Hi all
I’ve been viewing this website for the most part of this year. I find the advice/information to be excellent. I am finally going to purchase an IP but have many dilemmas. I currently have a loan which is under control for my current house. The repayments aren’t big at all – round $650 a month. However I have managed to save quite a decent deposit. My dilemma is do I pay off my home loan with my current savings and think of investing after? Or do I use my savings for an investment property? The feeling of being able to pay off my home loan and being free from that is tempting. I am going to my accountant in a couple of weeks and will ask for his advise but I’m wondering what people on the forum think?
Cheers MothyHi Mothy,
Whatever you do do not use your savings as a deposit on your investment property while you have non-deductible debt.
My thoughts are as follows;
1. Put your cash into an offset account linked to your home loan – from the sounds of it you have sufficient savings to cover the interest bill on your home loan. THis means your interest bill will be $0/month and also means that you have access to cash should your world go pear shaped.
2. Set yourself up with an equity loan/line of credit for your deposit and draw your deposit funds from this.
3. Borrow the remaining funds for the IP from a lender. Whether or not this is the same lender as the one providing your equity loan/line of credit will be dependent upon your lending institution.If you really do want to get rid of that non-deductible debt then there is some benefit (from a mindset point of view to doing this).
If on the other hand you are comfortable with the debt level then consider converting this to interest only too and retain your offset account to get these funds for free.
Derek
[email protected]
http://www.pis.theinvestorsclub.com.au
0409 882 958I agree with Derek use the savings to offset personal home loan and then borrow for an IP. The bank will problably keep the mortgage over your home as security though.
AJBS
Derek is spot on.
Don’t use cash for deductible debt until you have killed the nondeductible debt.
All the best,
Simon Macks
Residential and Commercial Finance Broker
***NODOC @ 7.15% to 70% LVR***
[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.
I’m with dereck too, reduse debt on PP and invest with strong cash flow…
resi
Hi Mothy,
I agree with the comments mentioned, if you have nondeductible debt (PPR Loan) and funds/savings available then you should consider placing your savings in an offset account linked to the non deductible debt,
Consider a split loan using your current property as security.EG,
Loan One.
Split 1: (current PPR balance) with 100% offset account linked, (place savings in the offset)
Split 2: 20% deposit and closing costs stamp duty etc for the IP purchase.Loan Two.
80% loan secured against the new IP.This structure will also avoid cross colaterisation and the need for Lenders Mortgage Insurance, 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 Derek,
wasn’t there a large exodus away from LOC? Reasons given are: higher costs, higher interest, possible lack of discipline would undo the benefits of the LOC? Are you now (or have you never gone away from) advocating LOCs?Is the Off-set structure more beneficial (as in cost reducing, increased savings) when compared to the Off-set structure?
I have recently refinanced, and it was suggested that, unless I have $10k in the off-set account it isn’t worth the extra fees and interest. What is the general feeling about that?
Cheers
C@34Our greatest weakness lies in giving up. The most certain way to succeed is to always try something one more time.
– Thomas EdisonHi C@34 and Derek,
wasn’t there a large exodus away from LOC? Reasons given are: higher costs, higher interest, possible lack of discipline would undo the benefits of the LOC? Are you now (or have you never gone away from) advocating LOCs?Great question C@34!! I just applied for a loan as part of a contract of sale for a property but unfortunately due to unforeseen circumstances the owner had to take the property off the market and now I have been approved for the loan but don’t have a property to buy anymore! (although I am hastily looking!!!!) My finance broker rang me today and asked if I wanted to set up a line of credit, all I would need to do is sign the paper work and pay the stamp duty of approx. $400 and I would have the line of credit available to me for future deposits.
My initial thoughts were this was a little risky (this was not based on facts just my gut instinct) but would like to know if you guys have had experience with LOC’s. Are they worth it?
Would really appreciate your responses.
Thanks guys
krskrs,
I have been interested in LOC, but a lot of the discussions here in the past have focused on the higher cost of having one. THe alternative and, as far as I recall, the more cost beneficial product is the 100% Off-set account.
There is also the issue of self control with a line of credit as if it is set up for investing purposes, anything you buy for personal use or consumption wil NOT be Tax Deductible! So For a lot of people it would be an unsuitable product due to their dependance on Doo-dats.My post is more of a query to see if, thru expereince, our more long term investors have used the off-set facility and have found that, perhps the LOC is not as bad as first thought.
We are only in the process of finalising our first IP so we aren’t really there yet for me to worry about a LOC, but for the next IP, should I have aneugh Equity, I’d like to set up a LOC. As usual, collecting experinces from those that have it before I jump into it!Cheers
C@34Our greatest weakness lies in giving up. The most certain way to succeed is to always try something one more time.
– Thomas EdisonHi C@34,
I was talking to an experienced investor today who has used LOC’s in the past in their property investing.
Some of the information I got out of this person is outlined below.
1. Current interest rates are used and payable only if/when you draw on the loan.
2. There are no additional account keeping fees (but depends on who is the lender) – the bank I am looking at doesn’t have these fees so good to know that there are one’s out there!
3. Limit on future borrowing capacity has more to do with existing equity in your properties rather than the income you earn.
4. The benefit in having a LOC is that ‘when/if’ a new property is found, only the new property needs a loan and valuation. All other matters have already been dealth with.Anyway just thought I would share. Good luck!
Remember this is not advice, just info I found out in conversation.Cheers [shades2]
krsThanx for that krs,
I guess thinking logically, the LOC makes sense. Comparing it to an off-set account (this off course is only valid if you have the money for an off-set!):
1. You’d park your savings/extra equity/ other funds in an off-set, the interest you earn reduces the interest you incurr agains a loan that would be non-deductible;
2. The money in the off-set would be available to you, same as if you had a similar limit in a LOC.
3. Apparently, and I’d have to check, the interest you incurr on a LOC is higher than a standard loan(?!). Of course if you use the money in your off-set account you wont incurr any interest on the money spent, only the off-set proportion that is no longer covered by the out going moneys.So I guess it depends on where you’re at in your investment life. A lot of non-deductible debt would suggest (to me) you’d be better off with the off-set account, negligible non-deductible debt and a LOC would make more sense as it is virtually the same as an interest only.. Hmmmm very interesting…[grad]
Cheers
C@34Our greatest weakness lies in giving up. The most certain way to succeed is to always try something one more time.
– Thomas EdisonHi C@34,
Cheers for the feedback…I obviously need to do some more research!
Good luck!
krs
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