We recently completed a deal for a couple who were looking to purchase a commercial property for investment through a non-trading company – the total purchase price was up to $1.2m.
The clients’ current owner-occupied property had a debt with Westpac attached to it. But they also had a number of investment properties located throughout NSW, which also had investment debts with Westpac.
Additionally, they had cash savings in their home loan offset account, which was significantly offsetting the home loan.
The clients – a husband and wife – were self-employed, with a company and family trust structure. This meant that evidence to support serviceability was based on a combination of wages and distributions through the family trust.
Our team has learnt that it’s critical to ensure you have mapped out the strategy and structure in detail so you can identify potential issues
I found that Citibank had a policy that allowed clients to secure a commercial debt against residential property, up to a maximum of $1m worth of borrowing at residential investment interest rates – which were significantly lower than the commercial rates the clients were on.
The Citibank fees and charges were also much lower than those of commercial lending products, meaning it was a more cost-effective strategy to go with Citibank than with a commercial loan product.
We identified one residential investment property that would have sufficient equity to meet the Citibank lending policy requirements, and arranged a Citibank valuation.
This identified that the security had LVR restrictions based on the number of apartments and the location of the property: the maximum LVR was 60%.
We then identified a second residential investment property for the additional equity required, and both of these properties had existing Westpac investment loans secured against them.
To enable lending with Citibank against both residential securities, we had to arrange a substitution of security with two of the existing Westpac investment properties, moving the existing loans across to the owner-occupied property.
The limits on the existing owner-occupier debt had to be reduced via a principal reduction, using cash savings from the offset to free up sufficient equity to enable the substitution of security.
Once this was complete, the two investment properties were unencumbered, allowing Citibank to take them both as security.
We then split the loans in two to avoid cross collateralisation of securities.
As the maximum loan that can be secured against residential property for commercial purposes with Citibank is $1m, we arranged for the remainder of the purchase costs to be funded through cash savings from the company purchasing the commercial security.
From the clients’ point of view, we have been able to help them save thousands of dollars in interest and fees over the life of the loan by placing them with Citibank under the residential security for commercial purposes policy.
By doing this, we are helping them achieve their long-term objectives of paying off all loans before retirement. And as a result of the structuring of the loans, they will have one unencumbered property – the commercial property – as soon as it is purchased.
Our clients were very happy with our structure and the interest savings that have resulted.
Key learnings from this process were that it is critical to understand the needs of the client and the details of their financial structures.
We worked closely with our clients’ accountant to ensure we followed all tax advice as required by them.
It has been a long, complex process given the nature of their employment and the involvement of multiple companies and trusts, multiple properties and two lenders.
Our team has learnt that it’s critical to ensure you have mapped out the strategy and structure in detail so you can identify potential issues that can be addressed upfront with regard to bank policy.
It is then very important to educate your client on the complexity of the application and explain bank procedures and policy so they understand that it is a long application process, and why this is the case.
This helped manage our clients’ expectations so they knew there would be additional requests for information or documentation, and were aware of the processing time frames that would be associated with the back and forth between two lenders simultaneously.
It’s also critical to keep detailed written notes on contacts with the bank and the clients so your entire team can be across the process and ensure that the clients receive consistent communication from everyone assisting them.