Hi Guys,
Currently have an IP (on a PI loan because I plan to turn this into a PPOR as soon as it's paid off) with 10K in offset and I'm looking to borrow to buy a 2nd IP (on IO loan)
Is it best to borrow 100% of property cost + LMI (and thus maximizing tax deductability) or use the deposit and borrow 80% and avoid LMI?
Has anyone been in my situation?
Any advice appreciated
Cheers
Kenzelhave a look at a line of credit loan against the first property to fund deposit for next property with a different bank loan
This makes sure that security is not tied together — avoid it – known as colaterisation across two properties so you lose both houses if things go wrong.Kenzel
In addition i would be converting your PPOR loan to Interest only as well and linking it to the 100% offset A/c.
This will give you the same interest saving but also will offer you flexibility when you come to rent the property out.
Richard Taylor | Australia's leading private lender
First off, thanks to all who answered I really appreciate it
Say I'm in the following situation with a PI loan:
Loan balance: 80K
Equity: 20K (i.e. built up via PI loan only – ignoring cap. growth)
Offset: 10K2 months down the track I decide to turn this into an IP by switching to an IO loan (as from what I understand this signals to the ATO that your intentions for borrowing the money has changed and that it's now an IP – i.e. the balance owing is now fully tax deductable)
2 weeks later I decide to borrow to invest in a 2nd IP and wonders how to best utilise the offset balance attached to now IP loan
=============================================Duckstar – LOC seems the common approach however how should I best utilise my offset balance of 10K? Should I dump it into the existing loan of 80K and then apply for LOC against the now 30K (20K + 10K) so I have more tax deductability potential (I've read this is called debt recycling from somewhere…not sure…) or should I leave it and use it to finance borrowing costs and prop. management fees?
Richard – Many thanks for replying to all my posts u r legend!
In regards to offset, if I apply for a separate LOC loan is it possible to get a 2nd offset account? (i.e. still retain the one that's linked to the 'PPOR turn IP account')Cheers
Kenzel
Ok let us try and answer this one for you
Loan balance: 80K
Equity: 20K (i.e. built up via PI loan only – ignoring cap. growth)
Offset: 10KWhat I would have suggested if you had been a client of mine and based on the fact that you still intend to buy a new PPOR one day would have been to gear as high as possible from day 1 the loan secured against the current property.
Let us assume that you took out a 95% LVR from the day of settlement against the 100k purchase price and put the extra $15K into the offset account. You may have incurred additional mortgage stamp duty (still charged in the odd State) and also an increased LMI amount. Both of course which are proportionally Tax deductible when the property becomes an IP.
When it comes to the first IP again you would have taken out a 95% or 100% LVR retaining the offset account linked to the PPOR. To avoid cross collateralising the loans you may have to cover the acquisition costs from your deposit sources.
When you move out of the PPOR your deductible interest would be based on the original loan balance less of course the offset amount (if you retained this linked to the loan).
If you buy a 3rd property which you live in then you would switch the offset account to the new PPOR loan and divert all of your rents and other income sources into this account and have the interest on all loans debited from the offset account.
There is no need to have a separate offset account as you want to minimise the interest charged on the PPOR and maximise the interest deductible on any IP.
Most Banks would have absolutely no idea how to structure a loan and usually suggest you cross collateralise them as it offers the Bank more security.
Hope this clarifies the situation a little.
Richard Taylor | Australia's leading private lender
Hi All,
Just an update – Just spoke to my Banker and apparently to restructure an existing loan from PPOR to IP you will liable to another round Stamp Duty!
Also the stamp duty is not tax deductable even if you're paying that through borrowings
Cheers
Hello Kenzel
Just a small correction
"2 months down the track I decide to turn this into an IP by switching to an IO loan (as from what I understand this signals to the ATO that your intentions for borrowing the money has changed and that it's now an IP – i.e. the balance owing is now fully tax deductable)"
The above statement is not correct. The ATO doesn't care if your loan for an investment property is PI or IO. Just by renting it out and earning income it becomes an IP with the benefit of being able to deduct all expenses including interest.
Cheers
Elka.
kenzel wrote:Just an update – Just spoke to my Banker and apparently to restructure an existing loan from PPOR to IP you will liable to another round Stamp Duty!
Hi Kenzel.
I must admit it never fails to amaze me how many banks (and brokers sadly) have absolutely no idea. True, everybody has to learn, but to give you advice like that – run a mile.
If you are not transfering the actual property title (ie ownership) you only pay SD once. Breath easy.
As for borrowing 100%, this of course does not have to be done by using a 100% loan (if you can find one) and paying lenders mortgage insurance………you can effectively 'borrow' 100 % by utilising existing equity you have to 'fund' the 20 % deposit (or if you don't have enough, 10% is usually not too painful as far as LMI is concerned) And you can do this without 'cross securitising' your properties – whether with the same lender, or another. Most 'access' this equity by getting a 'Line of credit' style loan, or an interest only loan and using it as the deposit. This can be done via your owner occupied home, or an existing IP – although I find many have a 'mental block' about borrowing against their own home – even if it is tax deducatable and helping them to build wealth!
Cheers
all the best with your journey.
Hello Kenzel
"LOC seems the common approach however how should I best utilise my offset balance of 10K? Should I dump it into the existing loan of 80K and then apply for LOC against the now 30K (20K + 10K) so I have more tax deductability potential (I've read this is called debt recycling from somewhere…not sure…) or should I leave it and use it to finance borrowing costs and prop. management fees?"
Since you intend to move into your current IP as soon as it’s “paid off” I think that you will be better off paying the $10K currently in the offset account off the loan and then re borrowing it (either as a loc or a split loan?? ) to use for the next IP. This way you will be paying this property, which is to become your PPOR, off quicker. The re borrowed $10K will remain tax deductible even after this property becomes your home as it was borrowed to fund the next IP.
As Richard has explained, if there is a chance that you will want another PPOR one day, you should then “pay off” the rest of the loan (now $70K) by having it in an offset account linked to this loan rather than off the loan itself.
If you can re borrow more than $10K from this property ( if the valuation is more than $100K now) it will help reduce the LVR on your next IP and thus reduce the LMI you will need to pay……… as v8ghia has already pointed out.
Your best bet may be to ring Richard, explain your situation in detail and get him to structure and organize your loans. It won’t cost you anything extra and at least it will be done right. Just a suggestion as your banker does not seem to inspire confidence.
BTW. NO, I don’t know Richard except from his posts and NO I don’t get any commission from him.
Hope this helps
Elkaduckster wrote:This makes sure that security is not tied together — avoid it – known as colaterisation across two properties so you lose both houses if things go wrong.Whether it is listed as security or not the first property would still be accessable to the courts if it went as far as bankruptcy. The only difference of not having it listed as security is that you can sell it in the mean time without affecting the loan on the second property.
Same owner – therefore still in the melting pot.
In regards to offset, if I apply for a separate LOC loan is it possible to get a 2nd offset account? (i.e. still retain the one that's linked to the 'PPOR turn IP account')
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