcoin, maybe some Verge, live on the street until end of 2020 and cash out. Should rake in enough to buy a few houses and a boat.

    • tebbybabes on 05/04/2018 - 21:00

      hmmmm, I remember when I toyed with the idea of buying bitcoin with an extra $500 way back at the start of the decade. Unfortunately it didn't stay 'extra' for long and I missed out. I remember thinking I could just take a punt on it, but back then, even moreso than now, $500 was fair chunk of coin and I chickened out.

  • Kunalk222 on 06/04/2018 - 08:15
    +1

    use the existing property A as guarantee on property B make sure this is only on 20% deposit. This way you will not pay LMI (end up saving you 10-15%)
    Once you pay back 20% in loan amount the property A papers will be back with you. So banks will not have both the house papers on entire loan amount, just on 20% of that Property B (which you can pay back in next 1-2 years easy, considering you already have 10% deposit)
    In terms of gearing, I am not the right person.

  • Ruckmauler on 06/04/2018 - 09:18

    Reading that the vendor is accepting 8% cash bond and not a deposit bond for 10% is mind boggling to me - they have actually done themselves a disservice and saved you the cost of the bond and 2% of the deposit. Well done to you for negotiating this by the way.

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