We have a property valued at $270,000, with $125,000 still owing. If we use, for example, $50,000 of the equity we have to use as a deposit on an investment property, do we pay interest on the $50,000?
Yes.
If you 'release it' as a separate loan (such as a line of credit) to do so you pay interest on it, and if you cross secure your home with the new one to use the equity that way, it means you can borrow the extra $50k against the new home as part of the new loan, (essentially allowing you to borrow 100% of purchase price (inc. deposit) & costs which again you pay interest on. In either scenario you have a loan – and thus pay interest.
Cheers
Thank you v8ghia, so it fair to assume that it's better to use our cashas a deposit, rather than our equity?
wblack wrote:Thank you v8ghia, so it fair to assume that it's better to use our cashas a deposit, rather than our equity?Not necessarily…
I take it you are trying to borrow from your Principal Place of Residence (PPOR) to buy an investment?
If so, you may want to check with a tax accountant whether you can claim deductions on the interest you pay on the amount you borrow for investing purposes.
If you can claim the interest, then you may find better ways to use your cash. I.e. cut down any non-deductable interest on other expensive items such as car loans or personal loans… Or maybe even on the portion of your PPOR loan that is not used for borrowing for investments.
I should clarify further… And financial types can explain better…
If you do 'cross collatoralise' your IP against your PPOR, you will essentially be borrowing the full amount against the investment property. You will resultantly be paying interest on every penny you borrow, but it will all be tax deductable interest.
If you take out a line of credit, as v8ghia mentions above, you will similarly pay interest on the amount borrowed… But you should consult a professional about whether you can claim that portion of your loan on tax as a cost of borrowing for investments, since it is still attached to your PPOR home loan…
As above, depending on your circumstances there may be better ways to use your cash savings to reduce non-deductable interest, such as the portion of your PPOR loan that is not tax deductable.
I hope I have not confused you…
Wow, I might be starting to actually follow this. So, based on all that, if we were to draw $50,000 as a deposit on an investment property from the equity we have in our PPOR, and if the interest paid on the 50k is tax deductable, we would be better to re-draw the 50k, and then dump the 50k cash we are sitting on, back into the PPOR loan, so our overall mortgage balance on the PPOR is much the same, but we potentially have a tax deduction from the 50k component now, and we've scored ourselves a deposit in the process.
You wouldn't necessarily put it straight back on the loan but might consider putting in in a 100% offset against your home.
grimnar thanks for that explanation – very helpful for me too
You could also consider using your cash deposit to be released to the developer for an off-plan purchase. Provided the developer has a good track record, you can get an advantage by locking in the pre-release price and getting a return on your cash up until settlement. Risks are that the developer could go broke and loan interest rates could soar over the build period, so that your cash flow doesn't look as good as expected. Independent Financial advice recommended, but this is a strategy that I use and also have recommended for cashed up clients looking for a better return than on a Term Deposit.
Graeme Freer | Freer Property and Finance
http://www.freerpropertyandfinance.com
Email Me | Phone MeBuyers Agent
Hi all,
As far as the deductability of a loan goes (for investment) it is the purpose of the loan, not what it is secured against, that depends whether or not is is tax deductible.
Here is an over simplified example to assist with explaining
EG1
You own a house worth $400k, and have a $100k loan owing on it.
You get a new loan (any loan, Interest only, Principal and interest, fixed.variable, line of credit….) for $200k and use it to go and buy an investment property. You now own your investment property outright (ie no mortgage) and owe $300k against your PPOR. THe interest on your $200k loan is tax deductible, where as on the orignal $100k loan it is not.EG2
Same scenario, but instead of a new loan for $200k, use get a small loan of $60k against your PPOR. You then take the $60k, and use it as a 20% deposit and purchase/govt/closing costs to buy the new $200k investment property, likely with another lender.
You now have three loans – the new loan against your investment property for $160k ($200k less the 20% you put in) which is deductable debt; you have your new 'small loan' for $60k, secured against your own home, which is deductible debt, and your original non deductible home loan.EG3
You get another loan against your PPOR for $200k, use $80 k to buy a new car, $20k for an overseas holiday, and give me the other $100k. All secured against your own home, none of it deductible. Even if it was secured against an investment property, it is still not deductible debt – as it was used for non investment purposes.
Being mindful of that puts anyone borrowing in a better position to work out how to use any existing savings and or funds they may have first, as has already been discussed.
Cheers
.
You must be logged in to reply to this topic. If you don't have an account, you can register here.
