Hi
Could someone help me wth some suggestions / advise on this.
We purchased our PPOR (settlement in Nov 07) with OneDirect. Here are the details of our current situation. (I have taken a conservative calculation on this.)
Purchase price for PPOR: $331,250
Loan $265,000 * 25 yrs * 7.6%
(Rates are now 6.97% with Weekly repayments is currently $430 – before Dec 08 rate cuts. Rates will drop to 6.15% and weekly repayment will be $400 after Dec rate cuts.)
Current LVR: 80%Current net combined income: $6,300
PPOR Loan weekly repayment: $450 or monthly is around $2,000 ($265K * 25 yrs * 7.6%)
Monthly living expenses: $2,000
Total monthly Expense: $3,800Net cashflow: $2,300
My partner and I, having considered the current economic conditions, have decided to look at the possibility of purchasing an IP in Melbourne, sometime around mid 2009. So far, I have worked out with online calculators that our servicibility is not too good factoring our current loan, that we can only borrow around $180,000 and would like to know how we can increase our borrowing power.
Our intended approach is to:
1 – Re-Negotiate our PPOR loan and increase LVR to 90%, taking out about $33K in equity and capitalising $4K in lender's insurance;
2 – Have Cash savings: $21,000 as of Dec 08. (roughly increaseing by $1,000 per month);
3 – Borrow some money from family to help cover stamp duty and fees if necessary;
4 – Put down a 10% deposit for an IP worth around $350KThe IP loan would likely be:
Amount $315,000 (90% of $350,000 * 6% * 25 yrs) Interest Only.
IO Repayment: $394 per week or 1,575 per month.
Projected Gross rental income: $350 per week or $1,517
Projected Net rental income: $280 per week or $1,213 (20% for associated expenses)
Negative gear: $114 per week or $494 per monthLooking at a possible a minor reno on IP to raise some instant equity as a buffer;
Looking to fix the loan for as long a term and as low as the interest rate as possible.This leaves us with only $700 a month in spare cash (Before accounting for projected rental income) . It looks like we have enough for the deposit.
Will lenders consider the projected rental income, or will that be ignored in their calculations?
Should be consider a broker, and any recommendations for one or two? We live in Oakleigh.
Thanks for going through this long post.
Regards
Daniel Lee
Lenders will consider rental income from the future purchase.
You might want to consider putting your cash into your home loan and reborrowing to save some tax.
Westpac is allegedly bring out a 1,2,3 year fixed rate of 4.99% on monday, so that could help with lowering repayments – but variable rates could fall still further. Westpac and other major lenders will take into account negative gearing savings in calculating serviceability.Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Hi, TerryW
Thanks for your response. Good for me to know that projected rental income and negative gearing are considered before proceeding back to my lender (OneDirect) or any other lender.
A mistake on my part of my cash savings. It is actually kept in my home loan to save on interest and I have a redraw facility with my lender. I tend to see any extra repayments into our loan as 'cash' savings, because we put as much of our salaries in and take it our for our expenses when required.
I did read from a newsletter that some lenders are offering 4.99% fixed loans, but I am going to wait till the smaller interest rate cuts come in 09 before moving into a fixed loan.
Thanks for your help. Now I have an idea on how to approach my lenders and others on this matter.
Daniel Lee
I was just reading that the futures markets are anticipating more cuts to rates, so maybe don't fix in yet.
Beware with the redraw – make sure you get a separate slit set up or you will be suffering at tax time and you will end up paying more tax than necessary.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Hi, TerryW
We are not looking at buying yet till early or mid 2009, so have plenty of time to do our research. Also understand that the market might be pricing in smaller falls in the interest rates, so we are happy to wait.
I currently have an online transactional loan with OneDirect. Any extra money that we put in appears to stay separate from the loan, we know exactly how much of the extra repayments we have put in or taken out, and is simply used to reduce the principle amount when calculating interest. The extra repayments do not appear to go straight into the loan itself.
In fact, it acts like an offset facility, even though when I check on the OneDirect website, it does not say anything about an offset facility.
Is this what you mean by a 'separate slit' set up?
Thanks for you help so far.
Regards
Daniel LeeHi Daniel, I'm unsure of your actual annual income (6300) is that monthly? Sounds like you would be flying really close to the wire. I realise that you intend to wait till next year with hopefully lower rates. However 350 for a first IP is a big chunk that may just inadvertently tie you down considerably for some time and your ability to borrow further may be held back initially. Of course a newer place will give you some taxation benefits but they aren't really huge in the big scheme of things. You didn't mention kids or the prospect of. They change everything and banks factor them in their lending criteria. Is your employment really secure? Good luck.
Hi, Lalibella
Our combined net monthly income is $6300.
Factoring in the negative gear for my rough calculation above, we will be left with around $1700-1800 per month.
Other factors to consider would be:
We are planning to start a family at around next yr, so am looking to purchase one IP before stopping for a couple of years (2-3 yrs). So, we are looking at the possibility of pushing purselves for one last stretch
I have heard that lenders are generally less inclined to lend money if they find out that you have recently changed jobs, am pregnant or am looking to start a family. The lenders does not need to know that we are looking to start a family anytime soon.
My calculations show that it can work. I have not factored in depreciation benefits as it is icing on the cake. Furthermore, I generally over-estimate expenses and underestimated income to show a more extreme scenario. The loan amount is roughly the maximum we intend on taking.
It does look like it is somewhat tight but do-able, and I am all for taking calculated risks.
I hope fellow investors can give me some insights into what they think about:
1 – My calculations as a rough guide;
2 – How feasible is it?
3 – Would they do it?Thanks to TerryW for telling me about how banks include future rental income and negative gearing in their calculations. I do not recall reading that in API magazine.
Already, we have identified a number of suburbs to concentrate our research on.
Regards
Daniel LeeHi Daniel
I don't know anything of Onedirect – I suspect they are mortgage managers so they may not offer offset accounts. But even if they do, you would still be better off in the long run by having a second split – after paying down the loan.
eg. Say you have a loan of $200,000 with $50,000 in the offset. You then buy an IP and use $50,000 as a deposit. So, you are only paying interest on $150,000 and this is not deductible.
Scenario A
You take the $50,000 deposit from the offset.
You are now paying interest on $200,000 on your home. None of this is deductible.Scenario B
You pay $50,000 into your loan and use redraw.
You are paying interest on $200,000, with the interest on the $50,000 withdraw for the investment being deductible and the interest on $150,000 not deductible.Scenario C
You pay $50,000 into your home loan and then request the lender to make available a LOC or separate loan for the $50,000.
You are paying interest on $200,000, with the interest on the $50,000 withdraw for the investment being deductible and the interest on $150,000 not deductible.Scenario C is better than B because with B every repayment must be apportioned between the investment and the home loan. The investment loan is 25% of the whole loan, so if you made a extra repayment of $1000 then $250 of this must come off of the investment loan and $750 off the home loan.
This is not ideal as you are reducing your tax deductions and making slower progess on reducing the non-deductible debt.A better way would be option C, then you can keep the $50,000 split interest only and concentrate on paying off the home loan portion first – saving you thousands in non-deductible interest..
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Terry,
OneDirect is ANZ's on-line play.
Maybe Anz one line side kick but dont offer a offset account.
Richard Taylor | Australia's leading private lender
Hi, Terry,
Yep. One Direct is ANZ's internet arm, and they do not offer offset facility, only redraws. Now I know that having a redraw facility mixes the deductible and non-deductible money together and is not clean for tax purpose.
Was discussing with the Mrs and we will have to go to an accountant to set up a tax-effective structure, as well as get some advise on how best to proceed with our home loan and our IP loan. Will also thinking of going to a broker to find a suitable IP loan, but that is after we have gone to seek out an accountant.
Was thinking of Chan & Naylor and their 'Property Investor Trust', as I am not sure of any other accountant with a property focus. Unless there are other suggestions. I live in Oakleigh.
Regards
Daniel Lee
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