One possible strategy to purchase an investment property is to utilise what is called a Term Deposit Guarantee. This is typically beneficial for two key groups of people:
- A guarantor, such as parents or other family members, that does not want to put their own property up as a security for their children’s property purchase
- Australian expats sitting on cash that they know they’d like to use to purchase their own home or pay down the mortgage on their own home when they return, but they’re not sure when this could be.
Let’s first consider the basics
In simple terms, a term deposit guarantee is a type of guarantor loan whereby the guarantor provides cash instead of their property as security for the loan. This would sit with the particular bank as a term deposit earning whatever interest that particular bank or financial institution offered and would be automatically rolled over until the guarantee was released. The term deposit is therefore security for the bank if you were to default on your property loan or mortgage, and as a result, it is often 20 – 25% of the property value that is required.
Taking this a step further, a line of credit or equity access loan can be established secured by the term deposit, often for up to 95% of the term deposit value, but we will get into this scenario shortly, particularly in exploring when you may want to consider it.
How could this work?
Let’s consider the following scenario:
John & Jacqui are Australian expats living and working in London, and they currently have A$200,000 in the bank. They’re planning to remain in the UK for the next 3 – 5 years, and don’t want to keep this much cash in the bank as the returns are very low. They therefore decide to put this A$200,000 with ‘ABC Bank’ as a term deposit, setting up an Equity Access Loan (EAL) to fund the deposit and purchase costs on an investment property.
As you’ll see from the diagram above, when John & Jacqui to decide to repatriate to Australia, they could elect to (providing their bank will allow) carry out a substitution of security, switching their primary residence for the term deposit as security for the EAL, which allows them to release the A$200,000 and use this to reduce their mortgage on their own home.
This can provide John and Jacqui with certain tax benefits, but it’s important to speak to your tax adviser or accountant to discuss how this could benefit you. In simple terms, the scenario has allowed John and Jacqui to put their cash to work in the form of an investment property growing their asset base, while also maintaining some liquidity to put the cash towards their own home upon their return to Australia.
Why consider a Term Deposit loan strategy?
There are a wide range of benefits of this strategy, some of which we’ve outlined below:
- Limited exposure for family members: If your parents are acting as guarantor for your home loan, by providing cash as a term deposit rather than their own property, this limits their exposure if you default on your loan.
- Flexibility for Australian expats: Many Australian expats are sitting on cash and struggling to find a home for it, while many others are not sure how long they’ll be abroad or where they’ll live when they return to Australia. This strategy provides a solution for these issues.
- Use of property: Given that the guarantor is providing cash, rather than their own property, as security, there are no restrictions on what they do with their property.
- Access to funds: The funds become accessible as soon as the guarantor is released.
This strategy can be a complicated one, and as such it’s vital that you speak with an investment-savvy mortgage broker to explore your situation, financial goals and objectives to assess if this could be a sensible option for you.
LoanSuite Pty Ltd is your lending partner for all of your home loan, investment property, business and commercial financing needs. With our wide range of lending solutions, expertise in financial planning and investment strategies, and extensive experience in working with both Australian residents and Australian expats, we are your partners for your lending needs.
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LoanSuite Pty Ltd is an Authorised Credit Representative (Credit Representative Number – 494608) of My Local Broker (Australian Credit License – 481374). Important Disclaimer: Your complete financial situation will need to be assessed before acceptance of any proposal or product.