We live in Perth. Our PPOR is worth $210K. Bought it in Jan 2004 for $185K. Still owing $130K. Bought 1st IP last month for $90K in a regional area, WA. Bank loaned us $95K with our PPOR tied up as security as well. IP is tenanted for $160 a week. My salary 36K and wife’s $15K per year. We are kidfree.
Should I NOW focus on paying off our PPOR mortgage or should I plan to buy another IP pos cash flow under $100K like the 1st one? Which one will be better for us in the future? And why?
I am new in this P Investment. I need direction. Thanks for any input [cap]Hi Balihai & welcome to the forum,
Regarding finance,
Your Bank has Xcolled your portfolio, when it seems there was no apparent reason or need for this to occur,E.g.,
PPR value $210K Owe $130K
Equity available @ 80% LVR = $38.000IP purchase $90K
Finance required @ 80% LVR = $72.000
20% Deposit & funds to complete Stamp duty etc, = aprox $21.000Based on these figures you had sufficient equity in your PPR to keep the two loans separate and avoid cross colaterisation,
Also, I estimate an extra $17K would have been available to park in an offset attached to your PPR debt, Cheers.Regards
Steven
Mortgage BrokerMobile Mortgage Market
Ph: 0402 483 216
[email protected]
http://www.mobilemortgagemarket.com.auPLEASE note comments made should not be taken as specific taxation, financial, legal or investment advice.
Hi Bali,
I agree with Steve. There seems to be no need to cross collaterlise your properties.
Regarding your question about some direction, you can do both depending on your loan structure. Using interest only loans and an offset account will allow you to reduce the expense of your non-deductible PPOR expense while still leaving funds available to unertake further investments when something pops up.
You should have a split interest only loan attached to your IP to the maximum LVR so when you do find the right investment property, you can just draw down on equity for deposit and costs and get another 80% LVR loan on the new investment and nothing much else will change. Your non-deductible loan will still be costing you less.
The Mortgage Adviser
http://www.themortgageadviser.com.au
[email protected]
Essential LinksThanks for your input guyz.
I know I should not have listened to the bank loan officer when he asked me to xcolled the loans. My PPOR then was worth $200K and I owed $135K. Nonetheless, I still got $25K which was enough to buy the 1st property. However, despite the dis, I thought I got the advantage on the Xcolled loans as I didn’t have to refinance (which costed money?) the existing non-tax-deductable home loan. And I thought I could have more tax deductable interest investment loan.(interest of $95K compared to $72K), while my homeloan didn’t have to increase because of the redrawal/draw-down for the IP deposit.
Was I wrong completely? Can someone help me understand this?
By the way, how much would it cost me if I refinanced my homeloan: P&I ($74K 4 yrs fix and $65K basic loan)?
What is the best borrowing structure for my next IP? Should I unXcoll my loans? How? Or do I just need to refinance and set up a Line of Credit loan before buying the next IP? But, how’s the best way to do it?
Hope you won’t get confused with my confusion.[buz2]
I am very new in this IP stuff. Your wise input will be valuable to me. I don’t want to make another mistake [cap]. Thanks…Some points:
The xcoll isn’t the end of the world. I would leave it for now – at the very least dont lose sleepover it at this stage.
I would consider IO for all loans and have an offset on the PPOR for all cashflow and savings.
Do not use this offset for anything except undeductible debt – ie another PPOR, car etc.
If you decide to buy another IP then borrow the full cost plus purchase costs. Even xcoll it if you need to.
If you decide that your PPOR is your home forever then no need for the offset – just pay into that home loan and knock it over.
If you feel confident of getting another IP with some good potential for CG then by all means buy another one or more. The CG will make you more wealth than the amount you can pay down your PPOR – this is the beauty of leverage.
All the best
Simon Macks
Finance Broker
[email protected]
0425 228 985Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
When you start tossing fixed loans into the mix, it gets more expensive. Your loan contract will tell you how much it costs to get out.
You do not need to refinance anything to buy additional properties. Even if you have a fixed loan, you can add a split loan if you have additional equity. The new property can stand alone.
I say stay away fro LOCs and stick to the simple stuff. Interest Only all the way on investment properties and Interest Only with Offset on non-deductible debt. This provides the most flexibility and the cheapest costs.
The Mortgage Adviser
http://www.themortgageadviser.com.au
[email protected]
Essential LinksOriginally posted by Mortgage Hunter:I would consider IO for all loans and have an offset on the PPOR for all cashflow and savings.
Do not use this offset for anything except undeductible debt – ie another PPOR, car etc.
Simon, can I use the offset for deposit and the purchase cost for my next IP?
If you decide that your PPOR is your home forever then no need for the offset – just pay into that home loan and knock it over.
If you feel confident of getting another IP with some good potential for CG then by all means buy another one or more. The CG will make you more wealth than the amount you can pay down your PPOR – this is the beauty of leverage.
I may want to knock at least half of my homeloan first as I don’t think we can service our next inv loan if we neg gear it.
Originally posted by The Mortgage Adviser:You do not need to refinance anything to buy additional properties. Even if you have a fixed loan, you can add a split loan if you have additional equity. The new property can stand alone.
This ‘basic’ info is new to me. Thanks a lot, Rob(?).
I say stay away fro LOCs and stick to the simple stuff. Interest Only all the way on investment properties and Interest Only with Offset on non-deductible debt. This provides the most flexibility and the cheapest costs.
Thanks a lot. I got it!
Originally posted by balihai:can I use the offset for deposit and the purchase cost for my next IP?
If you use your cash in the offset it will not be deductible as you are paying cash and you will increase your non-deducible expense. This is a bad idea.
As outlined earlier, you should have another split loan for deposits and expenses for deductible expenditure. This loan should also be interest only so you can continue to obtain benefits from your offset account.
I may want to knock at least half of my homeloan first as I don’t think we can service our next inv loan if we neg gear it.You can knock off half the ‘cost’ of your home loan in the same way using an interest only loan with offset account without having to pay it into the loan. You should only use this if you are good with money.
Why do you want another negatively geared property if you cannot service it? It will only make your cashflow position even worse especially if there is no tenant for a period of time or something else goes wrong.
The Mortgage Adviser
http://www.themortgageadviser.com.au
[email protected]
Essential LinksIf you use your cash in the offset it will not be deductible as you are paying cash and you will increase your non-deducible expense. This is a bad idea.This is new to me. Thanks. [cap]
As outlined earlier, you should have another split loan for deposits and expenses for deductible expenditure. This loan should also be interest only so you can continue to obtain benefits from your offset account.When should I set up this split loan? Now or just before the purchase of the next IPs?
How much can/should I borrow? To the max or just enuf for deposit and costs?You can knock off half the ‘cost’ of your home loan in the same way using an interest only loan with offset account without having to pay it into the loan. You should only use this if you are good with money.IO for the split loan and an offset account for the homeloan. Do I get it?
Why do you want another negatively geared property if you cannot service it? It will only make your cashflow position even worse especially if there is no tenant for a period of time or something else goes wrong.No. I don’t intend to buy a neg geared IP in the near future. I plan to buy a pos geared (or nearly) as we won’t see them many in the future. Am I thinking on the right track?
You should always set up your loan structuring sooner rather than later. As to how much to borrow, I prefer to go to the maximum I can afford every time I restructure to save me having to do it again more often. There are also ongoing costs and unexpected costs that arise so more than what you need is always better. You only pay for what you use and it costs the same in application and setup fees to get more upfront as it would cost to get just what you need.
Offset accounts are always best used against non-deductible debt. I think you have got it.
Regarding your thinking, it comes down to what you want. If you want to improve your cashflow, negative gearing should be avoided as this reduces cash flow. Other implications such as capital gains should be considered and discussed with your Accountant.
The Mortgage Adviser
http://www.themortgageadviser.com.au
[email protected]
Essential LinksOffset accounts are always best used against non-deductible debt. I think you have got it.At present, my home loan has no offset account. Instead, it’s a basic loan with redraw fasility.
Will it be ok? What is the drawback?Regarding your thinking, it comes down to what you want. If you want to improve your cashflow, negative gearing should be avoided as this reduces cash flow. Other implications such as capital gains should be considered and discussed with your Accountant.We want to improve our cashflow so we can comfortably service our loans.
You should always set up your loan structuring sooner rather than later.Can we set up a loan long before we need the money to buy the IP? How? Can you tell me step by step?
I think these are silly questions. But It would me more silly if I don’t ask and make mistakes.
So thanks beforehand [cap]Drawbacks of redraw has been explained. It usually costs a fee to get the money back and, if you move, you will not be able to deduct the whole loan amount but rather only the reduced balance.
I won’t explain step by step as this if for your mortgage adviser / broker to do and what they get paid for. You can set up any loan if you already have the property and leave it sitting there until you need it. You can also have pre-approvals ready when you are looking for investment properties which last 3-6 months.
As for making mistakes, use a good adviser / broker and you will not have to worry about it. It won’t cost you anything to use a professional.
The Mortgage Adviser
http://www.themortgageadviser.com.au
[email protected]
Essential LinksThank guys for the input.
I have learned a lot of new things esp on loans these last 2 days through this forum. However, I still think that I don’t have my initial question answered; in our situation, shall we pay off our homeloan completely first (or at least half) or buy another cf+ IP?
Any input (but please don’t say,’up to you’) will be most appreciated.[cap]
Unless you want to provide full financials and a good indication of exactly what you want to achieve, no-one can answer this question for you.
You were provided with options to do either one. You now need to take some responsibility and make your own decision.
If you can afford to, buy an IP. If not, pay off your house possibly using the offset structure.
It is ‘UP TO YOU’!!!
The Mortgage Adviser
http://www.themortgageadviser.com.au
[email protected]
Essential Links
You must be logged in to reply to this topic. If you don't have an account, you can register here.
