Hi All, hope some one can help me here.
Last year, i was unsuccessful selling our PPOR that I decided to rent it out for 12 months, and bought another place where we wanted to live – of course I then had to take out 100% loan on our own mortgage.
The mortgage on the now rental is very low, hence +geared..This is good, but doesnt help the huge repayments on our PPOR.
My question therefore is 1. Do banks agree to refinancing investment properties without necessarily doing any improvements to it (So borrowing more upto say 80% of value, and using this money to pay down our own mortgage), and if so, would the interest on the new investment mortgage be tax deductible??
Also on my mind is perhaps selling it and then putting all the proceeds on our PPOR mortgage and starting with a new investment.. My only dilemma is the tenant. The lease is up 2 Jan and she will only sign a 12 month lease and not go on periodical. I either take the risk of house not selling and her moving out, or I offer to investers only..
Any thoughts, brain waves, good ideas are most welcome….
Hi Sandy, this is a very common problem. You can't increase the mortgage on your IP to increase the tax deduction. It's all about the purpose of your loan. You're effectively taking out the extra loan to finance your ppor and this doesn't wash with the ATO. Probably your best solution is to sell your IP. It won't have a huge CGT as it was your PPOR until last year. There will be selling and buying costs, but the best path is to sell your IP, pay out your PPOR mortgage with the proceeds, start an investment LOC with your spare equity and use that for the 5% legals & 20% deposit on a new IP with its own new property loan for the other 80%. In the long term, this will save you a lot more in tax than you'll be losing in the changeover.
IPs get sold all the time with tenants still in them, so don't let that stop you from trying.
Cheers.
Hi Sandtracks,
I agree with S/C.
But to answer your questions:
1, Yes. As property price goes up, you would have built up equity in you home. You can ask your existing bank for an additional loan or go to another bank for a refinance. (There will be costs involved of course) They will do a revaluation of the property to determine how much the property is worth, and how much equity you have. Note that the amount you submitted as your estimation of your property’s market value, may form the cap of their valuation. (even if it may be worth more). Avoiding paying LMI maybe wise (ie up to 80% or 85% depending on lender).2, The additional loan amount as S/C mentioned, will not be deductible. The nature of the security asset is irrelevant, it depends on the purpose and intend of the loan. The loan is to purchase a PPOR and not income producing. Hence, no.
And if you do choose to sell your first PPOR/ now IP.
3, S/C already said, IPs get sold with tenants in them, and infact it can be a + for a lot of investors if the rent is decent. Personally, I don’t think there is a need for your concern.4, Depending on the timing of the purchase of second PPOR, you may be eligible for CGT exemptions. You are entitled up to 6 months to dispose (sell) of the first PPOR to acquire the second PPOR and incur no CGT for the first one. You may also continue to elect your first PPOR as the PPOR and apply the 6 year rule. But you can only elect one PPOR at any one time for a family. You will have to access the pros and cons.
Best of luck
KennyThanks heaps for your advice – I thought as much as far as tax breaks go, by trying to increase my IP mortgage!! I think then I may try and sell with the tenant in – my only problem there is that it is in the higher price bracket (over 650K) and so there may not be many investors – although the rent is almost 500 a week….
Will give it a shot!
cheers
Sandtrackers,
Before you go through the potentially costly engagement with a REA, you can probably try and gauge the market demand by speaking to Real estate agents as a buyer. (obviously if you say you are a seller, they will hype it up for you). As well as other investors. Just to get a sense of the market direction.
You can also check recent sales in your area:
http://www.homepriceguide.com.au/auction_results/index.cfm?source=apmIf the property is over 650K and rent is under 500pw. The rental return is under 4% and after expenses it’s probably even less.
I’m afraid it is not fantastic return. But again, you just need the one buyerGood luck
KennyWow Sandy, That's a pretty sizable IP. I said you would save a lot more in tax than it would cost you for the changeover but I didn't really think that through. The value of your IP made me think that perhaps you should really calculate the numbers.
You haven't given us the size of your IP loan and your PPoR loan, but let me work through a hypothetical example and you can do the same with your real numbers.
Say you owe 200k on your IP, 500k on your PPoR. You want to sell your IP and buy a new IP. You'd probably not pay so much for the new IP, but let's for the sake of argument assume it's the same value.
Selling costs on your IP = ~ 16500 I'm guessing a bit, but that's the rate I paid in 1985 the last time I sold a house!
Buying costs on new IP worth 650k = ~ 24k stamp duty in NSW, 34k in Vic. Lets use 24k
Legals/ loan costs ~ 5k
Lost Rent ~ 5,500
Total changeover cost ~ 50k min.You have ~ 400k left after sale and changeover costs deducted and the IP loan paid out.
You'll need to keep 130k for the 20% of your new IP worth 650k.
That leaves 270k to pay off the PPoR loan.
PPoR loan now = 230k
IP loan will be 520k
Now your total borrowings have increased by 50k, and only 270k has shifted from non tax deductible to deductible.
Assume you'll be paying 7% interest in a little while and assume you're in the 39.5% tax bracket, then the shift of 270k to deductible will save you 7% x 0.395 x 270k = 7,466.50 pa. The extra 50k you've had to pay or borrow will have an opportunity cost of 7% of 50k (because you could pay it off your home loan if you had it spare), ie $3,500 pa.The bottom line: You're only saving about 4k per year after all this mucking around and it's going to take a long time to pay off that 50k extra.
This conclusion is heavily dependent on the numbers of course; you need to do this exercise with your real numbers.
There're other considerations too, like your positively geared IP may be joint tenants with your wife, and getting a better tax treatment with her share.
Perhaps you need to just keep your IP and throw your heart & soul into killing the PPoR debt as fast as possible, leaving the IP debt as IO.
Interesting exercise, sorry I didn't think about it earlier. Sounds good in theory until you do the numbers!
PS, I'm trying to wean myself off this forum, so I won't be back for a while.
Good luck with it, S/C
Hi Sandtracker
Couple of quick questions:
1) Which State is the old PPOR in.
2) Did you cross collateralise the 2 securities ?
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Looks like the post is over 4 years old – it's only resurfaced now because of the spammer above your post.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
Good spot Jamie.
Yes i did report the post Abuse but never looked at the original post date.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
and assume you're in the 39.5% tax bracket, then the shift of 270k to deductible will save you 7% x 0.395 x 270k = 7,466.50 pa. The extra 50k you've had to pay or borrow will have an opportunity cost of 7% of 50k (because you could pay it off your home loan if you had it spare), ie $3,500 pa.
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