Construction Loans

Hi Mark

Before I provide an answer can you clarifiy the situation:

1) Will the land and subsequent construction be for a property to live in or rent out.

    If it will be a PPOR do you intend to sell your current property.

Reason i ask is in relation to the Tax deductability of the interest charged on the construction loan.

If this is for an owner occupied property the interest will not be deductible.

Assuming all things being equal then normally your mortgage broker would make application for a loan to cover the land purchase and then stage payments to cover the construction. Interest would be charged on the drawn balance so your repayments would increase as the home gets closer to completion.

Terry/Richard, if the land is for a PPOR and you borrow against the current house to fund purchase/construction then relocate to the new PPOR, will the interest on the loan on the old PPOR (now an IP) be claimable or is it better to sell the old PPOR and have buy a new IP (esp if there are CGT implicatations in selling the old PPOR)?

Hi Richard and Terry

I am a newbie to this forum and have tracking your comments with great interest and appreciation, thank you for donating your time and expertise (which is no doubt subject to me getting my own independent advice) 

It is hard to know the right questions, and at the risk of asking for too much…I would appreciated your comments on my situation, which  is:

Have a discretionary family trust already set up
PPOR with 80% LVR more than 50% for investment purposes with lender A 
PPOR borrowings $575k – split into LOC and Var
Have an IP with LVR of 60% with lender B
IP borrowings $264k – LOC
Rental income $250 pw
Avoided the danger of cross collaterialising by using two lenders

We have an investment which gives us an independent income stream of $47k p.a.
Self employed for 18 months; ABN and GST registered…earn $48k pa and will be increasing gradually
My wfe is PAYG earning $52k pa
Credti cards of $12k which we totally clear each month
No dependents
No debt other than the home loans with St George Portfolio Loan  (PPOR) and ANZ Breakfree LOC (IP)

Considering refinancing PPOR to CBA with fixed loans and with our IP stying with ANZ but switch to fixed loans.
 
Our overall objective is to build up a property portfolio, so:

What is the best loan structure for now and for the future? 
(Is it worth selling our PPOR to our trust in some way).

Pat

Hi Pat

You have set it up similar to the way in which I would do it for myself.

I would have IO variable loan on my home loan with a 100% offset account attached. All wages and rents and spare cash should go into this. Use credit cards with points to pay for everything and this will keep your money in your account longer, saving more interest.

Then, if there is equity, set up a LOC for this. This LOC should only be used to borrow deposits and costs. I would also borrow for all ongoing costs for the investments from this (rates and insurances etc). This will free up more cash to pay into the offset saving you non-deductible interest.

Furthermore you should talk to your accountant about borrowing to pay the interest on your investment properties.

For the investment properties, I would get an IO loan. As the values increase I would look at getting a LOC on any equity.

If you are self employed, look at borrowing all business expenses freeing up even more cash to pay off your home loan. Have a look at the latest newsletter at http://www.bantacs.com.au for information on doing this.

Whether it is a good idea in selling your PPOR to a trust will depend on the current loan on this property and whether you wish to continue to live in it.

For future properties, use the LOC for the 20% deposits and costs and then get the remaining 80% as an IO loan.

Once the PPOR loan portion is paid off keep on using IO loans with a offfset account attached to one of them. Never pay down debt.

Pat

Terry is correct as always however there are just a couple of additional points worth mentioning:

1) I would assume you have probably taken the Anz Bank Lodoc 60 product due to your LVR. Even though you have been self employed for a year you could have raised this to 80% quiet easily. This would have freed up more available equity in your Line oF Credit

Also not a great lover at all of having a LOC on your IP unless it is to fund deposit etc.

You could take the Anz Bank 1 Year fixed rate and still get 100% offset.

2) Again watch the LOC on your PPOR even with the SGB Portfolio product.
    My preference like Terry's is an interest only loan with 100% offset.

    Be careful using SGB Advantage Pro Pack for any other purchases as it is a condition that all loans within the package are cross collateralised.

3) I like the Discretionary Fmaily Trust structure but remember it has negative gearing limitations.
    If you intend to use it for IP's then work out the numbers before signing the contract.

Your broker should be able to do it for you but unless he is experienced I would check the figures yourself.