Hi,
Just trying to get our head around the best option for our loan structure:
We own our own home in Victoria. Is being valued, and we think it should be around $320k.
We owe $200k. (20k available to redraw)
We have made an offer on a house in SA for $340k (which will get a rental return of $320 a week). This property will become our PPOR in perhaps 12-18 months, at which stage we would like to change our current home to the investment property.
Our mortgage broker is suggesting that we move our existing loan from Westpac to ANZ, withdraw enough equity from the value of our home to pay for the investment property in SA, and take out another loan with them for the investment property. Then have all 3 loans packaged in the ANZ Breakfree package.
Alternatively we could refinance with Westpac and take out a completely separate loan with someone else. We currently have our home loan with them within the Premier Advantage package.
A friend warned us of putting ‘all our eggs in one basket’, i.e all with the same lender.
We are not currently planning on becoming ‘property investors’! But, we do like the idea of trying to keep both properties.
Any advice greatly appreciated!
Cheesemonger
Hi Cheesemonger
It's hard to comment without knowing the full details but what your broker is suggesting sounds about right.
You would have two loan splits against your current property – the first would be your existing loan (which should be changed to IO as this will become an investment down the track) and a second loan which will act as your deposit/purchasing costs for your next property. The third loan will be the remaining portion required for your new property.
Moving to ANZ can be a good option at present. They're offering a decent $1k rebate to offset the costs of switching. There also providing pretty decent rate discounts if your total borrowing exceeds certain amounts (make sure your broker requests these).
In terms of spreading your borrowing across lenders – it does become a factor, but for the first couple of properties I wouldn't be overly concerned (and just because your loans are with the same bank doesn't mean they have to be crossed collaterised).
Hope that helps.
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]
I'd probably structure it slightly different, depending on how much equity you have.
Loan 1, existing $200,000. Secured on Property 1 current PPOR. Make this IO asap so you stop paying it down.
Offset 1. Set this up on loan 1 and pay all spare cash into it.Loan 2. Set up a LOC. Use this LOC to pay for all expenses relating to Property 1. Such as rates and insurances etc. This will build up the loan and free up cash for the offset account (cash which you would have used to pay the bills). Only pay the interest each month.
Loan 3. LOC or term loan. Secured on Property 1. Use this for the 20% deposit plus costs. IO.
Loan 4 IO loan. Secured on Property 2. Only pay the interest on this loan until you move in. Once you move in you can pay extra off the loan or set up a new offset, or transfer the existing one, to this.
Once you make Property 1 an investment all of the interest on loans 1 and 2 should be deductibe.
Whle Property 2 is an investment all the interest on loans 2 and 4 should be deductible.
Each loan will also be stand alone without cross collateralsing them. Loan 4 could be with a different bank, but I probably wouldn't worry too much about this.
By borrowing the expenses for property 1 from loan 2 you will be freeing up a few thousand dollars per year which can help pay down the new property faster and will end up saving you tax.
This can be sped up by not paying the interest on loan 2 and letting it capitalise. But you will need tax advice on this as any deductions for this could be disallowed by the ATO if the dominant purpose is to increase tax deductions.
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
Thanks so much for your advice guys.
Jamie, do you mean make both properties Interest Only?
Terryw – I can just about get my head around your method, but am a little confused by Loan 2. Where does it come from?! What is it borrowed against? Do the costs of opening and having the LOC not counter the potential tax savings?
For the sake of ease and understanding, it looks like Jamies option might be more appropriate for us!
Cheers,
Cheesemonger
Cheese,
Sorry Loan 2 is secured against property 1. The idea to to get as much borrowings as possible in relation to property 1 so as to free up cash for property 2.
You will have to work out any costs and see if it saves you. There should really be any additional costs, but maybe an extra 0.1% on the interest rate for a LOC.
It may be a bit of an administrative task at first.
Even if you just paid the normal costs associated with the IP, rates, water, insurnaces, this will probably amount to $3,000 pa. Interest on $3k = $210. Tax savings maybe just $100 pa. But it all helps and think of the compounding effects.
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
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