Forum Replies Created
And argue till your blue in the face if the conveyancer tries to charge you anything.
HI 99Ivan,
Seems to me that you have approached this whole decision making process the wrong way.
As a bush fire fighter I enter situations with the mind I am not going to do the tasks assigned to me and my crew until I can be convinced it's safe, achievable and is part of a bigger plan. Investment decisions should, in my opinion, be approached the same way.
Reading your comments it would appear as if you have approached this investment from the other end – I'll do this until I am convinced it is a good deal/idea etc.
In other words you seem to have been half way there when conversations started. Easily burnt (no pun intended) approaching investment decisions that way.
HI YU,
Adding onto an earlier comment about selling your existing property to fund the new one.
I assume your current property is in Vic – if this is the case then it might be worth your while investigating spousal transfer to maintain deductibility of your existing home.
I am not sure if can apply to your existing property as it is owned outright by your wife.
Would certainly be worth a few minutes tracking down someone in Vic who knows how spousal transfer works and to see if it can apply to your situation.
Extending on the previous comments – all properties have costs (loan interest, rates, insurance etc) – a depreciation schedule can offset some of these thus increasing your overall cashflow position.
And get a solicitor asap. This conveyancer is not looking after your interests.
TheYoungUnprofessionals wrote:Our advisor is the director of Port Finance in Melbourne – a company that has a few different specialists, each dealing with different areas of financial matters… Heard of them?
Cheers
I don't know Port Finance so cannot comment – sounds like you are now armed with multiple questions to work through with your advisor. Today you have reached another level of understanding which will be valuable as you move along your journey.
Hi YU,
Your plans will need to consider the limited amount of equity you have in your property at the moment.
Based on the numbers you have provided currently your loan to value ratio is at 91% – the capacity to release equity from your existing PPOR is extremely limited.
When making plans and/or talking to your advisor make sure this issue is addressed in any planning you do.
PS – when you say advisor what do you mean?
Hi Dellas,
Given this is your first property and you have no other security you will need a cash deposit.
Reading your post above it would appear as if the bank is lending at 80% – did you enquire about borrowing at a higher loan to value ratio?
In this scenario you are using $93K of your savings and retain $54K
If, for example, you borrowed 90% of purchase price you would borrow $405K – because you are over 80% the bank will charge you lenders mortgage insurance of around $8K.
Approaching your borrowing this way you only use $53K of your borrowings and you retain $93K of your savings – coincidentally almost the reverse to the current option.
Note I am assuming valuation at $450K in my calculations here.
Food for thought?
Hi YU,
No worries – tis good you are still digging.
As your plans include a new home in 5 years time (a relatively short time frame in the property world) your plans should address how you intend going about that purchase.
Often people upgrade their homes and end up with a relatively large mortgage on their new home and a proportionally small debt on their old home – which is now an investment property. From a taxation perspective this is back to front and doesn't make sense as the larger of the two debts is now non-deductible.
Having said that each persons individual circumstances are different and you would need to consider what I have said in the above paragraph with your personal plans.
If you are committed to buying say 3 X $400K properties soon then paying down debt and releasing equity through a line of credit type facility may be suitable. Clearly having an extra $1.2m asset value in your portfolio now is to your advantage over the long term.
The downside of this approach will be the issues created by the new PPOR in 5 years time.
Now these issues are not insurmountable and could simply be solved with a sale of your existing PPOR with surplus funds being directed to the new home. Sure there would be buying and selling costs but what you lose in lost profit you gain with a reduced non-deductible debt and a capital gain tax free profit.
Unfortunately property has no hard and fast rules which apply equally to all people.
Your challenge will be to work out what is the best move for you.
Confused?
Hi Ceekay,
Did your contract include conditions addressing & seekign to remove the caveat from title before settlement?
Hi Dellas,
On the proviso you are disciplined with your money I would put minimum cash into the loan and put the remaining funds into an offset account.. This maximise your flexibility going forward and gives you a cash buffer should the wheels fall off your life at some stage in the future.
Should you or your partner need to move for employment opportunities this structure also gives you relative freedom to do this without any major tax issues going forward.
Doing this also gives you and your partner time to firm up your long term property plans.
Of all of your debts only the portion that relates to the original property will be deductible.
Edit unless the car and boat were business deductions
Hi YU,
Your current level of equity could well mean you will need to pay down some of your debt so you are in a position to release some funds for your next purchase. I guess the key is to make this pay down amount as small as you possibly can so that you retain as much cash as possible which can be redirected towards your new home in 5 years time.
Some banks/brokers may try and cross collateralise your loans because of your limited equity. Be wary of this and make sure you really understand your proposed loan structure.
"Also you mention that if we were to redraw from our current PPoR to buy a new PPoR it wouldn't be deductible, but if we were to use cash from the deposit account as mentioned in response 1, wouldn't that be non-deductible too…?"
If you take cash from your offset account to help with the new purchase of a PPOR that is not considered new borrowings. After all you are only using cash. While the interest bill on your loan now increases (because you have taken some cash from your offset account) the purpose and nature of the loan has not changed and full deductibility remains.
Hope that helps.
PS – not a broker or accountant
Hi Ryan,
You see a lot of poorly written articles in the media – that would have to rank with the best of them.
I suspect the article was stimulated by the recent release of the 100 Richest People in WA. I understand other states did a similar thing too.
Sure property rated a mention with many of the people who made the list. The bottom line is those people on the list may have started as simple property investors but are now major developers, land bankers, commercial property owners and not your run of the mill property investor like most people who read those articles.
TheYoungUnprofessionals wrote:Q: Would it be better to keep our current mortgage as P&I, overpay $170k immediately then redraw some of that equity, or should we convert to I/O immediately, open an offset account and deposit the $170k, then use that account to fund the IP purchase?
If you are moving out into a new PPOR in 5 years time you are far better off setting y our existing loan into I/O with offset. Plough all surplus money into an offset account for five years. When you move into the new PPOR then you can grab the money held in your offset account as deposit for the next place.
If you pay your loan and try and redraw some funds towards your new home in 5 years time the redrawn funds are not deductible because they are used to buy a new home. The ATO considers the purpose of the borrowings and not the security used when assessing deductibility.
TheYoungUnprofessionals wrote:Q: If we converted to I/O and used an offset account, is the deposit for an IP still tax deductible if we took it from the offset account?
Given you are removing funds for a deposit in effect you are using cash savings.You would be better off (from a tax deductibility side of things) to set up a line of credit secured against a property and use these funds for your deposits. Your equity levels would determine whether or not this is feasible at the time.
TheYoungUnprofessionals wrote:Q: Does using the equity from your PPoR extend the length of time to repay the loan, all other things being equal?
If you set up your equity release in the form of a line of credit (or similar) it would be considered a separate loan and you can monitor your loan levels V limits quite easily.
TheYoungUnprofessionals wrote:Q: Since we're looking to move in 5yrs or so, is it better to forget about trying to clear our mortgage on the current place altogether and focus on using it in whatever way we can to build our portfolio just now?
In general terms yes.
TheYoungUnprofessionals wrote:Q: However we fund the IP purchases, given the conventional wisdom seems to be to have them on I/O, how do we get to a point where we can start using equity from our IPs to fund future purchases – is it purely by selling them off in future and using the profit to buy bigger and better properties? Wouldn't it be better to have one or two on P&I to start building some equity in them?
When they increase in value you may be able to release additional funds through line of credit, or similar, secured by your IPs.
Paying down a loan on P & I is always an option and it does depend on your plans, circumstances and situation. If you do choose to go down that pathway you are better off setting up offset accounts. You could also consider taking out I/O loans but make arrangements to make payments at P & I level. This means you have some control over your finances from one month to the next.
It is also dependent upon your overall strategy.
TheYoungUnprofessionals wrote:Q: Isn't it better to have some things in both our names though, so we can use the power of both our salaries to increase our DSR?
Depends on your personal situation – you may even be better off in a trust structure.
Hi Dan,
Not a broker so take what I say with a grain of salt.
Make sure the broker you choose is also a property investor. I would steer clear of those franchised operations where you will in, all likelihood, be serviced by an employee.
Your spending ceiling makes sense too – takes advantage of FHB grant. When speaking with your broker make sure you keep in mind that any borrowing calculations done at the moment will realise significant borrowings because interest rates are very low.
As I understand it most banks will accept your regular savings through your shares – something else to confirm with your broker. Depending on how you see the share market moving you may be able to leave these in situ until required.
As you grow your portfolio it will be to your advantage to have either equity or cash savings. Banks will look at these two aspects of your situation, along with your income before determining what they will lend you. So if you do go down the subdividing route you will be in a position to do so with the level of savings you are talking about.
Hi Dan,
My bad – just noticed a typo in my original post. Sorry.
I meant to ask how much 'cash' you have saved. This is important to your overall borrowing capacity.
I am sure you are aware the WA Govt still offers a $7K FHOG and First Home Buyers in WA are exempt from stamp duty for any property up to the value of $500K. These two incentives will be of assistance to you as you start on your journey.
Typically it takes around 6-8 weeks (give or take a bit) to settle on a property once you have made your selection. In WA you only have to give 30 days of intent to vacate your leased property. So bottom line is you do have time to have something tucked away before your current lease expires. Having said that it would a strange decision by the landlord to evict you at the end of the lease if settlement on your property was imminent.
Just make sure you grab a good broker to help you through the purchasing process. Find a good one now and they will become an asset as you grow your portfolio.
Your property plans are solid and make sense – maybe add an extra dimension and try and find something that is subdivideable. You may wish to consider this as an option in the future.
Hi Dan,
You don't say what sort of interest you have saved at the moment.
With finance size does matter. The bank will not only assess your income level they will also look at your security level, In the instance of your first property this often, not always, is your savings level.
I assume your comment, "I have it too late to purchase a house" means you are strongly leaning towards a house and land package which is specifically targeting the first home owner market. Is this correct? If not you may be able to find something (nice 2 X 2 X2) or townhouse that is more suited to your current situation rather than a big house in the burbs.
Must be that time of the year. My daughter and her partner have been in contact with me this week asking exactly the same questions you are asking. Someone is trying to sell them a 4 x 2 X 2 in Perth's sticks and in a suburb laden with first home owners. I haven't seen any specs but I suspect the property will have entry level finish and be short of the desired standard without extra expense and additions to the contract.
Luckily she has asked me first for some advice and I will be sitting down with them over Christmas and helping them to develop a short and long term plan.
Good luck with it all.
Who baulks at paying to get their car serviced? As a car owner I know I need to make arrangements to look after my car. I also know the car will require maintenance over the life of ownership.
Just a car needs regular service to to does a property. Owning a property comes with responsibilities and as landlords we should be fulfilling these.
Recommend all investors grab a copy of tenancy act for each of the states they own property and know what their rights and responsibilities are.
nice sig TonyLyn
