Hey guys,
Hope you’re all having a good one.
After reading and receiving some great help from this forum I took the plunge a few months ago and bought my first IP. I bought the place for about 229k and have paid off 80k so far. When a tenant is in place it should be + cashflow by about $30 a week (being conservative).
I’ve also taken your advice about leaving all the money in an offset account and currently have about 40k in there.My question is what is the best way to go about purchasing another place for say 180-200k? I am still confused about how equity works exactly and despite all my reading, haven’t found many actual examples with figures. I also tried emailing my broker but with no reply so far.
Any advice on the best loan structure to take?Many thanks!
Rome
Mhh i am concerned already and hope your current broker didnt suggest the set up you have.
I would have suggested interest only with a 100% offset account from day 1 to preserve the deductibility of the interest and also to give you flexibility.
All i can hope is that you dont have a current PPOR loan or likely to in the very near future.
Depending on with whom the current loan is with will determine the suggest course of action and the plan of attack going forward.
Under NCPP (new Credit Laws) there are a couple of other considerations before a suitable recommendation could be made over structure and potential lender.
Getting it wrong could be expensive in a couple of ways
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Hi Richard,
thank you for your response. I think I phrased my first post a little incorrectly. I have an overall oustanding loan of about 180k and have close to 40k in my offset account. My loan is interest only as suggested by many posts on this forum. Also, my loan is with westpac where my repayments are about $900 a month (but I’m putting about 1k extra into the offset account per month).
What are the other considerations I need to make before choosing a course of action? sorry, as I said I’m still fairly new to the property game but am trying to do as much research as I can.
Romeo
Hello Rome,
It is a simple equation really. Youn can borrow 80% of the value of your property so long as your income can service the loan. Your broker can tell you if that is ok. There are other options if you have run out of servicabilty but speak to your broker about them.
In your example you said you paid 229K for you property. That means if the value is still 229K (it can go down of course) that without paying mortgage insurance you can borrow 183,200 (80%). If your loan is 180K already then you haven't got much equity. You do have 40K in you offset account which is saving your interest repayments. Without knowing all the facts I would say you have 43K available for a purchase. In the 43K you need to account for stamp duty and conveyancing and some other small fees. I would say based on all of this your maximum purchase price is 180K. I have based this on a 20% deposit of 36K and Stamp Duty of 6.5K. Servicablitly will be your only issue as I don't know your income. The situation changes dramatically depending on your situation.
You need a boker if you don't have one. If you need one I am sure plenty of people on these forums know one or I can give you mine if you like. One thing to consider is that banks are like the America's Cup. They change the rules all the time.
Good luck.
Hi Rome
Yes i think i understood the numbers but was concerned that you are using a P & I loan as you mentioned you have paid off $80,000 to date.
It is not as easy as Martin mentions as there is a big difference between equity and usable equity and you can only use this if you cross collateralise the 2 loans which is certainly not recommended.
Not sure what product Wesuck have you on but will depend on whether you have an imediate need for the $40K in the offset account or whether you are happy to use this as deposit / acqusition costs.
What is your current housing position?
Course your income / liabilities also have a bearing.
Dont want to appear rude but actual numbers are important to advise further and dont expect you to do that on a open forum.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Hi guys,
again thanks for the responses. I don’t really need the 40k in the offset for anything like holidays because I don’t really take them. It’s pretty strange/convenient because the apartment I bought is about 60 metres from where my parents house is. This means because I can stay in my apartment but have very few costs with my parents nearby (laundry, food and even a car).
I think other than the loan I have a HECS debt of about 20k and will be studying full time next year. And my income after tax is about 30k but I also make about 3k or so from doing odd jobs. Pretty much $500 a week goes into the offset account per week and interest only repayments are about $920 (although I hope to hammer this down more so. It was only $848 before interest rate rise)
And the loan product I have is the Flexi First Investment loan.
Please let me know if I’ve missed anything
Ok the plot thickens.
The Flexi First doesnt as far as I am aware have an offset but a redraw facility and there is a big difference.
Also hate to say if you are studying next year and on your current income i dont think you will service another loan especially if you intend to occupy the property.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Hi Richard,
I do have a redraw facility with my Flex First loan, although it also has a 100% offset account as well (where all my money is currently). My plan was to study full time for 1 year and hopefully graduate at the end of 2011. At that point I should have around 40-50k in my offset account ready to go. If I can I would like to buy another place (positively geared if possible) and then move to Japan to teach for a year or so. This means I won’t use the new place as a PPOR, but just as another IP.
Although exactly how to best set up the finance structure and how equity will work (if at all) in this situation is what I am a bit confused about. While in Japan I’d have subsidised or free accommodation so I’d be able to put a significant part of my wage towards paying off my debt.
Any ideas on this plan?
Rome
Ok not convinced it is a proper 100% offset account as i say Flexi First doesnt offer such a product but either way we wont argue as it really doesnt matter.
As you wont need the funds for a PPOR redrawing the funds for a deposit on an investment property really doesnt matter so i would do this and then depending on the price top it up with your savings etc.
Only issue i can see is from what you have mentioned is that your circumstances will certainly have changed during the next 5 years and this impact will on your ability to repay the loan. Under NCPP your Bank or Broker will need to be making investigations into this and certainly based on the information the loan WOULD be unsuitable.
i think you are going to have problems.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
I thought that Flexi First with Westpac doesNOT have 100% offset… only redraw.. it is a no-frills product
may be some confusion redraw vs. 100% offsetHey guys,
I checked a few times with Westpac and from what they have said it is a 100% offset account. So when I open my internet banking it is as follows:
– Westpac Choice (I have been assured this is a 100% offset account and after doing the calculations it does seem that the funds in this account do offset the interest, otherwise my interest only payments would be much higher)
– Flexi First Option Investment Property Loan with RedrawSo basically its a matter of using my offset account money to fund the deposit for another place. And just to clarify the amount I am able to borrow will also be based on my ability to service both loans as a whole? I am just wondering if this is the right way to think about it as I have read in some other posts it is best to split these debts up into different accounts and avoid cross collateral?
Again, thanks for the responses to all my queries!
And just to clarify the amount I am able to borrow will also be based on my ability to service both loans as a whole?
Yes this is correct.I am just wondering if this is the right way to think about it as I have read in some other posts it is best to split these debts up into different accounts and avoid cross collateral?
Definately dont cross collateralise so split up the loan accountsCheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Qlds007 wrote:I would have suggested interest only with a 100% offset account from day 1 to preserve the deductibility of the interest and also to give you flexibility.What do you mean by this Richard? How does this provide flexibility and how is the deductability of interest preserved? Also, with an IP in this situation then the only value gained is the appreciation in capital value over the actual loan amount, which seems pointless
Sparkys
Assume that you paid down $50,000 of your investment loan balance and then decide you need to purchase a motor vehicle for $20,000 or use the entire $50,000 as deposit on a new PPOR.
You redraw the $50K from the investment loan account.
Trouble now is that the purpose of the funds is not for investment and therefore the interest is not deductible.
You now have a split loan and an accounting nightmare.
Interest on the $50,000 at say 7.5% = $3750.
Assume a marginal Tax rate of 30% this would have meant an Annual Tax credit $1125 which is now lost.
Had of course you placed the $50,000 in a 100% offset account you can have still accessed the $50K and the interest would still be 100% deductible as the purpose test would be satisfied.
Nothing to stop you have a loan of $300,000 and $299,000 sitting in the offset account.
If you had no PPOR debt then you could always transfer the funds and pay down the home loan but at least you make the choice here. Flexibility is the key when it comes to investing and loan structures.Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Ah, that makes a lot of sense! Thanks Richard
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