If an investor intends to finance 100 per cent plus costs of the purchase through a financial institution, funding the deposit is only a short-term requirement until the property settles. Borrowing the money to pay the deposit will effectively cost the interest on the borrowed funds for the term of the contract plus any additional charges such as loan establishment fees. Most lenders will require security by way of a mortgage over the property before advancing the funds. It can take between one to two months to arrange and settle the loan and the disadvantage of this option is the time and cost required to set up the loan.
If the investor has an existing loan secured over property and with a redraw facility, they may be able to use this to pay the deposit. Be aware that significant tax implications can occur for an investor who redraws money from an existing loan to fund a deposit and later refunds it from the new loan, 100% of which is provided at settlement. If you are not familiar with what these implications may mean or do not fully understand the ‘purpose test’ which dictates tax deductibility on investment borrowings, ensure that you speak to a qualified accountant and read the section later in this module on ‘purpose’.
Without this redraw facility, the option of seeking a short-term loan to pay the deposit through traditional means is not viable unless it can be arranged well in advance of the purchase.
To borrow the deposit in a short time frame, the investor can seek funding from a short-term caveat lender. A short-term caveat lender lends money for short terms, usually 30–90 days secured only by a caveat over real estate. This allows the lender to advance funds relatively quickly, usually within a week.
The short-term loan is paid out of the loan to finance the purchase at settlement. If such a loan is used, the buyer must be sure the caveat is lifted prior to settlement or the settlement will essentially fail on the day.
This option is the only option for the residential investor who doesn’t have the cash to pay the deposit, is unable to redraw funds from an existing loan, doesn’t have the time to arrange a loan and whose vendor/selling agent won’t accept a deposit bond.
It is the most expensive of all the options because of setup costs and higher interest charges, are for a relatively short term.