G’day Guys,
I’m just about to buy my first property in Victoria and i’m hoping someone might be able to give me some advice on what will be the best way to increase my portfolio over the shortest amount of time. A little bit of info on my situation:
Im currently looking at buying a property worth $300k (95% loan – as i dont have much deposit), i’ll need to spend $20k (on a personal loan) to renovate before i rent it out, so i figure that i’ll live in it for the first 6 months and then rent out afterwards, hopefully building up my properties there after.
My loan is currently going through approval (no issues there – fingers crossed), however my question is regarding which type of loan i should be getting vs what is best for Tax offset and rental return + growing a portfolio.
I know its a big doozy of a question, but can anyone advise if an IO loan would be best, or if its worth just paying down as much as i can and then using that equity towards my next purchase?
Thanks in advance!
Cheers,
BTW I’m also going through CBA (have always been with personally and with my business so i’ve had a good credit rating), so i’m aware that i can get better rates elsewhere, however i’d prefer to get the loan established first and then change later if i need to/can.
Cheers,
IO is the better option if you are not going to be tempted to touch the funds sitting in offset account. Paying IO will also help you pay down your personal loan quicker since you are being charged a higher interest.
Re CBA – they are not the cheapest but they have been quite competitive over the past 12 months. Generally speaking I would stick with CBA but go onto an IO loan.
TheFinanceShop | Elite Property Finance
http://www.elitepropertyfinance.com
Email Me | Phone MeResidential and Commercial Brokerage
Thanks for the quick reply, that sounds like some good advice!
Unfortunately i think i wouldn’t have much change left from the rent (event with the IO loan repayments) – this is just due to the expected rental, however it certainly would make sure that i don’t have to pay much extra to service the loan – although this would mean that the loan wouldn’t be negatively geared.
Moving forward then (gearing up for my next property), if i am not paying off any principal for the next 10 years with my regular repayments, would it be worth making additional payments on my loan to reduce the principal (does it work like this) and then redrawing on those repayments later down the track for the deposit on another one, or would it be better to just pile all my excess cash into an offset account (after the personal loan has been repaid) and then use this money as the deposit?
Sorry for all these questions, i’d just prefer to get it right the first time
Best option would be to utilize it as an IO loan with 100% offset. Any excess funds can be distributed in the offset account. The reason for doing it this way rather than paying down the loan is that it allows greater control over your funds down the track, it's yours to do what you want with it without affecting the tax deductibility of the loan.
Example: Your initial loan was $285K IO and in two years time your 10 year old Mazda conks out and you decide it's time to update to a Toyota Aurion for personal use.
If in that time you had paid the loan down say by an extra $25K to $260K and then redrew $25K for the car, the balance would be back to $285K however only $260K will be deductible debt due to the personal nature of the loan withdrawal. If on the other hand you still had the $285K loan with $25K in the offset, you could pull out the $25K in the offset to buy the car and still have full deductibility on the $285K loan.
Not to say that you can't pay down the loan and redraw for investment purposes which would be deductible debt, however in the end with money in the offset you have better control. As they say cash in king!
Thanks Tom & Finance Guy,
It seems like this is definitely the right way to go!
I think this has answered all my questions, unless there is a reason i should go 5,7 or 10 years IO, or look at doing 50% instead of 100% offset?
Thanks Guys,
I knew there was something else…
Is it also possible to make a lump sum payment on the IO loan (with an offset account) and it make a big dent on my principal? Or does the IO loan with an offset account not really work that way?
Again from what i understand it would be better to just increase the amount of money in my offset account and then use that later for another deposit instead of the equity?
WombatsInvest wrote:I knew there was something else… Is it also possible to make a lump sum payment on the IO loan (with an offset account) and it make a big dent on my principal?Yeah it's possible but pointless. You'd be better off making that lump sum repayment into the offset instead – it will have the same effect but a better outcome if you decide to turn this property into an IP in the future.
Here's an article I wrote for API magazine on the interest only with an offset structure and here's another article I wrote on interest only structures in general. Hopefully they help a little.
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]
Thanks Jamie,
Much appreciated.
To re-iterate it will be an investment property after 6 months, so i think this would definitely be the way to go.
I’ll have a look at your links and come back if i have any questions. Thanks also!
Also if you have any suggestions as to the term for the IO it would be much appreciated!
WombatsInvest wrote:Thanks Jamie, Much appreciated. To re-iterate it will be an investment property after 6 months, so i think this would definitely be the way to go. I'll have a look at your links and come back if i have any questions. Thanks also! Also if you have any suggestions as to the term for the IO it would be much appreciated!No worries.
If it's going to be an IP after 6 months than IO with offset is the way to go.
Park any spare cash into the offset and when/if you buy a PPOR – take the cash out of the IP offset and move it onto your PPOR. That way, you've increased tax deductible debt whilst lowering non-deductible debt.
You usually opt for the highest IO period on offer and then roll it over once it expires (all depends on what's available from the lender).
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]
Legendary!
Starting to think i should have used an independent mortgage broker, but fingers crossed there’ll be a next time
BTW some good advice on your links!
Thanks Again to all
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