Hello all
I have an IP that was bought 3 years ago as a PPOR. We have one of those rocket mortgages from Westpac. Our wages went into the offset facility and we paid extra off our mortgage. A year ago, we decided to rent it out as an IP and rent ourselves. We changed our mortgage to interest only, had the income from the IP go into the offset account and paid for our own rent from the same account. As the new financial year approaches, I’m wondering if this is the correct setup for someone with an IP and hopefully will invest in many more to come. Any advice in the best practice or correct procedure in this area would be grealtly appreciated.
Thanks a lot.
Welcome to our forum NikNak…..
.There are just so many variations and structures available to you from a variety of lenders and I could spend time running through a few examples for you however, this in itself can present problems, as you will be receiving suggestions that do not factor in all contingencies of your personal situation such as short and long term goals, available equity, your current tax liability, whether you are applying depreciation and variation, and so on…..
This forum has a few REAL good mortgage brokers who will probably offer you up some very good suggestions and ideas to help answer your question(s). If you feel the answers are incomplete or simply not helping you to set yourselves up as best you can, then feel free to drop me a line and we'll show you how we would not assess you on the one dimension of finance, but also encompass all your specific needs and circumstances.Hi Alf1
I may not have explained myself clearly. I am not looking for another mortgage package (at least not yet anyway ) more along the lines of staying with the same bank and opening up say…another account were the IP income and expenditures go in and out of. I am very new to the whole process but have learnt many lessons in life to understand that a correct setup in the beginning will save a lot of work and less hassle in the end.
I can certainly appreciate when I have more IPs that the financial model will be completely different yet again and I would certainly seek your service in this area.
Thanks again
NikNakPadyWack wrote:Hello all I have an IP that was bought 3 years ago as a PPOR. We have one of those rocket mortgages from Westpac. Our wages went into the offset facility and we paid extra off our mortgage. A year ago, we decided to rent it out as an IP and rent ourselves. We changed our mortgage to interest only, had the income from the IP go into the offset account and paid for our own rent from the same account. As the new financial year approaches, I'm wondering if this is the correct setup for someone with an IP and hopefully will invest in many more to come. Any advice in the best practice or correct procedure in this area would be grealtly appreciated. Thanks a lot.This sounds ok.
Did you withdraw any money paid into the loan?
Ideally you should have an IO loan with a 100% offset. All income will go into the offset, including rents, wages, inheritances etc. Everyday money is in there it is saving you interest off the loan, so adding a interest free credit card can help you keep your money in the account longer saving you even more interest – but make sure you pay it off in full.
When you go and buy a new property if it is an investment then dont use the funds in the offset, but set up a LOC on the equity in the property and then borrow that for the deposit. Get the remainder from the same or another bank without using the first property as additional security.
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
Hi Padywack
Without any non-deductible debt I think your current IO with an offset structure is fine. If you do have any consumer debt – car loans, credit cards, personal loans, etc than I’d redirect your surplus cash to paying those off first.
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]
As promised NikNak, you are now starting to receive the excellent feedback from 2 of our 'senior' contributors and what both Terry and Jamie say should go a long way to helping answer your questions. Thanks again for your usual positive input guys !
Thank you for your replies.
Terry – No. The extra money remained on the loan. And over the last year all our savings have been going onto the offset. We have just released $100k into our share portfolio to spread our risk.
We owe $230k and we are paying interest only. The IP income covers the repayments and we have some left over.
Your last paragraph sounds like it’s gold…and i wish I fully understood what it meant. I will look closely at your suggestion and start to learn more about this exciting prospect.
Hi N,
Good. But the $100,000 for the shares, did this come from your offset account?
If so you are not doing it tax effectively.
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
NikNakPadyWack wrote:Your last paragraph sounds like it’s gold…and i wish I fully understood what it meant. I will look closely at your suggestion and start to learn more about this exciting prospect.Yep, it is
Borrowing for the deposit means the funds are deductible (whereas the cash in your offset wouldn’t be). This method also avoids crossing the two properties (i.e your first investment property won’t be used as collateral for your second property and vice versa).
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]
Terryw wrote:Hi N,Good. But the $100,000 for the shares, did this come from your offset account?
If so you are not doing it tax effectively.
Yes it did. It was living in my offset which we use to pay off the credit card and any other day to day expenses. I’m guessing I should have spoken to my accountant before doing this? Oh there’s so much to learn.
Thanks for highlighting a different way of thinking.
I just reread your post and see that you are renting now. So at the moment it has no effect.
But if you could have problems in the future.
This $100,000 is basically cash, but has been used for investment purposes. Therefore there is less cash for you to use for personal items. If you ever buy a new house to live in, for example, you would have $100,000 less deposit and would have to borrow an extra $100,000.
Interest on $100,000 is approximately $7,000 pa. On an average tax bracket of 30% = a potential tax saving of $2,100 pa.
So, what you could have done is to get a LOC on your property and borrow the $100,000 to invest. The interest on this borrowing would have be deductible. The $100,000 cash that you didn't use would stay in your offset would have been still available in the future when you purchased your new PPOR.
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
Wow…I never new I could do anything like that. I do have a financial adviser and this method was never mentioned.
By the end of this month, I will have been self employed for two years earning on average circa $130k gross but its only over the last year, that I have started to think more about my families financial future through investing. By renting ourselves, I did not want the difference in our repayments to be not doing much and wanted to invest this money and make it work harder.
I will now go back to my FA. and let him know that I am open to this different form of borrowing to invest and see what he says.
Thank you for opening my eyes.
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