Borrowing the funds to pay the deposit will cost the investor the interest on the borrowed funds plus any establishment costs. In the case of the investor making an off-the-plan purchase, interest is payable on the loan for the full term of the contract. This can be between one and five years and therefore interest on borrowing becomes a major consideration. As the asset is secured, but not yet producing income, there is no option to claim immediate tax deductions on this interest, although it can make up a part of the cost base and slightly reduce capital gains tax upon sale.
For example, let’s assume an investor intends to purchase a property off the plan for $420,000 and that is expected to settle in three years’ time. If the investor borrows the 10 per cent deposit of $42,000 at 7% per annum, interest charges would be $2940 per annum for each of the three years, totalling $8820.
As well as the cost of interest, there is also the time it takes to arrange the borrowing. This is normally between 30 and 60 days, however, vendors are always keen to receive payment of the deposit so that they can count on the sale.
They would prefer not to wait the 30 to 60 days it takes to arrange and settle the loan to pay the deposit, when the property could be sold to someone else during this period of time. The interest charged as well as the amount of time it would take to arrange the loan makes borrowing an unattractive option for the investor.