Due to a work transfer soon we will be in position where our PPOR becomes our first IP! Very convenient. We will be renting in our new place. We have about $26500 equity in the soon to be IP paying 5.99% P&I over 25 yrs. Should we refinance this to IO? The property will be cashflow positive in any regard.
Question 2:Our current lender does not have LOC facility. We want to keep them for the first IP because they are good. How do do we arrange LOC for the second IP and who is competitive in this area?
Assistance would be appreciatedHi Sterlo
Q1. IO or P&I?
It is advisable to repay interest only on investment property loans for the following two reasons:
a) It is more tax effective as you are only entitled to claim interest expense as an allowable deduction whereas if you pay P&I the whole repayments are not fully deductible as only a portion relates to interest expense; and
b) It is more efficient use of cashflow. Considering you are likely to purchase another IP you are better off to pay IO on IP1 so as to divert as much free cashflow as possible to meet the interest only repayments for IP2.The only situation I would suggest paying P&I is where you only have one investment loan (and no PPOR loans) and you do not intend to purchase another IP for a while.
Q2: Arranging LOC
Firstly, I would not suggest using a LOC as these products are too expensive outside of a professional package (pro package are availabe for total lending above $150K).
Another point to note is that generally lenders will only lend 80% of a property’s value in respect to LOC products (there are some who lend 90%). There are two ways of achieving the purchase:
a) Use one loan (which balance is equal to existing loan plus cost of purchase of IP2) secured by IP1 and IP2. Note that both these loans will have to be with the same lender as the lenders will requrie a first mortgage over both properties. So if you have your heart set on a LOC product you will not be able to stay with your existing lender for this option.
b) Increase your existing loan by an amount equal to 20% of IP2 value plus costs (eg. stamp duty etc.). Take out a new LOC secured by IP2 for an amount equal to 80% of the value of IP2 with the new lender. This will maximise your flexibility as each separate loan is secured by only one property.There are a number of issues to consider such as the cost of LMI payable if loan value ratios are above 80%. For more info please visit http://www.prosolution.com.au
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