Hi all
My situation is this.
PPOR is on interst only loan as it will become an IP in time as my partner and I upgrade, loan is at $355K and I have $50K in the offset account. I will be purchasing an IP this year and would like advice on a few things.
* Should I use the cash in the offset to pay for IP deposit?
* Should I pay the offset amount into the loan and use equity/redraw? If so how?
* Should I put down a 20% deposit to avoid LMI on the IP or is 10% suitable?My partner and I have a healthy income and are looking for an IP between $250-$300K
Look forward to the responses
Ideally
1. no
2 no
3 noBorrow the deposit if you have the equity.
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
Hi Ryallsy, I'm in a similar situation so I thought I'll share some knowledge here.
The difference of using equity from your existing PPOR for your IP deposit is that you it will be tax deductible, happy days during tax return. Saying that just to bear in mind usually bank only allow you to pull out equity for your current property valuation less than 80% the loan currently owe, so just a quick example here. if your PPOR current valuation is 500k and you currently owe 355k, you can pull out 45k of equity.
Calculation I.E (500k / 0.
– 355k = 45kIf 45k is enough for your next IP deposit then just pull out the equity for it and it'll be tax deductible. If 45k is not enough then you're best looking at paying down some or all your offset saving into your current PPOR loan to get the requied $ for your next IP deposit. By the way don't forget about other fees like stamp duty, solicitor e.t.c..
Regarding your question on either 10% or 20% LMI for an IP I've sent a few replies on the forum regarding this, some of the guys here doesn't really object doing 10% even though you incur LMI, my 2cents though on this was that by putting only 10% instead of 20% for your next IP deposit, you kinda "saved" the other 10% which you could leave it in your current offset account to reduce some interest you need to pay in the current loan and this also allows you to save up a tad faster for yet another IP down the road.
Ryallsy as Terry has mentioned certainly dont use cash in your offset as deposit on your IP.
In regard sto the lvr you should look at this will depend on whether you are looking to increase your portfolio or whether buying the
1 investment property is your goal. Certainly there is no point in paying LMI if you have plenty of equity and are not intending to expand by buying a couple of properties.I tell my forum clients that LMI is an opportunity cost which gets to 2nd base that much quicker.
It is like increasing the purchase by the cost of the premium. If you would still buy the property even if it went up that much dont worry about the premium.Remember LMI incurred where the loan is for investment is considered a Loan cost and therefore is deductible over the term of the loan or 5 years whichever is the shorter. Proportional in Year 1 depending on when Settlement occurs.
Irrespective of which way you decide to go make sure the loan is structured correctly. Seen to many forum clients come a cropper where their lender suggested they cross collateralised the securities.
Your mortgage broker should be able to make some structured suggestion in this regards.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Excellent and speedy responses thank you so much.
To give a little more info on my situation – I purchased the PPOR in Dec of 2010 for $396K with a 10% deposit so there is no equity to use for IP investments at this stage, sadly I have to use hard earned and saved cash for the time being.
Given that it's a cash only option is it best to put it onto the existing loan and refinance through that equity?
Advice given from a friend who has built a healthy portfolio suggested going with a 20% deposit to avoid the LMI, I was planning on saving up the 20% (and closing costs) and going from there.
Keep the suggestions coming, thanks!
In that case, then since the first property and the second property will become an IP it doesn't really matter which way you go. You would take the money from the offset or from the paying in and redraw.
Is there any chance one will become a main residence at some stage? If so you may want to aim at reducing this loan and maximising the other.
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
You mention that the PPOR will become an IP eventually when you move out so i assume at this moment in time you are still living there for the time being.
If this is the case i would not be using cash savings as deposit but either bbe using your cash as security and borrowing 100% of the investment property or paying down the debt on your PPOR and taking out a separate loan for the same amount assuming your lender does not charge additional LMI.
Look without being funny advice from your friend is not practical and i guess there is variance in what is a healthy portfolio.
Saving up a 20% deposit on an IP when you intend to upgrade your PPOR down the track does not make financial sense.
I would suggest you get some Professional advice rather than advice from a mate.Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Of course Richard I will seek advice from professionals in due course, my friend has built his portfolio over 15 years and generates $6000 a week in rental income so when a person with that level of investment experience speaks, I listen, as I do to all.
Yes I live in PPOR and it is interest only and I plan to be there for approx 5 more years. In that 5 years I hope to buy 2 IP's so when we move and upgrade there will be 3 IP's and a new PPOR. So the plan is to constantly expand.
Can you explain
"Saving up a 20% deposit on an IP when you intend to upgrade your PPOR down the track does not make financial sense" more please?My thoughts are that if I pay a 20% deposit the IP may be $200 a month negatively geared. If I pay a 10% deposit it may be $400-500 a month negatively geared and I can only see option 2 running at more of a loss than option 1 after deductions which will ultimately leave me with less buying power in the future…
I understand tax breaks and deductions but I am yet to see the major advantages of being heavily negative and leaving myself with less money to save and expand with.
Just remember the more money you chip into the purchase on an investment the less you will have for private purchases. This means you will have to borrow more to purchase your PPOR down the track. More non-deductible interest.
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
5 Years more in your own PPOR you would certainly be unwise to use your own cash.
Sure $6000 / week + is nice especially if it comes from ununcumbered property like mine does but it just doesnt make sense to advice like that from anybody who gives you advice like that.
Sorry i call it like i see it.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Ok thanks guys for the input. I will take a copy of these points raised to my broker for advice and discuss our options regrding a smaller deposit for the IP.
– 355k = 45k
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