Hi there,
I am about to refinance my first property (PPOR) to an IP and build a new PPOR.
I've read Steve's book, as well as many threads in here, but with so many conflicting answers figured I'd start a new thread to try and get an answer.
The specs are as follows:
Current PPOR – Valued at $540k and refinancing for $440k
Typical area rent – $500-550 p/w
Budget for new build – $450-500k
After the refinance, should have some spare cash (25-50k). It looks like the IP will be close to neutral geared, and not sure on the best place to leave that cash. Also whether it makes sense to put more into the IP offset account, or pay down PPOR (I've seen people say the direct opposite on this issue so am confused).
Also looking to know best structure (given I am married and run my own business). Current PPOR (soon to be IP) is Titled to both of us.
Hope that's enough info.
Thanks
Adam
Hi Adam
how much is the current loan on your property? It will only be that amount that you can claim on the IP.
Generally you are better off putting spare cash in an offset against PPOR. If you pay down the loan and down the track decide to make that property an investment property you will lose the tax deduction on the repaid portion.
Dustin McMahon
Your Broker [email protected]
0430110304
Hi Adam
You can only claim the original loan amount against the IP – not an increased amount from the refinance.
Ideally, it should be set something like this.
PPOR (now IP)
Loan 1: Original loan (now tax deductible and ideally interest only)
Loan 2: Equity release for new PPOR deposit/cost (not deductible)
New PPOR
Loan 1: Remaining balance to cover new PPOR once the deposit from loan 2 above is taken into account.
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 Dustin,
Current loan balance is 380 (P&I) but refinancing now to interest only at 430-ish. Will be moving out in 12 months to a new PPOR.
Cheers
Hi Jamie,
Currently the existing loan is P&I, and only converting to Interest Only as part of the refinance (in the next month). Will continue to live in the premise for approx 12 months more, while building a second property.
Hope that helps clarify?
Cheers!
Hi Adam,
With the refinance unfortunately it is not determined by when you redraw the money.
The simplest way to look at it is what the money is used for not what the money is secured against.
eg. it appears from the information you have given you are borrowing an additional $50k against your current property to use on your future PPOR. As the $50k is used for the PPOR it is not tax deductible despite being secured against the IP.
I hope that makes it a bit clearer. Make sure when you do the refinance you are talking to someone who know what they are talking about otherwise if you combine these two loans it can become quite difficult for you accountant to claim tax wise.
Regards
Dustin McMahon
Your Broker
[email protected] 0430 110 304
Great that makes sense. I think at this stage that money in the IP won't be used to buy the PPOR. Going forward once I have both I just need to figure out whether to pay down the PPOR, or pay down the IP as a preference. From what I've read, paying down the PPOR makes sense as it's not the investment asset?
As mentioned you need to separate the original $380K loan from the money you will use for your PPOR. If you don't you will have issues with the tax department because it will be part personal and part investment.
I'd change the $380 to interest only NOW. You don't want to be paying down deductible debt when you will have non deductible debt in your new PPOR. Always pay down non deductible debt first.
I'd speak to a good mortgage broker ASAP.
xfitzyx wrote:Great that makes sense. I think at this stage that money in the IP won't be used to buy the PPOR. Going forward once I have both I just need to figure out whether to pay down the PPOR, or pay down the IP as a preference. From what I've read, paying down the PPOR makes sense as it's not the investment asset?Yes – if you're going to pay down any debt than non deductible should be the first to go.
If you suspect that your next PPOR may one day become an IP (like what you're doing now) than best to set this up properly from the start as well.
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]
I think that will be the plan!
Thanks for the advice so far all!
If my wife and I have a similar salary, and will continue to do so for the next few years, is there any particular way to structure the new purchase?
The current property is in both our names and I guess still will be after conversion to IP.
Cheers!
So I've progressed a bit further.
Currently planning to do the following:
Refinance to a new loan as follows:
1. Current PPOR – converting to Interest Only
Split 1 – $40k
Split 2 – $380k -> this is the remaining loan balance on existing loan
2. Pre-approval for Interest Only with Offset for $500k for new PPOR to build.
I think that's correct based on my understanding of the various bits and pieces. My only question is with the non-deductible 40k split, do I pay that off over the whole term of the IO loan, or do I use a shorter term and try and pay it down faster as it's non-deductible, or do I pay that secondary as the new $500k loan would do better with that money in the Offset account?
Hi,
I have just read the thread and thought to comment as well. The $40k that you refer to is Personal Debt so it gets priority either way. How and when you choose to pay this is up to you. To transfer over to your Offset on the new debt really defeats the purpose as it is still Personal Debt. Initially you may want to look at an Offset on that $40k split to offset the interest along with other cash flow such as Wages. This will assist in the interest cost whilst you build if you are using these funds.
Once you move into your new home, at this point in time you can look at the balance of the Offset and pay down the debt, or transfer the funds over to the other loan, this will really just come down to what balance the offset is and what can you affords to pay down off of the loan at the time.
What you need to do is think through a cash flow strategy to help you pay down the Personal Debt sooner than later, this can be maximized by using your offset with Wages, Rent, Tax Deductions from utilizing an ITWV, and other savings.
Regards Grant
Ok that also makes sense.
So in that case is there a point in splitting the loan? If I don't split the loan, the lender will just cut me a cheque for the balance and I'll use that to clear off debt, but then would have a 430k loan (I guess eating up 40-50k of potential equity headstart).
Or maybe it doesn't make a big enough difference either way on this property, and I should be more concerned about setting up the new place correctly and go from there.
You would split the loan to be able to demonstrate for tax purposes the use of funds between Personal and Investment. Good Financial Housekeeping…
Hiya xfitzyx
Just to confirm that I'm reading this correctly.
Are you talking out $40k against your current property to cover the deposit/costs on a $500k purchase?
If so – I doubt that's going to be enough to cover the deposit/costs unless there's some hefty concessions available to you.
Also look at the LMI costs with increasing the current loan above 80%, accessing more equity and borrowing less for the next IP. Your broker/banker can scope this out for you.
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]
Hey Jamie,
Sort of… refinancing to set up IO loan on current PPOR and clear off a bunch of personal debt (so planning to split the loan). This will then facilitate a 450-500k second loan for buying a new PPOR (with an offset account). I only need 5% deposit and will be taking that from my business initially. The 1st property has about 150k of equity in it, and servicing is les than 80% across both. Have already confirmed that.
So I think should be all good. With the split though, does that 40k become P&I over full loan term, and then pay that off in preference to putting in the offset on the new PPOR, or it makes no difference which one?
Sorry, I mean the refinanced loan will be less than 80% (just) to avoid LMI 425k as opposed to 430k I think..
You must be logged in to reply to this topic. If you don't have an account, you can register here.
