HI All,
I have a PPOR which is fully paid off and currently valued at $750K. I want to release equity from the PPOR to buy an IP worth $350K. I think that I have the following options:
Option 1: Take out a PI mortgage on the PPOR of $350K to purchase the IP.
Option 2: Take out a IO mortgage on the IP with LVR 75%, and take out a second mortgage or PI on the PPOR to cover the deposit for the IP.
I was wondering which option would be the best? If I go for option 1 would I still be able to claim the interest as a tax deduction? Option 1 seems the simplest and I would only pay 1 set of fees and valuation, but am correct in thinking that the PPOR would then be acting as security for the IP?
Many Thanks.
Hi David,
There are unlikely any taxation implications with however you structure your loans. I would suggest, however, that you should take out a loan for at least a large portion of the amount against the IP. You can get lower rates at lower LVR's with some lenders, so perhaps you don't want to go to the full 80%. There is no cost saving from taking one loan over two if you use the same lender by the way, for most lenders there aren't any valuation fees and if its a pro pack than you can have multiple accounts for the same annual fee with most lenders.
How you best structure this purchase probably has more to do with your longer term plans than just this property.
Regards
Hi David
Option one is no good.
Here's how we generally set it up.
Loan 1: Equity release against your PPOR to cover the deposit/costs on the IP. This is usually enough to cover a 20% deposit plus costs but can be a larger amount if you want to contribute a larger deposit to take advantage of a lower rate on the IP loan.
Loan 2: The remaining balance for the investment property loan (usually 80% of its value – but can be lower if you've taken out a larger equity release against your PPOR).
These loans are usually set up as interest only – with the first securing your PPOR and the second securing your IP.
Of course, this is a general structure that may or may not apply to your individual circumstances.
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]
Hi Guys,
Thanks for you replies.
Jamie, I think I will be choosing option 2 to get lower interest rate, but I just want to try and understand why option 1 is no good?
Thanks,
David
Option 1 may be not so bad depending on the long term plans. If you do take option 1 and cannot pay the loan for whatever reason the bank will sell your house from under you. It is generally better to have the investment as security so that this is their first line of attack if things go bad. But, if you are doing a reno and intend to sell in the short term then maybe 1 is the way to go.
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
Option 1 just doesn't make a lot of sense, there wouldn't be a cost difference, the problems are.
1. Why choose P&I this just sets a higher minimum repayment, if you choose IO you can still make principle reductions or achieve the same reduction in interest cost by using an offset.
2. You're maximizing the debt against your PPOR, while the risk might not be great why expose you most valuable asset, not to mention one that has a direct effect on your lifestyle.
3. There are greater far more barriers to drawing on equity than borrowing for a purchase
None of these probably matter that much for this purchase, but why set up a sub optimum loan structure when it is no more difficult and no more expensive (if anything it will be less expensive) by setting yourself up properly. You can also set yourself up to make future investments easier to fund.
Jamie's sample structure is spot on, the only thing I would add is you should have an offset account against one of the loans (which you should not put borrowed funds in) for you to bank out of and I would set the other loan up as a LOC and would place a limit on it which is greater than what you immediately need, this you could use to fund deposits for further property purchases or for alternative investments.
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