Hubby and I have finally after many long discussion decided that our best option looking forward is to turn our PPOR into an IP.
Now a while back I had posted about what we have currently done which I'll explain;
Our current mortgage $277K, house valued at $480Kish – we pulled out $90K equity in cash and on advice of mortgage broker it was placed into an offset account which I get now is a no no. The $90K is sitting back into loan now, and we just pay a $10 monthly fee and are able to redraw at any time (unsure if best option is to close and start over).
We are about to have baby number three, and I am over halfway through my uni studies, so we want to wait until I am finished uni (June 2015) and baby will be older so I can get back to work and service any extra payments that we need for new property.
We want to use a portion of that $90K to renovate the kitchen and bathroom (really run down) in our PPOR so that we can rent it out in the future and use the rest as a deposit on a new property. We require a new place as we need the extra bedroom/space now.
I am not sure whether I would need to turn existing PPOR loan into IO, or continue to keep it at P&I – at P&I we would still need to be putting in some extra to cover small shortfall (approx $190 a month) and that's just taking into consideration the rent and no other expenses.
Any help/advice much appreciated!
Hi Kat,
Since no one has taken the time to help you Ill have a stab. Please take my advice with a grain of salt.
Regarding you loan on your PPOR (soon to be IP) – from what I have read it is best to convert the loan to IO with an offset account attached. The difference in repayments (between a P&I loan and a IO loan) should be placed into the offset account to reduce your repayments. The benefits of this are:
– The money in the offset account is readily available should you need it.
– You reduce the amount needed each month for repayments (through offsetting the interest).
– You are maximising the amount you can claim on tax.
I guess this strategy helps keep cash available to reinvest.
Hey Paul, thanks heaps for your reply.
Ok so basically extra income from rent should be placed in an offset, and I assume I could use this for any repairs/maintenance/insurances etc as needed for the IP.
And then as this offset account grows, obviously the interest payments would reduce somewhat, giving the property to appreciate in capital so I can use equity again to purchase another investment?
Am I on the right track??
Hi Kat
Following on from Paul's post, the general rule is that if you're planning to turn your PPOR into an IP – then it's best to set up the repayments as interest only now so you can preserve your future deductible debt. This becomes more important if you have other non-deductible debt (personal loan, car loan, credit cards, ect) that can be paid off first and/or if you're planning on owning another PPOR at some point in the future.
If your only debt is the PPOR (soon to be IP) then place all of you spare savings into the offset so you can reduce your immediate interest repayments. When it comes time to turn it into an IP – you can move the funds back out of the offset and bolster your deductible debt. This works particulaly well if you're purchasing another PPOR – because your reducing non-deductible (PPOR debt) and increasing tax-deductible IP debt.
Make sure you get a valuation on the property when it becomes an IP as well. It's important for working out future capital gains tax if you ever decide to sell it.
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]
This is more complicated than you think because of that $90k mistake.
The loan is currently $280k (rounding to make it easier). Of this $90k relates to the extra repayment. So your loan must have been around
$280,000 before you withdraw the $90k
$370,000 after you withdraw the $90k
and
$280,00 now that you have redeposited the $90k.
The $90k is considered a separate loan as it was borrowed separately from the original money.
Now once you withdrew the $90k you had a mixed loan:
$280,000 associated with the purchase of the house and
$90,000 associated with a savings offset account.
total loan $370,000 $76% of the interest of this loan is associated with the first loan and 24% the second loan.
Now you have gone and deposited $90k. Since you have a mixed loan – ie two loans within one you cannot say the $90k deposit must come off the $90k loan. Any deposit must come off both loans in proportion to the %. So 76% of the $90k deposit must come off the $280,000 portion. 76% is $68,400. So your new mixed loan balance would be like this:
Total loan $280,000
Loan associated with the purchase of the property = $211,600
Loan associated with the money borrowed to fund an offset account = $90,000 – (24% of $90,000) = $68,400
Therefore only part of the loan is associated with the purchase of the property and this part is $211,600/$280,000 = 75.5%
ie only 75% of the interest on this loan would ever be deductible.
And this assumes you had not paid any principal off the loan since borrowing $90k. If you did you owuld need to do the cumbersome calculations as above for each repayment.
One way you could have fixed things when you became aware of the mistake was to split the loan into 2 portions one being $90k and then immediately pay off the $90k loan.
This is why brokers should not give tax advise
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
Hey Jamie, we have no other debt other than the PPOR and the 90K which is sitting back into loan. I was thinking to create another offset for the new PPOR so have two loans and two offset accounts…one for new PPOR and one for the IP?
Terry thanks for your comment, was hoping you'd post
Not sure if this even makes a difference – the 90K is back into loan and is separate from the 280K and IO payments will run for another 4 years. But I was thinking because of what happened and it having been mixed would I be better off just using that 90K as a deposit for a new PPOR which we'll need anyway as I figured I won't be able to claim anything on that anyway???
But based on what you said – because they got mixed up originally if I turned PPOR into IP, I'd only be able to claim 75% of the IP expenses?? Hopefully I got that right!
Kat, does the $90k loan have its own loan number separate to the $280K?
You could possibly claim only a max of 75% of the interest on this mixed loan if it became and IP. Other expenses could be claimed in full.
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
Terry/Jamie et al.,
If I were to turn my PPOR into an IP does the interest on the loan from that point become tax deductible? I recall you saying that it is only tax deductible if the purpose of the loan was for an investment (which it wasn't, it was to buy our home).
What happens in this situations?
Yep, it should do.
p.s I'm not an accountant.
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]
Paul B. wrote:Terry/Jamie et al.,If I were to turn my PPOR into an IP does the interest on the loan from that point become tax deductible? I recall you saying that it is only tax deductible if the purpose of the loan was for an investment (which it wasn't, it was to buy our home).
What happens in this situations?
generally, but not necessarily.
Imagine you had a loan of $500,000 which was used to purchase the property. The interest on this would generally be deductible if you rented the house. This is because the purpose of the loan was to buy the house and the house would be an income producing asset once rented. So interest be be deductible once it is available for rent.
Now imagine that you had receive an inheritance of $490,000 and paid it into the loan in year 2. In year 4 you pulled out $490,000 and your loan balance is $500,000 again. Assume i is interest only for the next 30 years. In year 35 you rent it out.
Only interest on the $10,000 of the loan would be deductible. The $490,000 you pulled out is new borrowings and the itnerest on this will only be deductible if the purpose of these borrowings are investment related.
It can be very complicated if someone sets up a LOC on their home loan. They would need to treat each withdrawal as new borrowings and work out the balance the loan attributable to the purchase of the house. So NEVER use a LOC for a loan other than as access deposits for further property. Otheriwse you could have a large loan with no or little interest being deductible.
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
Yep Terry it has its own separate account number.
Either way – it all still sounds do-able to this point. I am just unsure about using the 90K as a deposit for a PPOR – that would then mean we are lending 100% to buy doesn't it?
kat13 wrote:Yep Terry it has its own separate account number.Either way – it all still sounds do-able to this point. I am just unsure about using the 90K as a deposit for a PPOR – that would then mean we are lending 100% to buy doesn't it?
That is good news. It means it is not a mixed loan and can be paid off independently.
If you don’t use this as deposit do you have cash to use?
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
Nope no cash at the moment…..and I am off work for maternity leave. My plan is to finish uni – June 2015 and then will be at work fulltime so can service any extra's in loans etc…hence why I want to do this at that time and not now.
kat13 wrote:Nope no cash at the moment…..and I am off work for maternity leave. My plan is to finish uni – June 2015 and then will be at work fulltime so can service any extra's in loans etc…hence why I want to do this at that time and not now.In that case you will have little choice but to borrow 105% of the value of the new PPOR.
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
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