Hi, I am new to this forum and IPs. I have been educating myself in IP ever since I made a deposit on an OTP property a year ago (stupid? Yes, but I needed something somewhat safe to get me started and to force my brain into reading books and doing research). My current plan is to live in this property for 6months to benefit from the QLD FHOG bonuses then turn it into an IP. So I plan on taking out an IO loan. Here are some questions that have been bothering me and I couldn’t find the answer for.
1(a). If I take out an IO loan today for my current PPOR, over the period of 6months I place $25k into my offset account (to save on interest). Before turn it into an IP I can simply take out the $25k for personal use and my tax system remains simple right?
1(b). If I keep the $25k in the offset account and add another $25k over another 6months. A total of $50k in my offset account over 1 year period. If I then take out the $50k for personal use. Is this when my tax system becomes a mess? Wouldn’t the accountant have some simple plug and play formula for these things?
2. Does that mean all investors still have some sort of saving account for holidays/cars/etc if they don’t have a PPOR to redraw from?
3. I’m having a difficult time deciding how much LVR will be best for me if I intend to buy more IP in the future. Do most investors use the maximum loan amount to get maximum leverage? Ie >90% and pay LMI? What happens if the value decreases and the LVR becomes >100%, does the banks start demanding for extra repayments?
Any comments would be greatly appreciated!
Hi Jason
Welcome aboard.
I'm not an accountant and would always recommend seeking professional assistance on such matters.
1 – Yep, should be fine. Offset accounts are treated different to "redrawing" money from the loan. Same applies if you have $50k in the offset (the amount doesn't matter).
2 – Most of my clients have an offset set up against their PPOR loan. It can be used for storing savings, personal expenses, etc.
3- Depends on your risk profile and goals. If you want to adopt an aggressive approach then using smaller deposits and higher LVR loans might be a good option. If you're risk adverse and not wanting to be overly aggressive in your approach – then a larger deposit and lower LVR would probably be more suitable.
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]
Hi Jamie,
Thanks for your quick response!
Point 3 still doesn't make too much sense to me mathematically.
Let's assume I put $0 down as an deposit vs putting down 50% as a deposit. Let's neglect LMI and the fact that there is probably no 100% loans.
If the property value decreases by 10%. The original loan amount remains the same? The repayments remain the same? Or does the banks start demanding for extra repayment because the LVR is now 110%? Or if I somehow lose my cashflow to cover the repayments and decide to sell, I am still only losing 10% of the property value right?
Thanks,
Jason
Hi Jason
Your loan repayments are based on the actual loan amount – not the value of the property.
In theory, if the bank believed your property was worth more less than the loan amount, then they'd want you to pay down some of the loan to bring the LVR within their required threshold. In reality, I don't know of it happening.
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]
Hi Jason, quick comment not relating to your question but to your situation, unless something has changed you need to live in the property for 12 months to get the full concessions, 6 months for FHOG but 12 months for the stamp duty concession that you also get for being a first home buyer and/or PPOR.
My boyfriend had to pay back 3k to the government a couple of years ago because we moved out of his house (of which he got the FHOG) after only 8 months, we told everyone including the broker, accountant and solicitor what we were doing from the start and at no stage did ANYONE mention the 12 month stamp duty thing.
On the upside the 3k was tax deductable..
Hi Claire, thank you so much!
I was informed of this awhile back, but had been completely sidetracked by researching for FHOG only.
The $3k sounds like your boyfriend only had to pay back the difference of the grant? Did he have to pay back the difference of the stamp duty as well? I don't seem to be able to calculate which grant he received, $7k+14k, $7k+10k, or $15k grant? I'm curious because the rules seem to be different for each grant.
I found this link https://www.osr.qld.gov.au/duties/transfer-duty/exemptions-and-concessions/first-home-concession.shtml
that says "not dispose of part or all of the property before moving in or within 1 year of the date you move in." I believe this only applies to the latest $15k grant.
And this link http://www.minkproperty.com.au/sites/mink_property/uploads/documents/Building%20Boost%20Application%20Guide.pdf
that corresponds to my $7k+10k grant. Which says "Applicants must ensure the home will be occupied as a place of residence for a period of at least 3 months (whether or not continuous) during the year after the transaction is completed"
The new problem for me is that I have recently received a letter from the developer saying the property won't be completed until early 2015 and in my original document it says the building work must be completed on or before 31 January 2015. Though the above link says the 30 April 2015.
Interesting times ahead.
Jason QLD wrote:Hi, I am new to this forum and IPs. I have been educating myself in IP ever since I made a deposit on an OTP property a year ago (stupid? Yes, but I needed something somewhat safe to get me started and to force my brain into reading books and doing research). My current plan is to live in this property for 6months to benefit from the QLD FHOG bonuses then turn it into an IP. So I plan on taking out an IO loan. Here are some questions that have been bothering me and I couldn’t find the answer for.1(a). If I take out an IO loan today for my current PPOR, over the period of 6months I place $25k into my offset account (to save on interest). Before turn it into an IP I can simply take out the $25k for personal use and my tax system remains simple right?
1(b). If I keep the $25k in the offset account and add another $25k over another 6months. A total of $50k in my offset account over 1 year period. If I then take out the $50k for personal use. Is this when my tax system becomes a mess? Wouldn’t the accountant have some simple plug and play formula for these things?
2. Does that mean all investors still have some sort of saving account for holidays/cars/etc if they don’t have a PPOR to redraw from?
3. I’m having a difficult time deciding how much LVR will be best for me if I intend to buy more IP in the future. Do most investors use the maximum loan amount to get maximum leverage? Ie >90% and pay LMI? What happens if the value decreases and the LVR becomes >100%, does the banks start demanding for extra repayments?
Any comments would be greatly appreciated!
1. Where is the $25k coming from? If you are using redraw then what you say won’t work. If savings then ok.
Redraw = new borrowings. Which means interest deductibility depends on the use to which the borrowed funds were put.
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 Jason
It's going to be a crazy time for you getting all the ducks to line up given the time frames.
I'm pretty sure the 3k was more to do with the stamp duty concession (either because he was a first home buyer or maybe it was just that it was our PPOR as it turned into an investment the moment we moved out at 8 months. I'm pretty sure the trigger for them sending us the 3k bill was when our new tenets lodged bond with the ATO.
Make sure you paid for good up to date advice closer to when you move in as no doubt the rules will change a couple of times in the next year…
Hi Terry,
The $25k will be from cumulated income over each 6months period. The main intent being, placing the income directly into the offset account to generate a saving at the mortgage rate rather than the lower interest rate of a savings account.
Taking money from the offset account doesn't equal 'redraw' whilst it is the PPOR right?
Thanks,
Jason
Jason QLD wrote:Hi Terry,The $25k will be from cumulated income over each 6months period. The main intent being, placing the income directly into the offset account to generate a saving at the mortgage rate rather than the lower interest rate of a savings account.
Taking money from the offset account doesn't equal 'redraw' whilst it is the PPOR right?
Thanks,
Jason
Thats ok then. As long as the offset has a separate account number than it is just really treated as a savings account.
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
Claire hate to say the Stamp Duty on the Transfer will not Tax deductible but added to the cost base once the property is sold.
Also the First Home Owner Grant Stamp Duties concession form clearly states that the property needs to be occupied for a continuous period of 12 months.
Anyway away from that if you are considering renting the property then go for interest only with 100% offset account.
I would also be looking to cop some initial LMI as when the property becomes available for rent the LMI will become Tax deductible albeit over 4 years (or the term of the loan if shorter).
Make sure your Broker shops around as LMI rates have recently jumped and there is a significant difference amongst lenders.
Only concern is of course if the property has fallen in value and you end up putting in cash and borrowing against the valuation rather than the purchase price.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Hi Richard,
Thanks for the heads up with the LMI increase. I have been looking around lately, hoping to buy my first IP after this financial year (the OTP is almost 2 years away still).
An extract from https://www.osr.qld.gov.au/duties/transfer-duty/exemptions-and-concessions/home-transfer-duty-concession-rates.shtml
“If you move in and then sell the home within 1 year, you will have to pay duty on a pro-rata basis, depending on how long you lived in the home.”
I would assume this is the $3k that Claire paid? I don’t understand what will be added when the property is sold, can you explain this part please?
Thanks,
Jason
Hi Jason
Claire mentioned that she moved out of the house didn't say she sold it.
Stamp duty in Qld on the transfer cannot be claimed as a Tax deduction.
It is actually added the Cost base of the property so when you eventually sell the CGT is reduced.
Ok if you are looking at an IP post July 1 then might have different criteria to meet your needs than it would be for a PPOR.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
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