Hi all,
I currently have a mortgage over a PPOR of $400,000 valued at $480,000 but it is on interest only at the moment as it is a new home built Nov 2013.
I am keen on getting into investing property and have read a few books in regards to Offsetting my Home Loan.
I am a person who doesnt splurge on wasteful items so i believe this would be better for me to do but i am after someone to tell me if that it would be beneficial to put my savings approx $25k into one of these accounts to assist with purchasing investment properties whilst lowering my interest paid?
Other information is i earn approx $100k p.a. and please let me know if there is any more information required to advise if this is a better option that what is currently in place.
Thanks,
Mitch
Hi Mitch
Firstly welcome to the forum and i hope you enjoy your time with us.
If you are looking at buy at an investment property you are better off to set up a separate sub loan and use these funds as deposit for your new IP.
Assume you had 25K to invest you would reduce the PPOR loan by 25K and then set up a separate 25K interest only loan.
In the meantime, you would probably set up a 100% offset account linked to the main loan.
Going forward the 25K probably isn't going to be enough to cover a deposit and the acquisition costs so you might want to look at a loan where the lender will fund your purchase costs . Your Broker should be able to advise you on this going forward.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Thanks Richard for the welcome. I hope these questions aren't too basic for these forums.
So first step would be to turn the "main loan" my PPOR into an offset account.
Secondly, deposit the $25k of cash savings into this account as available funds but also to lower the % of interest i pay weekly.
Thirdly, if my property is valued at $480,000 and i owe $410,00, based on 80% lending would that leave me with $26k of equity to use towards a deposit as well..?
Then is it a LOC that i open with the Savings/Equity on the property..?
Thanks,
Mitch
Hi Mitch
Welcome aboard
An offset isn't a type of loan – it's a feature of a loan. It's like a savings account that saves you home loan interest rather than accumulating interest.
A lot of people set up their PPOR loan as interest only with an offset just in case they decide to rent out their PPOR one day – it preserves the principle balance so you have a larger loan to claim a deduction from when it becomes an IP.
Moving onto the other question – Richard mentioned that if you're looking to purchase an IP – it's best to inject your cash into the loan and "reborrow" it as a second loan split. It would then be used to cover the deposit/costs on your IP purchase. This would allow your entire IP debt (including costs) to be deductible.
In your situation, you might be able to do something like this:
Assuming your home is valued at $480k – the max some lenders will you to borrow up to is 90% of the loan amount which would be $432k ($480k x 0.9 = $432k).
Take the current $410k loan away ($432k – $410k) and you're left with an equity release of $22k.
If you haven't paid LMI on this loan previously, you'll be slugged with a whole new LMI premium. If you have paid LMI previously, you'll just have to pay a small adjustment fee to the current premium.
Now – if you've got $25k sitting in the offset – you could inject that into the current loan and "reborrow" it as part of the equity release – so now you're equity release has gone from $22k to $47k.
With $47k you should be able to purchase something – but it ultimately comes down to your plans, the value of the property you're looking to buy and your borrowing capacity.
Also – if that $25k is your only savings then I wouldn't drop it all into your next purchase. Look to hold onto some (if not all) for emergencies.
Hope that helps – if in doubt, get a decent finance person to sort this out for you.
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. I have read some of your blogs on your website which are really really good for people from non finance backgrounds to understand and digest.
Yes i did pay LMI so i was assuming there would be a small adjustment due to the new $$ made available.
I think i will get the offset feature set up anyway as I would assume the saving it would create on the interest charged would be better than earning 3.95% p.a. anyway in the Goal Saver it is currently stored.
Just to be sure, i would transfer the "$25k" into my home loan so when they do the release that would just be "robbing peter to pay paul" as apposed to doing it in two different transactions (one being cash and one being equity release..?)
Thanks again,
Mitch.
No worries Mitch – my pleasure.
Since you've paid LMI it's best to try and stick with your current lender for the equity release – it will save you quite a bit since you won't be up for a new LMI premium.
Offsets are great – I'd recommend utilisng one regardless of whether your loans is set up as P&I or IO.
Does your lender to upfront valuations? If so – get one of those done first before you start injecting cash to reborrow.
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]
Will do. Thanks Jamie.
All the best for the rest of your week.
Mitch.
Cheers Mitch – just let us know if you have any hassles.
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]
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