Hi Guys,
I am looking to buy my first IP soon. I have been scoping out the market for properties under $100k around my area, that could potentially be cash flow positive.
I brought my PPoR for $225k just over 3 years ago, and am currently on the CBA economiser (or whatever its called), anyway I think the comparison rate is at 8.29% now, because we just came out of the 3 year introductory rate. I would like to remortgage to MyRate who last time i checked had a CR of 7.59%, but given that my PPoR is probably only worth around $240k now and I still owe $195k the LVR would be around 81% and I guess I would have to pay LMI.
Now the other problem is if I wish to start buying IP's I guess I am going to need deposits, I was thinking of using the $13k I have in the offset account as the deposit on my first IP, but after thinking about it more not sure if this is a good idea. Is is a good idea to use money from your PPoR offset account as a deposit for your IP? that $13k is in affect earning 8.29% taxfree, isnt it? And if end up refinancing as above than that $13k will no longer be available anyway
So I guess I am trying to work out is whether I refinance now and cop the LMI and eventually make up the difference in interest savings, or wait a couple of months until i get the loan amount down to say $185k and/or the property increases in value to say $245k so the LVR is below 80% and then refinance, or stay with CBA's high interest rate and use the $13k as a deposit for my first IP?
I would really like to do both (refinance to a cheaper interest rate, and buy an IP), but it feels like I am going to have to either put off investing for x years while I gain some offset monies again on my PPoR, or I pay a higher interest rate on current mortgage while I hopefully return a postive cashflow from my IP (which I use to pay off my PPoR, I guess this would build up the offset account again).any help would be welcome,
DaFizHi DaFiz
Firstly i certainly would not use my own capital as a deposit for an IP especially when you have a non tax deductible home loan.
If you dont necessarily need the cash why not look to pay the $13,000 into your home loan thus reducing the LVR and then look to refinance at the same time as you go to contract on anew IP.
Borrow 100% of the IP purchase price plus sufficient to cover the acquisition costs and even if the combined LVR is over 80% it will charged on the IP component and therefore becomes tax deductible over the loan term or 5 years whichever is the shorter period.
Normally i am not a great advocate of cross collateralising your loans and therefore you may wish to restructure the loan into 2 separate components and keep totally separate.
The other consideration is of course the valuation on your own property. In 3 years you would expect to see some growth and it maybe an idea to get your mortgage broker to commission a valuation on the property prior to submitting an application to a potential lender.
This will at least give you a guide as to the valuation and an expected total LVR.
Richard Taylor | Australia's leading private lender
Richard, thank you for your insight.
So basically I should keep the $13K in the offset account, so it continues to reduce the overall interest on my PPoR, and buy my first IP at 100%/106% because that amount will be tax deductable.
So I have a property in mind at the moment, for $80K and if i paid 20% cash deposit and 5% cash for closing costs the property would just break even on cash flow. But if i borrow that 105%, cash flow would be $-1700pa. Now my question is, would tax deductions and depreciation be enough to cover that amount (assuming a $50K salary)?
Cheers,
DaFizDaFiz
Yes you are better of to use the Banks money for a non tax deductible expense and your money to offset or reduce your own home loan.
Without knowing the details of the property (age, amount of depreciation available etc) i am unable to advise you what the weekly shortfall would be but you are not going to be a million miles away.
Remember any loan costs and mortgage stamp duty (if payable) are deductible over a 5 year period or the term of the loan whichever is the shorter. Whilst these are borrowed upfront they will be able to be offset against your Taxable Income immediately.
Richard Taylor | Australia's leading private lender
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