Hi all,
I’m looking for advice in my particular scenario and keen to hear your experience of best way to approach things.
Currently I have a single separate LOC (solely used for investment purposes) working account against my PPOR which I have used for deposits in purchasing some investment properties over the last few months. At its current stage, this is reaching near it’s limit but I’d like to continue purchasing more properties so I figured I have two options:
Option 1) Revalue my established PPOR to extract out more equity and increase the limit on my PPOR. I’m likely to be able to increase the limit by +$100k which is sufficient for my intended purpose, however, I am somewhat weary that this will be also increasing my exposure limit.
OR
Option 2) Revalue my recent investment property purchases to try and extract out whatever equity I can squeeze from each IP and then use the funds to ‘pay down’ my current investment LOC account against PPOR and then that would in effect allow me to reuse the funds once again.
What is the better approach?
Would you choose one over the other, why?Cheers,
Hi Jate
Either option will achieve the same outcome – you’ll be using debt to pay down debt, you’re just moving the securities around.
Say you have a fully drawn $50k LOC secured against your PPOR. You then get a $50k LOC against your IP’s to pay down PPOR LOC – there is still the $50k debit balance, it’s just a different LOC with a different security attached to it now.
Either scenario you’re going to have LOC/S with a total limit of $100k with $50k drawn on it giving you $50k tp ‘spend’.
Kinnon Bell | Kinetic Funding
http://www.kineticfunding.com.au
Email Me | Phone MeMortgage & Personal Loan Broker based in Cairns and Melbourne but servicing clients Australia wide.
Thanks for the reply Kinetic.
Would the banks or any other parties (ie. Accountants, ATO etc…) look at the ‘debt’ differently if the security is against a PPOR vs the IP’s?
On a slightly separate note, If I go with option 1, when will my LOC ever get paid off? Currently the DEBIT interest is compounding on itself. Won’t this get me into strife long term if I continue this structure?
From a taxation perspective, the security tied to the debt is of no relevance, the key is the usage of funds.
With regards to paying down debt, are you saying that you are currently capitalising the interest? Capitalisation of interest is only allowable in very strict circumstances for taxation -be careful with this. Outside of what the ATO thinks, you don’t want spiraling debt!
Generally investors will keep their investments at interest only and only pay the interest component of their investments whilst in the accumulation phase. When they have reached their ‘peak’ amount of property, they may buy more (to sell in the future) or start paying down debt/selling a portion of their properties. There is a number of ways to go about it, but it’s best that you work out your strategy and how you plan to build, consolidate and maintain your portfolio.
Corey Batt | Precision Funding
http://www.precisionfunding.com.au
Email Me | Phone MeInvestment Focused Finance Strategist - servicing Australia-wide
Hi Jate
Agree with kinetic – both options achieve the same outcome. You can borrow from the IP – but you don’t need to pay down the LOC against the PPOR.
Generally speaking I’d just access equity in whichever property provides the most with no (or less) LMI involved.
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 all for your input. I’m glad to hear that either way I go achieve the same outcome in terms of the borrowing. I guess for some reason I feel it safer to have the securities against my IP’s than over leveraging my PPOR.
In regards to the Line of Credit I have with Commonwealth Bank, called them up this morning wanting to stop the capitalisation and to pay the interest portion from one of my other translation accounts and was SHOCKED to hear that for the LOC product with CBA, that this was not possible?
Not sure if the service desk staff was clueless or really it is the case…. Anyone else with CBA too?
You can transfer the interest payment from a transaction account on a LOC manually on a monthly basis when auto debits are not available.
Colin Rice | CDR Finance
http://cdrfinance.com.au/
Email Me | Phone MePerth Based Mortgage Broker - Investment Property Finance Specialist | E: [email protected]
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