I have come into some money, about 60K. We still owe 120K to the bank on our PPOR worth about 600K. I would like to get into property investing using the 60K as deposits for at least two IP!?!.(newer ones being positivey geard) My partner disagrees and says to pay off PPOR bringing our private debt down and borrow more for IP. (not being positively geard) I understand the saving on personl intrest charged over tax deductable intrest but I find it hard to see the banks lending us more $ should we wish to buy a 2nd or 3rd IP.
Your comments would be appreciated!!!
TigaHi Tiga,
If I were you, I would pay my PPOR debt, bring it down to 60K and get a loan against it. bank would loan upto 90% of the valuation. This way, you would reduce your PPOR debt and get a tax deductable loan to buy IPs. for eg.
PPOR debt 120K, valuation 600K
Scenario 1 – You pay 60K towards your PPOR Debt.
New PPOR debt 60K, valuation 600K, bank will loan (600-60=540K) 90% of 540K i.e. 486KScenario 2 – You don't pay your PPOR debt then bank will loan (600-120=480K) 90% of 480K=432K plus 60K the cash that you have. Total cash 492K.
Alternativley, you can put 60K in the PPOR offset account and take a loan against equity in the PPOR.
Hope i am clear.
I agree with the above (and your partner). Pay the PPOR down, reduce non-deductible debt and then reborrow the $60,000 to invest. Interest on $60,000 is about $3000 pa. That could save you up to around $1500 in tax per year
Regarding banks and whether they will lend you – your overall loan amounts will be the same either way! If you use it on an investment you will have $60,000 more owing on your PPOR. If you use it on your PPOR you will have $60,000 more owing on your IP. Which is more tax effective?
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
I'd agree with firstmillion and Terry. Increasing the loans on your IPs is a lot more tax effective than putting the $60K as deposits for IPs. You need to talk to both your accountant and a good mortgage broker.
I'll just add one more point for consideration – pay it back on the PPOR, reborrow via a line of credit however much you feel comfortable with and use this for deposits on other IPs. Then secure the new IP loans against the IP not against your house.
As above (more or less) – borrow $60k against your house on LOC or if you have other income to support a larger loan, borrow 60-80% on LOC (but this may put your house in jeopardy).
Puchase 2 or more IPs using the $60k or more as deposits (providing you can fund the repayments).
I agree with the above posts. My accountant gave me the most valuable advice years ago when I was getting into Investment Property. Do everything you can to reduce your non tax deductible expenses.. simple as that..
Take $60k off your home loan, your interest expense goes from 6% of $120k ($7200 pa) to 6% of $60k ($3600pa). That saves you $3600 per year.
Then use equity in your home to the value of $60k to purchase an investment property, thats $3600 per annum interest you can claim off your tax.Alternatively, you can plough the $60k straight into an investment property and you don't get to claim any deductions on your tax bill and you are still paying the full $7200 per annum off your home loan.
I know this is oversimplified, but its a good way to illustrate the issue.
cheersJohn
just to hammer home the tax angle:
scenario 1 – $60k earning 6% pays $3,600 p.a, or $2,088 after tax (assuming 42% tax)
scenario 2 – $60k paid off PPOR saves $3,600 p.a after tax
would you rather be $2088 better off or $3600?
Wow! I like to personally thank you guys (firstmillion, Terryw, hleung, Scott No Mates, John1970 and crashy) for your informative responses. I guess I'm cooking dinner for the week, no should I say month!
Thanks again,
TigaHow does he get a deposit? Borrow that too?
In answer to your question Rhys_Roberts… Yes!!
Use equity in their existing home to create the deposit. Remember its all about reducing your non-deductible expenses.. A loan for a deposit from equity in their existing home is tax deductible. Why use your cash savings to fund an investment property when the banks and government can do it for you…
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