Hi all,
I have found that this forum has been very helpful and makes for an interesting read.So I thought I’ll start my first posting by asking everyone here for some ideas – as we really need them!
Here is some background information on our situation:
Combined income 130K – husband 80k, wife 50k
PPOR Value 850K with 500K left to pay Repayments $900/wk – P&I loan
IP Value 330K Owe 180K 50% fixed (end in 2012) 50% Var. Rent $450/wkRepayments $300/wk-P&I loan
Savings 70K (offset account to PPOR)
Here is our concern:
Getting really bogged down by repayments on PPOR – we are currently making extra payments of $150 per week on top of the required weekly repayments. The repayments make up about 50% of our after tax income. Also, as we are planning to start a family next year, we think we will really struggle when reduced to one income next year with the arrival of the new bub.Our questions are:
– How to be smarter on our financial planning?
– How to be financially ready for when the baby arrives late next year (hopefully)?
– Should we sell our IP so that we can be more comfortable financially?
Any input is much appreciated JHi, Richard Taylor's going to jump on you!
Why is the IP loan less than the PPOR loan? And why oh why is the IP loan P&I?
Ideally, it should be IP loan $350000 and PPOR loan $330000
Look at the discussions on debt recycling. Try to work your PAYG down as low as you can.
KY
I don't think they will have much trouble working their PAYG down when one of them stops working to have a baby.
Hi, you've answered your own question, basically.
I didn't look at the 2nd part where one income stops.
The best financial outcome is not necessarily the lifestyle choice.
In the present scenario, the best outcome is achieved by making current PPOR a rental. Can you bear the pain & inconvenience of that?
KY
crj & KY, thanks so much for your input, it's definitely food for thought!
We forgot to mention the time frame of each purchase,
Year 2007
Initially we puchased our IP with FHOG in May 2007, with basic understanding in property investing and no long term plan. We secured a property in 15km west of melbourne and borrowed 80% against the selling price of $230K.
Year 2009
As we had accumulated some savings, we were contemplating if we shoud get another IP or a PPOR where we can grow the family. We saw the housing market crashing in late 2008 and took the opportunity to secure our PPOR for 800K in early 2009. Positively, if we didn't jump in and bought it, there is no chance that we can afford it now.This is how we've come to get the IP loan to be less than the PPOR loan.
We will reseach more into debt recycling.Unfortunately, due to the circumstances at the moment (family member living with us), we are not in the position to make the PPOR as a rental.
We still think paying $2500 in non-deductible interest is too much though and is looking into other avenues to possibly harness some tax reduction out of this situation.
crj, could you provide more information on what you wrote "I don't think they will have much trouble working their PAYG down when one of them stops working to have a baby".
Again, thanks so much for all your help.
What you need to do is look at your structure.
a. you are in Victoria so your IP could be transferred by one of you to the other free of stamp duty and if you treat it as your PPOR free of CGT. What was the value when you started renting it out? This could give you approx $70K of new deductible interest so you could pay that off your PPOR. This could drop your loan to $430 and your repayments by a bit under $100 p.w on the PPOR. A risk with this will be vulnerability and pressure if your tenant stops paying rent or you have a vacancy. If the property makes a tax loss, the loss will be added back to income for the purpose of calculating family tax benefit. Have you got a depreciation schedule on this property. Will there be break costs on the fixed loan portion?
b. sell the IP, treat as your PPOR for CGT purposes – reduces your PPOR loan to say $370K after selling expenses this will drop your payments about $150 per week bringing you back to around $600 per week P & I
If I were in your circumstances I would sell the IP, reduce the principal, keep your $70K intact, put the additional $150 per week into the offset until you stop working and if necessary after you stop working put $150-$200 pw from your savings towards your mortgage. You could do this for a number of years and still have a good safety net. I would also review life insurance and income protection insurance. At some stage in the future your strong equity position in your home will give you the opportunity to get other investments.
What I meant in my first post was it's all very well to have tax deductions but their usefulness is only if you have income and if you have no income the tax deduction will not be useful.
im only new and i dont know much about how much babies cost, but wouldnt you first change your investment property to interest only, then use the extra cash you were using to pay the principal on that to put into the offset account on your PPOR. pay down your PPOR as much as you can before the baby comes and then chuck some of your savings off the loan, refinance it and that would reduce your minimum repayment. keep maybe 20k in the offset for emergencies. that way u get to keep both properties, and generate more cashflow?
crj,
I'm afraid option (a) is not possible since we have both of our names for our IP and PPOR. I haven't organised a QtySurveyor as the IP was built in the 1950's.
And with option (b), I prefer not to sell our IP until 2012 as we have fixed 50% of the loan, because I'm aware that the exit fees to a fixed interest loan is normally pretty big.
We've been reading about Line of Credit (LOC) and thought this may be an option for us.
At the moment, we are leaning towards getting a LOC set-up against the IP, and use it to pay the interest and all IP related expenses and use the rent as an additional PPOR loan repayments, but not sure if this is the right move.
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