hi I have been a reader of this forum and found this place very informative and educational.
Here is my first question hopefully someone can shed some light on it.I and my partner currently own PPOR (semi-detached house bought at 660k) in Sydney Inner West (within 3 km from CBD) for 3 years and the morgage we owe currently is $200k with building society and it comes with 100% offset account.
At that time, median house price in our suburb was $650k. Now median house price of our suburb is up and down but latest figures is over $800k. We haven't done any official bank re-evaluation of our PPOR.The BS loan account is a package with variable rate. Our BS loan has been very good and we are glad we have refinanced from St George LOC package.
Since then we have put all salaries and extra cash into this offset account which has now around $150k. (and as a result, total mortgage balance is $200k as mentioned)Now we want to buy our 1st IP. My question here is regarding a loan structure.
1. we want to avoid crossing for security reasons by all means
2. we could use $150k for deposit of 1st IP but don't like the idea that we will end up paying extra few hundreds dollars of more interest every month in our PPOR mortgage account as a non-tax deductable item although money is used to generate an income.
3. we want a IP loan as 3 years fixed but no need to come with offset account as we can create another offset account with PPOR loan account for free.We initially planned to use this $150k as a deposit to buy a 1st IP (something around $550k-600k) but recently realised we will end up with paying extra few hundreds monthly in PPOR interests under this structure and start looking for a better structure to maximise our tax benefit. In the future, we want to buy a few more IPs as long as we can borrow.
We also consider conver our PPOR into an IP in the near future as you can read benefits of doing it in this forum.
Obviously, our PPOR will be instantly CF+ if we do.Could someone give us any advice what the best loan structure under this situation?
Thank you in advance.
skippyz
Hi Skippyz
Welcome to the forum and i hope you enjoy your time with us.
Couple of answers to your questions:
Firstly if you are thinking about using the property as a future investment property you should switch the loan to an interest only loan with 100% offset account asap to preserve the dedcutibility of the interest going forward.
Now in regards to the suggested loan structure for your first IP i would recommend:
1) Set up a separate equity loan or Line of Credit secured against your PPOR for an amount equal to approximately 20% of the new purchase price and sufficient to cover the acqusition costs. i.e If the new purchase price is $400,000 then take out the equity loan for say $100,000.
2) With a separate lender take out an interest only fixed rate loan for $320,000.If you would rather take the IP loan to 90% then by all means do so and reduce the loan on your PPOR to 10% plus acqusition costs but remember you may incur LMI. Do not use your own savings as deposit as this again will reduce the amount of interest you can claim as a deduction.
Once the IP has increased in value increase the standalone IP loan to 80% (or 90% of the increased valuation and use the raised funds to repay the equity loan / LOC secured against your PPOR. This enables you to repeat the process for the next and ongoing IP's.
Your mortgage broker should be able to assist you with the structure and set up going forward.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
I agree with Richard.
Don't use your offset account money as this is personal funds and will be needed for your future PPOR. You have plenty of equity so use this to borrow 105% of the new property (without crossing loans).
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 Skippyz
You mention that you and the misses refinanced home loans from St George LOC package to a 100% offsett account.
The question I would like to ask is
For your every day expenses do you use a credit card ?
When I mean by everyday expenses, your bills, shopping, petrol etc !!!!!!!!
The reason why I am asking is, Deb and I have a St George LOC package at the moment and we are looking to refinance to a 100% offset account type home loan which I think is the better loan of the 2.
We dont seem to be making much headway into this loan at all with this LOC St George home loan.
We have had this loan for about 7 years and it seems like we are chasing our tails all the time.
Im not sure if its the right type of loan for us at all.
Thanks and cheers
karlmNot only is it not a recommended way to go to reduce your interest on your home loan it is also a dangerous way of structuring a loan if you ever consider that you may want to rent the property out in the future because you have now contaminated the interest.
If you end up staying with St George be careful of their so called offset product.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Thanks Richard and Terryw for your advice and comments.
Equity loan sounds like the way to go. I will further talk to our broker.
For this time, we only need 20% of aquisition cost plus legal fees from equity loan.
We prefer not to pay LMI.Kind regards,
Skippyz
karlm63 wrote:Hi SkippyzFor your every day expenses do you use a credit card ?
Hi karlm
Yes, we pay all day expenses using credit card and pay off from offset account.
We keep all extra cash in our offset account.The reason we refinanced from St G LOC to building society's home loan was
we didn't utilise LOC account as loan was only for our PPOR.and later recently I learned from this forum that crossing with PPOR and IP security is not what we want to do.
On the top of that, Interest rate of LOC is much higher than simple standard rate loan w/ offset. so it's not best for our PPOR loan.You may have a question why we opened St G LOC in the first place – because it was recommended by the advisor we used at that time. Key word – Margaret Lomas
karlm63 wrote:For your every day expenses do you use a credit card ?
Hi karlm
Yes, we pay all day expenses using credit card and pay off from offset account.
We keep all extra cash in our offset account.The reason we refinanced from St G LOC to building society's home loan was
we didn't utilise LOC account as the loan was only for our PPOR.and later recently I learned from this forum that crossing with PPOR and IP security is not what we want to do.
On top of that, Interest rate of LOC is much higher than simple standard rate loan w/ offset. so it's not best for our PPOR loan.You may have a question why we opened St G LOC in the first place – because it was recommended by the advisor we used at that time. Key word – Margaret Lomas
cheers
SkippyzSkippy yes i must admit it did sound like a Destiny set up.
They just love crossing those loans together.
Remember to get that existing PPOR loan coverted to IO asap.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
SkippyZ wrote:You may have a question why we opened St G LOC in the first place – because it was recommended by the advisor we used at that time. Key word – Margaret LomasI've enjoyed her books and show and also agree with much of her investing methods. However, when it comes to finance – she's definitely not a guru. Cross collaterisation and over use of LOCs…hardly makes sense.
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]
I was just advised from our broker that I can only take a LOC from current Building Society as they hold our mortgage.
I would like a second opinion. Is that correct that we cannot apply for a LOC from other lenders than current B.S.?Also, when B.S. during LOC application process, do B.S. consider current offset a/c balance into consideration?
I assume it's all part of equity calculation.I recently found out that our current B.S. is one on the most conservative (strict) side in terms of lending criteria.
Cheers
Theoretically you could by letting the new lender take a second mortgage.
But it will be virtually impossibe to find lenders that would allow a second mortgage on your house behind another lender.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 Skippy
It all depends on the available equity.
Lenders do take 2nd mortgages but as their risk is greater the normally limit the maximum combined exposure.
No when calculating your over equity lenders do not take intom consideration funds in your offset account as these could be withdrawn at any stage.
Yes i find it funny your Broker has placed your loan with a Building Society who are known for being the most conservative as well not the cheapest in overall pricing and product range. Must admit we take many an enquiry from clients wanting to get away from Building Societies not the other way round.
Each to their own i guess but it is not for most investors.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Thanks again Richard and Terryw. I feel like I have read many topics in finance section but still lots to learn!
OK, so from your advice, I understand now that as long as I can take a LOC as a secound loan to cover 20% amount of IP price and other admin/legal costs to cover from Building Society, the first IP purchase can go ahead. I believe we can get it done with current BS.
Whether it is the best option or not is a different matter so –
If we want to purchase second and third IPs in the near future, this finance structure with BS of 1st IP and PPOR would be any issue?
I mean BS has the most strict lending criteria but if it serves the purpose for 1st IP purchase (considering we want to buy a few more IPs in the future). Then is it still worth go ahead with BS for 1st IP or better refinance with others?
(please note it's been only 12 months with our BS after refinance from St G LOC)Cheers,
skippyzSkippy
Personally i would just take the LOC with the Building Society and then try and get a base rate investment loan elsewhere.
With a lender who is restrictive in regards to lending terms there is no point in digging yourself in deeper than you need to.
When the IP has increased in value you want to redraw the additional funds upto the orginal lvr and use these to pay down the LOC secured against the PPOR so you can go again (Simple debt recycling strategy). You dont want to find your current B / Soc says NO you cant as then you have more issues.If you have the capacity to buy more IP's then you might even think about going to 85% or even 90% LVR to stretch your LOC even further.
LMI is an opportunity cost but is not evil.
Again with further hard data it is difficult to comment further.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Thanks Richard.
You initially advised me to switch the loan to an interest only loan with 100% offset account asap to preserve the dedcutibility of the interest going forward. I understand this
and I have explored this in this forum and read Jamie's article as referred to in the forum
http://passgo.com.au/blog/25-mortgage-broker-canberra-blog/75-interest-only-with-offset-account-structure.htmlAfter reading this article, it made me wonder if any difference from this IO w/ offset loan and our current loan P&I w/ offset structure.
Our Building Society loan is P&I with 100% offset.
We put all salaries and extra cash into offset account and monthly interest for home loan is deducted (set automatically) from offset to home loan account. Our home loan account balance has been almost stayed unchanged since start. We don't pay extra into home loan account.It seems to me this is working exactly like IO loan with 100% offset.
what is the exact difference from P&I and IO loan in this situation??
The difference is the loan is being reduced by the principal component each and every repayment (albeit initially small in the early years). As the debt goes down the amount of interest charged reduced and therefore reducing the amount you could claim as an interest deduction of you decide to rent the property out in the future.
If there is any likelyhood you might rent the PPOR out then IO with offset account is a must.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
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