Hi guys,
I have just purchased my investment property, to which I put down about $100k in cash as a deposit. I purchased this property for $310,000. I am now looking to buy my next house to which I want to live in. I have a simplicity plus home loan with the ANZ. My current loan amount is ~$190,000.
I think I have made a huge mistake putting all that cash down for my investment property. The way I see it, I should’ve gone with a loan that has an interest offset account, put down the minimum to avoid lenders mortgage insurance and then put the rest of my cash in the interest offset account.
The reason I think this, is because the investment property is almost positively geared. This next place I buy to occupy, I cannot negative gear. I have all my money tied up in the investment loan which means I will probably have to borrow most of the loan to purchase my occupied property.
Is there any way I restructure my loans, so that I can take all the cash but the 20% deposit on my investment loan and utilise it for my owner occupied property? Therefore keeping the principal and hence interest charged on my investment loan as high as possible (so that it is negatively geared), and paying off as much as I can on my owner occupied home (I cannot negative gear this)?
Please share your thoughts
Thanks guys
chrisaus wrote:I think I have made a huge mistake putting all that cash down for my investment property. The way I see it, I should've gone with a loan that has an interest offset account, put down the minimum to avoid lenders mortgage insurance and then put the rest of my cash in the interest offset account.It's easy for things to become 'mistakes' in hindsight, when at the time it wasn't such a bad idea.
Re: restructuring the loans.. there's no good news. Tax deductibility of interest is based on the 'purpose' of the loan, you can't borrow more money for the purpose of buying an investment property you already own. You can try and juggle things around with another entity, but there's usually very little benefit. In brief, some other entity needs to buy that investment property from you, (ie: spouse, trust, company) that will allow the other entity to borrow 80% of the transfer cost, and have a 100% tax deductible loan. On the downside the transfer will attract stamp duty (in some states you can transfer to your spouse for free.. I think? maybe?) and it will be a CGT event. also, the CGT would be calculated based on a market value, rather than your transfer value.
Considering the downsides, the advantages look pretty dubious. If the house is worth $310, then 80% is $248. You said your loan amount is $190. So we're talking about borrowings of $58k. The interest on that will be around $3800, so say your in a %30 tax bracket, your looking at a tax advantage of $1140. So if you cop the stamp duty & cgt now, it'll take you a while to catch up to your tax advantage.
Thanks for the response, I’m really spewing I’ve made this mistake.
I’m now thinking of doing a renovation on the investment property and redrawing the loan back to its full extent ($210,000). Can I extend my investment loan back to what it would be if I only placed 20% deposit ($248000) and utilise a total of 248000-190000 for a renovation?
That way there will be $58000 which is tax deductable.. Does anyone have any other suggestions on how I can improve my tax situation atm?
Well, hey – if the renovation is worth while then great, and yes the borrowings would be tax deductible.
But if you do it with an aim to 'undo' the situation your in, then it just doesn't make sense. Your goal is to pay the least interest possible on your PPOR. Borrowing more to renovate the rental means you pay more tax deductible interest, but doesn't reduce the non-deductible interest you'll pay on the PPOR.
The concept of negative gearing can become a bit of an obsession. But IMO paying an extra $3770 in interest just to save yourself $1131 in tax doesn't make much sense to me. The interest your paying -must- be balanced by capital growth or rent return.
Whatever you choose to do, get an interest only loan + offset for your PPOR.. who knows when you'll decide to move and rent out your new PPOR
The way I see it.. (and it's just my opinion of course) your options are:
1. Just relax, whilst your situation isn't the best possible tax scenario, its still pretty good, loads of my clients would love to have an almost positively geared property to help them pay off their PPOR. Dont do the reno, use whatever surplus funds you have to build equity in your PPOR.
2. If you absolutely cannot abide paying interest on your PPOR then sell the rental, pay the CGT, and use the equity to pay down some of your PPOR. Thereafter you can buy another rental and borrow 100% of the cost, secured against your PPOR.
3. If your worried about the CGT, then buy another rental before you buy your PPOR, if you borrow 100% of the cost then the loss on that property will go a long way to offset the CGT you incur. Once you have that out of the way buy the PPOR.I realise none of these are particularly attractive 'golden bullet' options.. others may have better strategies for you.
You must be logged in to reply to this topic. If you don't have an account, you can register here.
