Pay LMI or create LOC for deposit on 2nd IP??

Hi Kyla, If you keep your LVR on your first IP to 80% then your total borrowing will be 80% of 380k = 304k. That means you can only increase your borrowings against that property (in the form of an LOC) by 12k. This can be used to fund the second. If you were to keep it under 80% LVR, you would only be able borrow 80% of 440k (assuming it values up at the price you're paying) = 352k. I think you'd be making yourself far to vulnerable if you push the second property to over 80% on top of pushing the first property to 80% with the 12k LOC.
 So lets work backwards: You have 12k from the LOC plus 30k from your offset account = 42k. Multiply this by four to get a rough idea of the maximum price you should be paying for any property, ie 168k. This allows 5% for costs, and 20% for the required LVR.
A 440k property is probably far too ambitious yet. You'd need to wait until your first IP increases in value by another 90k or so (which may only take another three or four years) or save as much as you can to help fund the deposit directly.

Sounds like a case of your Broker cross collateralising the loans hence the LMI is so expensive. 

If the loans are separate then the LMI will be less.

LMI is calculated on the overall lvr on a sliding scale based on the total loan amount. Over $500K the scale jumps.

Think i would be rejigging the deal to make the numbers more acceptable. 

Loan would have to be set up correctly with a LOC against the current PPOR and then a separate standalone loan against the new IP.

Kyla you can afford quite a nice new four bedroom home for 450k if you're prepared to live a bit on the fringes, eg Heathwood/ Forest Lake etc. It's still only a 25 to 45 minute commute to the CBD from Heathwood depending on the time of day (23km). You can also buy new 3 bedroom townhouses for ~380k at Durack for example (17km from the CBD). My 11 year old two bedroom units in Morningside & Coorparoo sell for about 350-360k. Anything with a bit of land area close to the CBD starts to cost upwards of 550-750k. I'm just showing that you can compromise down a bit (or out a bit) if you don't want to stretch your borrowings so much, without having to settle for a shack.
   It would be a real bummer if you have to sell your first IP. It's just starting to create a bit of equity. By the time you take out all the buying and selling costs, plus the capital gains tax, there won't be much left, especially if you have to deduct the net negative gearing costs along the way.
   My first IPs are now 11 years old, and they are just starting to become positively geared. (only at the current interest rates of course). It's a long slow process when you are a passive buy & hold investor like me. I had 20 years of equity buildup in our PPoR before the penny finally dropped about property investment, so I at least had a good head start with equity, which allowed me to buy four IPs in the same year.
   You need to buy problem properties, not solution properties as Steve tells us if you want to fast track the equity buildup. This involves solving the problems of course, which requires a lot more commitment than I'm prepared to give. I prefer to have them all in the background as much as possible.
Just a few thoughts, sorry to ramble on.
Cheers,
S/C

No kyla

That is the way to structure it.

If you stay with the 1 lender and amount is over $500K then your LMI premium will really start to rise.

Just remember kyla, that if you're using an LOC to fund the deposit on your IP that is eventually going to become a PPOR, then keep that LOC as a separate sub-account to any other LOCs, so that you don't end up with contamination of private & investment in your LOC. I know you can only afford a small LOC now, but later you'll have the opportunity to top it up as your equity grows. Top it up as a separate LOC or LOC sub-account (depending on how your bank prefers it).

Don't do what I did! I have a 400k LOC, of which 200k funded deposits on IPs, 200k funded share investments. I then shifted my shares into super as an undeducted contribution. That instantly transformed the 200k shares debt into private debt. I can only get rid of that by paying back 400k to zero out the entire LOC.

Not exactly Kyla, it's still 50% investment and 50% private. If you make any payment of principal, say 50k, then 25k is considered to be for the private half, and 25k is for the investment half. You have to distribute the payment exactly according to the proportions of each debt, so the only way to clear out the 50% private contamination is to pay the whole 400k. It's not that bad, because the undeducted contribution in super generates a tax free transition to retirement pension, more specifically that undeducted proportion of my super creates an equivalent tax free proportion of the pension (if that makes sense!). It would be nice to be able to kill the private debt before any other debt though. It's safer to chop your LOCs up if you can; don't have one big LOC bucket.
Cheers.

Gidday StumpCam,

I'm not sure who is giving you your tax advice, but it seems a little ummm… off the mark.

The ATO's position is that you don't need to have a separate loan account so long as you clearly apportion the interest in the LoC (or any other loan account for that matter) based on what the principle balances were used for.

This of course means that your decision to move the $200K from shares to superannuation renders that component non-deductible, however it has no impact on the deductibility of the other $200K that has funded property.

You can get the principles of deductibility for the investment property from the horses mouth, here: http://www.ato.gov.au/individuals/content.asp?doc=/content/00113233.htm

The concept of some type of the mythical 'tax contamination' cured through clever loan structuring is a load of bollox. In fact, search the term 'tax contamination' whilst you're at the ATO site to help you understand what it really is. 

Whilst it's true that moving assets and liabilities between personal and investment purpose may have tax implications on CGT and income tax, the concept that you can mitigate or worsen this through loan splitting is false.

Having said that, it may make it a little easier for your accountant or book keeper to reconcile come tax time,but that's about it.

If your accountant had you believing otherwise, then it's a sure fire sign you should be looking for a better one. As for the decision to move money from shares to super, there could be a real case for complaint against your adviser there too.