Hi all,
Apologies if these questions have been asked and answered already in the forums, I have searched through and found several threads with situations similar to mine, but none of which address all the questions I have…
Here is a quick bullet point rundown of our situation:
- We have owned our PPoR for two years, and are ready to get into property investment for the first time
- We just came out of a 2yr fixed deal, where we weren't allowed to use an offset facility or make overpayments
- So PPoR is worth $470k, and current loan balance is $430k
- But we have around $170k of savings (mostly from inheritance) that we want to utilise for purchasing our first IP
- Our PPoR loan is P&I
- We hope to 'upgrade' to a bigger house closer to the city in maybe 5yrs or so, and ideally keep our current place as an IP
- In the meantime we are keen to buy our first (and hopefully then several more) IP pretty soon
Soon we will be going in to see our mortgage advisor to discuss the best strategy, but for now I am just trying to build my own knowledge – just wanted to state that so people know I'm ok with general advice and won't be acting on it directly without speaking to an advisor first!
So, I have a few questions on this which I hope people can help with please…
1. Many sources suggest that if we're going to be changing our current PPoR to an IP in the future, we should have it as Interest Only rather than P&I, with an offset facility which is where we put any and all of our savings to reduce interest on the PPoR. Our thinking (up until I read this recently) was that now we're out of the fixed period we can make overpayments, so we were going to 'overpay' our mortgage next month by $170k, then we could use that equity immediately to fund IP purchase(s). Also we thought this was a smart use of the money due to the tax deductible nature of the IP deposit when it comes from our PPoR equity.
Q: Would it be better to keep our current mortgage as P&I, overpay $170k immediately then redraw some of that equity, or should we convert to I/O immediately, open an offset account and deposit the $170k, then use that account to fund the IP purchase?
Q: If we converted to I/O and used an offset account, is the deposit for an IP still tax deductible if we took it from the offset account?
2: One of our goals (before doing much research) was initially to be mortgage free on our PPoR as fast as possible. But assuming we use equity from our home each time to purchase an investment property, we'd have to keep making the repayments on our PPoR loan for much longer since we keep extending the loan, wouldn't we? I read that most people seem to advise taking I/O loans on the investment property, but since we're not repaying any capital we would have very little equity to use in the IPs for funding more purchases, and very quickly we would run out of equity on our $470k PPoR.
Q: Does using the equity from your PPoR extend the length of time to repay the loan, all other things being equal?
Q: Since we're looking to move in 5yrs or so, is it better to forget about trying to clear our mortgage on the current place altogether and focus on using it in whatever way we can to build our portfolio just now?
Q: However we fund the IP purchases, given the conventional wisdom seems to be to have them on I/O, how do we get to a point where we can start using equity from our IPs to fund future purchases – is it purely by selling them off in future and using the profit to buy bigger and better properties? Wouldn't it be better to have one or two on P&I to start building some equity in them?
3. Our PPoR is in my wife's name only (mortgage & title) – I've read that it's better for everything to be in my name as I'm the higher earner.
Q: Does that seem right and if so should we change right now?
Q: Isn't it better to have some things in both our names though, so we can use the power of both our salaries to increase our DSR?
Many thanks for taking the time to read this (and hopefully answer!) – any insight you can offer would be very much appreciated.
Cheers
HI there,
I like your profile name, suits me fine too!!
Anyway, i came to this forum with lots of question and looking for right answers from well experienced members.
i posted an question like you did!(about 10-12 weeks ago). and since then we bought our IP (settlement in end of NOV 2012) and already looking for 2nd IP!!!
So i want to thanks members of this forum and PI.com itself.
it goes to show that you are at right place and if you follow advise of members from this forum, all your question will be answered + more!!!
At the beginning, i spoke to Richard (QLD 007) and he put me in right direction. He is in QLD and I am in NSW (at this day and age, it is not an issue for lot of ppl). so i contacted Shahin( finance shop) and he structured deals and helped us to found area/properties and gave us right advice and knowledge and we are on our way for buying right properties. so thanks to both members!!!
I am sure other brokers/members would offer similar advice and service,
i know i didn't answer your question, but my post may put you in right direction or at least give you an assurance that you are at right place.
Hi there
Welcome aboard.
Your post is super long but here's some responses that seem to address most of it:
– Avoid using cash for IPs, consider placing these funds back into your PPOR and reborrowing – this way, the entire IP debt becomes deductible. Some careful structuring needs to occur here.
– Change current P&I loan against PPOR to IO now – there's no point paying down this debt further if it's going to become deductible in the future.
– Generally speaking, if the IP is negatively geared then it's best to have ownership (or a larger percentage of) in the name of the higher income earner. However, IP's do tend to move towards CF+ over time as rents increase – so keep that in mind.
If your current broker doesn't understand investment structures or what it is you're aiming to achieve, then it could be time to contact someone that deals with these scenarios daily. The reality is that most brokers/bankers don't have a clue – but that's not to say your current one doesn't.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
TheYoungUnprofessionals wrote:Q: Would it be better to keep our current mortgage as P&I, overpay $170k immediately then redraw some of that equity, or should we convert to I/O immediately, open an offset account and deposit the $170k, then use that account to fund the IP purchase?
If you are moving out into a new PPOR in 5 years time you are far better off setting y our existing loan into I/O with offset. Plough all surplus money into an offset account for five years. When you move into the new PPOR then you can grab the money held in your offset account as deposit for the next place.
If you pay your loan and try and redraw some funds towards your new home in 5 years time the redrawn funds are not deductible because they are used to buy a new home. The ATO considers the purpose of the borrowings and not the security used when assessing deductibility.
TheYoungUnprofessionals wrote:Q: If we converted to I/O and used an offset account, is the deposit for an IP still tax deductible if we took it from the offset account?
Given you are removing funds for a deposit in effect you are using cash savings.You would be better off (from a tax deductibility side of things) to set up a line of credit secured against a property and use these funds for your deposits. Your equity levels would determine whether or not this is feasible at the time.
TheYoungUnprofessionals wrote:Q: Does using the equity from your PPoR extend the length of time to repay the loan, all other things being equal?
If you set up your equity release in the form of a line of credit (or similar) it would be considered a separate loan and you can monitor your loan levels V limits quite easily.
TheYoungUnprofessionals wrote:Q: Since we're looking to move in 5yrs or so, is it better to forget about trying to clear our mortgage on the current place altogether and focus on using it in whatever way we can to build our portfolio just now?
In general terms yes.
TheYoungUnprofessionals wrote:Q: However we fund the IP purchases, given the conventional wisdom seems to be to have them on I/O, how do we get to a point where we can start using equity from our IPs to fund future purchases – is it purely by selling them off in future and using the profit to buy bigger and better properties? Wouldn't it be better to have one or two on P&I to start building some equity in them?
When they increase in value you may be able to release additional funds through line of credit, or similar, secured by your IPs.
Paying down a loan on P & I is always an option and it does depend on your plans, circumstances and situation. If you do choose to go down that pathway you are better off setting up offset accounts. You could also consider taking out I/O loans but make arrangements to make payments at P & I level. This means you have some control over your finances from one month to the next.
It is also dependent upon your overall strategy.
TheYoungUnprofessionals wrote:Q: Isn't it better to have some things in both our names though, so we can use the power of both our salaries to increase our DSR?
Depends on your personal situation – you may even be better off in a trust structure.
Hi Jamie,
Thanks for the reply. Points 1 & 2 of your response are kind of mutually exclusive though, aren't they? This is part of what I'm trying to understand as fully as possible – both are avenues I see benefit in, but which do I choose since I can't do both??
My current broker seemed very good when he first helped us with our current place, but this is also why I'm trying to gather as much information as I can – so we can have a more informed discussion and I'm better placed to know whether he's really able to help us or doesn't understand investment structures as much as I need him to…
Cheers!
Hi Derek,
Thank you for the very comprehensive reply – and sorry to all for my post being so long in the first place!
You make some very good points – can I please clarify though…
You suggest we should convert to IO straight away and run an offset account alongside it, but use a line of credit loan to fund any IP purchases (rather than non-deductible cash from the offset account) – but if we do that right now we will have virtually no useable equity, given a value of $470k and mortgage of $430k still… Therefore we'd have to wait a year or two before we'd increased our equity enough to even get a deposit for a first IP – is that right…?
Also you mention that if we were to redraw from our current PPoR to buy a new PPoR it wouldn't be deductible, but if we were to use cash from the deposit account as mentioned in response 1, wouldn't that be non-deductible too…?
Sorry if these are silly questions – I'm well aware I'm just getting to a point where I have barely enough knowledge to be dangerous, and am keen to understand as fully as I can…
Many thanks!
Hi YU,
Your current level of equity could well mean you will need to pay down some of your debt so you are in a position to release some funds for your next purchase. I guess the key is to make this pay down amount as small as you possibly can so that you retain as much cash as possible which can be redirected towards your new home in 5 years time.
Some banks/brokers may try and cross collateralise your loans because of your limited equity. Be wary of this and make sure you really understand your proposed loan structure.
"Also you mention that if we were to redraw from our current PPoR to buy a new PPoR it wouldn't be deductible, but if we were to use cash from the deposit account as mentioned in response 1, wouldn't that be non-deductible too…?"
If you take cash from your offset account to help with the new purchase of a PPOR that is not considered new borrowings. After all you are only using cash. While the interest bill on your loan now increases (because you have taken some cash from your offset account) the purpose and nature of the loan has not changed and full deductibility remains.
Hope that helps.
PS – not a broker or accountant
Hi Derek,
That does indeed help, thanks!
I wonder if you could help with explaining one last thing a little bit more though please… I still can't quite get my head around why it's better to keep as high a debt as possible on our current PPoR and convert it to IO immediately (thus restricting our ability to purchase say 3 x $400k IPs any time soon), instead of paying down $170k of the PPoR loan and using that equity to fund some IP purchases in the very near future.
Wouldn't the benefits from utilising the equity in our PPoR now and having had 3 IPs to our name for 5yrs by the time we come to move outweight the tax-deductible benefit of holding our PPoR debt steady just now on IO and not being able to purchase 3 IPs any time soon?
Once again please understand, I'm not challenging what you're saying as being right or wrong – just trying to learn the why's and why not's of it all!!!
Cheers
Hi YU,
No worries – tis good you are still digging.
As your plans include a new home in 5 years time (a relatively short time frame in the property world) your plans should address how you intend going about that purchase.
Often people upgrade their homes and end up with a relatively large mortgage on their new home and a proportionally small debt on their old home – which is now an investment property. From a taxation perspective this is back to front and doesn't make sense as the larger of the two debts is now non-deductible.
Having said that each persons individual circumstances are different and you would need to consider what I have said in the above paragraph with your personal plans.
If you are committed to buying say 3 X $400K properties soon then paying down debt and releasing equity through a line of credit type facility may be suitable. Clearly having an extra $1.2m asset value in your portfolio now is to your advantage over the long term.
The downside of this approach will be the issues created by the new PPOR in 5 years time.
Now these issues are not insurmountable and could simply be solved with a sale of your existing PPOR with surplus funds being directed to the new home. Sure there would be buying and selling costs but what you lose in lost profit you gain with a reduced non-deductible debt and a capital gain tax free profit.
Unfortunately property has no hard and fast rules which apply equally to all people.
Your challenge will be to work out what is the best move for you.
Confused?
Ahh ok I see, that makes a bit more sense now – the goal of doing the approach you mentioned is essentially to minimise the mortgage required for the new PPoR whilst maximising the tax advantage (or minimising the disadvantage I guess!)…
We're not dead set on having 3 x $400k properties, that's just a rough idea at the minute – perhaps the best thing we can do is somewhere in between the two options – convert current PPoR to IO, put most of our savings into an offset account, keep pushing as much as we can into the offset for a deposit down the line, and use a line of credit against the equity we have at the moment to get started – maybe one IP now, then another each year or eighteen months if we can do it… That way we'll have some IPs established by the time we come to move, and we'll still have a significant deposit for our new PPoR.
As mentioned, all of this is just to give me enough info for an informed discussion with my advisor – which we'll be doing soon.
Confused? Hmmm maybe a little less than I was when I started thanks to your help – but I wouldn't for a second say I'm confident yet that I know what the right approach for us will be in the end – that's why our final decisions will very much depend on our advisor…
Thanks again for all your help Derek!
Hi YU,
Your plans will need to consider the limited amount of equity you have in your property at the moment.
Based on the numbers you have provided currently your loan to value ratio is at 91% – the capacity to release equity from your existing PPOR is extremely limited.
When making plans and/or talking to your advisor make sure this issue is addressed in any planning you do.
PS – when you say advisor what do you mean?
Yeah I know, our LVR is currently far from ideal – but all planning will take this into account. Thankfully we have the big chunk of savings to work with, which will be a massive help in getting us started with a good structure and approach.
Our advisor is the director of Port Finance in Melbourne – a company that has a few different specialists, each dealing with different areas of financial matters… Heard of them?
Cheers
Oops one other thing I thought of but forgot to ask in the last post…
Assume we're at a point where we do have some equity in our house and are going to use $50k to fund the deposit for an IP. You mentioned taking a line of credit loan – is there an advantage to doing that over simply redrawing the funds?
Cheers!
Redraw gets messy – particularly if you're redrawing from a PPOR loan to fund an IP deposit/costs.
Setting up a second split in the way of a LOC or an interest only loan works better.
If you require the face to face service of a broker, I can recommend someone decent in Melbourne.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
Cool thanks for that Jamie – sounds like a LOC is the way to go then…
I will give our broker a try first – he certainly seems to know his stuff from earlier discussions – and I feel I'm well enough armed now with some ideas to run past him, and will be able to tell fairly quickly if he knows what he's doing or not. If not, I will check our some other brokers and would be happy for recommendations at that point…
Cheers!
TheYoungUnprofessionals wrote:Our advisor is the director of Port Finance in Melbourne – a company that has a few different specialists, each dealing with different areas of financial matters… Heard of them?
Cheers
I don't know Port Finance so cannot comment – sounds like you are now armed with multiple questions to work through with your advisor. Today you have reached another level of understanding which will be valuable as you move along your journey.
TheYoungUnprofessionals wrote:Cool thanks for that Jamie – sounds like a LOC is the way to go then…I will give our broker a try first – he certainly seems to know his stuff from earlier discussions – and I feel I'm well enough armed now with some ideas to run past him, and will be able to tell fairly quickly if he knows what he's doing or not. If not, I will check our some other brokers and would be happy for recommendations at that point…
Cheers!
Sounds like a plan – let us know how you go.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
Thanks Derek, I am indeed better armed thanks to you and this community – I look forward to discussing further with my advisor now!
Cheers again.
Will do Jamie, thanks again for your help.
Cheers!
HI YU,
Adding onto an earlier comment about selling your existing property to fund the new one.
I assume your current property is in Vic – if this is the case then it might be worth your while investigating spousal transfer to maintain deductibility of your existing home.
I am not sure if can apply to your existing property as it is owned outright by your wife.
Would certainly be worth a few minutes tracking down someone in Vic who knows how spousal transfer works and to see if it can apply to your situation.
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