Hi all, just discovered this forum – looks great! Was hoping to get some opinions about my situation.
A year ago, bought a 2 bedroom unit for $260K, borrowed $208K assessed on sole income of $70K.
Now, I estimate the unit to be worth at least $285K, as that is what a similar unit in the block of 10 fetched and that was unrenovated (we've done ours up).
Currently we owe $167K on the mortgage, and my income is now $100K and my partner's $60K. We contibute $5600 per month towards the mortgage – nearly 5 times the minimum.
The only prob is the place is a bit small, and we would like something bigger. However, we'd like to hold onto our unit. Based on what other units in the block have fetched, I know I could rent it out for $285 a week. Based on that, I think the property is just CF+.
THis would then leave us the $5600 per month to service a new loan, the deposit paid out of the equity on the property.
So… does the above sound reasonable to people, or am I missing something?
The new place we buy would become our PPR and our current place our IP – therefore we'd work at paying down the PPOR debt first and probably going interest only on the current place.Any issues to consider here? Any advantages to setting up a Discretionary Trust – sadly I didn't consider this a year ago, but could I transfer the properties into this to take advantage of my partner's lower tax rate?
Any advice appreciated!
Cheers.
Hi dodo
You certainly have a reasonable amount of equity in the property due to the natural capital growth and the fact that you have been paying down the loan.
If you are looking at purchasing a new PPOR the last thing you want is to carry on paying principal & interest on the current loan and therefore i would look to switch this to an interest only loan with 100% offset account with immediate effect.
Deposit your salary and any other forms of income into the offset account and this will both protect the interest deductability of the current loan as well as maximise your interest savings.
In an ideal world you would want to maximise the loan on the current property which will be the future IP and reduce the loan on your new PPOR as the interest here is not deductable.
Transferring the current property into a DFT structure is probably not a good idea as this will incur Stamp Duty and you are unable to claim the negative gearing in a DFT. Selling the property to a Unit Trust maybe an option however there maybe a couple of other ways of achiveing what you want without going to this expense.
In ideal world try and ensure the loans are not cross collateralised and your mortgage broker should be able to assist in setting up a line of credit on the current loan which can then fund the deposit and acqusition costs on the new property.
Richard Taylor | Australia's leading private lender
Thanks Richard,
Actually, the loan we currently have is a LOC, basically an equity redraw loan. Currently it's capped at $208K, but I guess we'd look to get that extended out a bit once the property is revalued. At the moment we just pay in our $5600 every month, but can redraw as needed – effectively an offset account.
So, from what you're saying, just need to get my structures right (ie: make sure I'm paying off PPOR rather than IP) and all will be sweet! Is a broker the best person to see about this, or do you think going back to the bank I have the loan with will make things easier?
Cheers!
dodo
Please please dont make the mistake of thinking that a LOC is similar to an offset account.
If you stay with what you have then you are going to have real real issues as the interest on your redraw is not tax deductible.
Everytime you have paid the loan down (for example by making a salary credit into the account) and then redrawn the funds over the fortnight the interest on that portion of the loan redrawn is non deductible.
It maybe too late and you may have contaminated the loan already without recourse.Do not listen to the Bank as clearly if they have set you up with a LOC in the first place the have not advised you correctly.
Lenders have no knowledge or ability to advise you on tax deductability or security structures and would not now a cross collateralised loan from their elboe. They are only interested in protecing their interest and not yours.
Richard Taylor | Australia's leading private lender
Hi Richard,
OK, that's not good news! What I have is the ANZ Equity Manager – I was advised it worked the same as an offset.
At present, all I have used it for is to purchase my current PPOR.
What would you advise I should do moving forward? Happy to refinance (and cop any fees) if it allows me to have the correct structure from a tax point of view and investing moving forward. The immediate aim would be to have the current PPOR as the investment property and the new place as our PPOR.
Cheers!
HI Richard,
Have done some further reading on your point and see the issue.
When set up, I didn't really have a long term investing plan, so it was really only set up with the PPOR in mind. Tax deductibility obviously isn't an issue if the PPOR is the only property involved.
I can see where the issues will be if an IP becomes invovled – although from my readings I could use the Equity Manager, it would just need *really* merticulous record keeping to record the portions used for private and investment purposes??
Sounds like keeping things seperate (Private/Investment) is the way to go though.. would the clean slate approach be best? Refinance with someone else, pay out the equity loan, cop the fees, but move on in a tax effective structure? – what would you suggest?
Cheers,
Hi dodo
One of the issues i tell every client is what starts off as your PPOR often ends up as a IP and therefore if the structures are correct from day 1 then it is a lot easier to control down the track.
Unfortunately the Equity Manager account is not a recommended product at all for your main loan.
I would need a little more information to give you a structured answer but if act fairly quickly (suggest pre june 30) anything is possible.
Richard Taylor | Australia's leading private lender
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