Will shortly be refinancing my PPOR loan and plan to purchase first IP in the next 6 months. Is the only way to access the equity in current PPOR for IP going the LOC route if I end up getting IP loan through different lender? Don't have any real savings for the deposit other than equity in existing property and don't want to make the wrong decision now and find out I can't access it and can only get another loan through the same lender.
After reading posts in this forum I realise it is not a good idea to have loans through the same lender (especially if with one of the big 4) as don't want to make the mistake of cross collateralising.
Any help / advice would be appreciated. Thanks
Hi knownothing,
we all started where you are now!
Got to start somewhere.From my understanding (which is not complete!), the only way NOT to cross-collateralise, as you say, is to withdraw equity and make your first IP loan independent.
This could mean that eg you leave 20% equity in PPOR loan and take 20% deposit for IP out of home loan.
Hang on a minute, that is not a great position.
Costs from your PPOR are non tax-deductable, but IP costs are.
So if your 1st IP is cashflow positive, then you theoretically make more profit from it and will pay more tax, by having some of your PPOR home equity propping it up.
Having less equity in your home is NOT helping you get ahead most efficiently.If your 1st IP is negatively geared, (which is not such a good idea depending on your strategy) then you will probably get less benefit from negatively gearing, by having a good deposit from your PPOR invested in this IP.
I fully agree that the first aim of investing in property has to be, to make money (ie implies tax will have to be paid!), but why pay more than we need to!!
I see no problem with buying your IP with the same bank at this stage. As you move ahead, eg by 4th IP, you will probably need to re-address this, but it shouldn't be a problem for a while yet.
Something else to look at, is which structure to own your IP's in. Your own name may be fine for now, but not the best down the track. You should talk to your accountant about Family Trusts and the above info.
If he doesn't know much about it, consider changing accountants!
Once you have bought in one name and find you'd be better to transfer to a Family Trust, you'll have to pay stamp duty all over again to do so. So do your research first!I recommend reading Steve's revised copy of 0-130 pproperties in 130 years, as it will be a great help.
quickchick
Yes the best way is to set up a separate loan on the PPOR and then use this as deposit for the new one. No use in using savings if you had it as you should be paying your PPOR loan down first. The separate loan doesn't have to be a LOC (usually a higher interest rate), it can be a straight IO loan with redraw. Most banks offer these.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
quickchick wrote:From my understanding (which is not complete!), the only way NOT to cross-collateralise, as you say, is to withdraw equity and make your first IP loan independent.
This could mean that eg you leave 20% equity in PPOR loan and take 20% deposit for IP out of home loan.
Hang on a minute, that is not a great position.
Costs from your PPOR are non tax-deductable, but IP costs are.
So if your 1st IP is cashflow positive, then you theoretically make more profit from it and will pay more tax, by having some of your PPOR home equity propping it up.
Having less equity in your home is NOT helping you get ahead most efficiently.Hi quickchick,
Just wanted to clarify something. If you withdraw an amount of equity from your home, for the purpose of purchasing an investment property, the interest on the LOC would be tax deductible.
Interest is determined by the purpose of the borrowings, not the security offered against the borrowings.
One way to do this is have a separate loan for the IP deposit, rather than just redrawing on the current PPOR loan.
quickchick wrote:I recommend reading Steve's revised copy of 0-130 pproperties in 130 years, as it will be a great help.
quickchick
Wow, I didn't realise it took Steve THAT long to buy his properties!!
Whoops!
He looks good for his age!
quickchick
Yes, you're right Dan re taking a loan against PPOR for IP.
Didn't think of that at the time.
After reading further in this forum, I got the impression that many posters agree that a LOC is practically the same as having a IO loan with offset, so am I correct is saying that if I do end up refinancing with a LOC (to get equity out of property) this in effect means my current loan needs to be increased to put that money into the LOC. So I could in fact do the same with an IO loan with offset, by increasing the loan limit and putting that money in the offset account.
Property Value = $400,000
80% LVR = $320,000
Loan = $250,000
there is $70,000 equity in property.So does this mean if I pull that equity out regardless of whether it is a LOC or an IO loan with offset the loan value will need to be increased to $320,000 and the $70,000 would be available in either the LOC or offset account and both still reducing the interset you pay.
Or do I have this totally wrong.
KN
I think you need some specialised advice as coming in at the end of the post i think you have still missed the point.
The accounts need to be separate and you will find it slightly harder than it was to obtain a IO loan with no end use.
Lenders like to see what the funds are going to be used for and hence the need for some specialised advice.Getting it wrong can be an expensive mistake and most independant mortgage brokers do not charge for their services so no extra
cost to you.Richard Taylor | Australia's leading private lender
knownothing wrote:After reading further in this forum, I got the impression that many posters agree that a LOC is practically the same as having a IO loan with offset, so am I correct is saying that if I do end up refinancing with a LOC (to get equity out of property) this in effect means my current loan needs to be increased to put that money into the LOC. So I could in fact do the same with an IO loan with offset, by increasing the loan limit and putting that money in the offset account.Property Value = $400,000
80% LVR = $320,000
Loan = $250,000
there is $70,000 equity in property.So does this mean if I pull that equity out regardless of whether it is a LOC or an IO loan with offset the loan value will need to be increased to $320,000 and the $70,000 would be available in either the LOC or offset account and both still reducing the interset you pay.
Or do I have this totally wrong.
If value is $400,000 and loan is $250,000 the equity would be $150,000. If you are borrowing 80% then the extra funds available would be $70,000
Assuming rates are the same the interest on the LOC v the IO with offset would be the same if you were to put the extra funds in the offset.
BUT there are important tax consequences resulting from withdrawing and depositing into loans. Interest is only deductible if the funds are borrowed for investment/business. If you use a IO with offset you are borrowing funds and parking it in the offset account before using it to invest. If you are using the offset for only borrowed funds then you may be ok as you can clearly trace the funds. But if you are mixing wages and rents in the offset then your borrowed funds become less distinguishable from the other funds into the account and this may complicate things if you wish to claim the interest.
A possibly better way would be to set up a different account for the extra borrowings – $70k in the above eg. then pay the funds down on the loan to $1 and access it via redraw later when need be. – assuming there are no redraw fees etc.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
You must be logged in to reply to this topic. If you don't have an account, you can register here.
