Cash secured loan

I have saved money to purchase a Main Residence (PPoR) next year. In the meantime I would like to build two townhouses. I have enough borrowed funds for one and enough cash to build the second townhouse. However, I don't have enough security to cover a second loan. Say the second townhouse will cost $300k to build and I have $300k cash.

I would like to access a product (such as a term deposit) where I can deposit $300k and then borrow $300k using the term deposit as security. The timing is likely to be around 6 months. Once construction is finalised, I would take out a standard investment loan with the townhouse as security, pay back the cash secured loan and get my term deposit back (obviously at the end of the term). Then I can use the funds to buy my Main Residence next year.

For example: First Option offers a Cash Secured Loan which may be approved for any worthwhile purpose (within the Credit Union’s lending guidelines).

A Cash Secured loan is a loan that is fully secured by Fixed Term Deposit held with First Option Credit Union.

First Option Fixed Term Deposit example interest rates are:
2.50% 6 months
2.75% 12 months

First Option Cash Secured Loan (using the Term Deposit as security) interest rate is 5.35%

For 6 months, the effective interest rate is 2.85%.
For 12 months, the effective interest rate is 2.60%.

http://www.firstoptioncu.com.au/loans-personal-loans-cash-secured-loan.html

Does anyone know anything about this and what other options there might be for this type of scenario?

Thanks!

 

There are definitely lenders that will look at this - Macquarie will for existing customers, although it's not the simplest process, AMP used to but that's not helpful at this point! Also Suncorp, I believe. There's probably others too, that's just off the top of my head.

 

Found another one: eecu
Term deposit:

6 months 2.65%
12 months 2.75%​

Deposit secured personal loan: 4.89%

Effective rate 6 months 2.24%
Effective rate 12 months 2.14%

http://www.eecu.com.au/DepositSecuredPersonalLoan

 

Heritage bank
Term deposit:

6 months 2.80% (over $100k)
12 months 2.75% (over $100k)​

Deposit secured personal loan: 5.19%

Effective rate 6 months 2.39%
Effective rate 12 months 2.44%
https://www.heritage.com.au/Personal-Loans/Low-Rate-Secured.aspx

 

Its not really a product you are after but a normal loan with a term deposit as security.

I have written a tax tip on this also and will post later.

And consider the alternatives - parental loans, spousal loans, parent's security etc.

 

True.

Awesome!

Yes. This is tricky in my situation. I own the property 80%/20% split with an investment partner. He has funds he can loan me and I have funds I can loan him. My only concern with this would be, if I loan him money and he loans me money, at what point does this start looking a Part IVA scheme? Of course the purpose of the arrangement has nothing to do with tax. It is about preserving capital to purchase a Main Residence. I am just concerned that to the ATO, it could look irregular.

 

CBA and NAB will also do it

 

Don't do that without advice - probably deduction of interest would be denied.

 

I agree. I wouldn't do anything like that without advice. It just looks wrong to me. One of my rules is that if I wouldn't feel confident explaining it to an ATO auditor, I don't do it.

 

Im yet to find a bank which won't accept cash as security.

@Perthguy your example in the OP is the exact circumstance when cash security works well. On completion of the development you should be able to do a 'security swap' and simply change security from cash to property and release the cash held. In some cases this won't even require a new loan application (though does need a valuation obviously).

I haven't used this system in a few years, but the cash differential you are talking about sounds quite high. We used to be able to do this for about 1-1.5% however, that was using commercial products (bank bills) through our business lender and treasure dept. Plus the market has moved quite a way.

Also note you will pay tax on interest earned, but will get a deduction for interest paid.

Blacky

 

This is what I thought but my mortgage broker is coming around tonight to explain why I can't do it. Maybe it's an ING thing or maybe I need a new mortgage broker.

Understood. I don't have a problem with that. Thanks Blacky.

I sat down and worked out last night that my investment partner could loan me all the funds I need. I have to get proper advice of course, but it looks like the interest rate (according to ATO) should be 5.45%. This would be a more expensive way for me to do this. Of course investment partner would be happy with the interest

 

Given the nature of the loan and circumventing bank lending processes and reporting the related lender loan seems a good thing.

 

I'll see what the mortgage broker says, but I am keeping it as an option. I could set up an account where the borrowed funds are the only funds deposited and all investments are made from the one account (I know this not ideal due to possible contamination). Anyway, if I got that to work the interest rate is 2.75%, so the difference between interest earned and interest paid would 2.70%. Not too bad for a short term deal. I will take @Terry_w and @Rolf Latham's advice on this one though and get proper advice. It doesn't seem like DIY territory to me.

 

All good @Blacky. For some reason the MB got the wrong end of the stick and though I was trying to use borrowed funds for the term deposit to create a new loan against! I agree, that wouldn't work at all. Now he understands I am just trying to securitise my own cash, he is on board. Happy days!

Option 1 is to do the deal through ING. If they don't want it, option 2 is Comm Bank.

 

Two more options.
ING Direct
12 month term deposit: 2.8%
interest rate: 4.84%
Effective rate 12 months: 2.04%
90 day limit.
Commonwealth
12 month term deposit: 2.45%
interest rate: 4.87%
Effective rate 12 months: 2.42%

 

@Perthguy, which one you end up going with?

 

I probably won't need everything in place until Jan 16, so I haven't selected a provider yet. I am leaning toward eecu at this stage but need to find out more about the product.

 

We need a link here to @Terry_w's tax tip.

 

Tax Tip 60: Never use cash to invest

Tax Tip 62: Paying Cash for a property and then getting a loan