Hi,
I have a $328K loan for my 1st IP @ 5.16% interest. The property market value is probably around $450K.
I have cash of $25K currently in a savings a/c, not earning any interest and can't be used to offset the loan interest on the IP.
Let's assume my income tax rate is 30%. I'm not sure if my property will be positive/negatively geared, but based on my estimate its probably going to be a borderline come next year tax time.
I have these questions:
1) Should I transfer the $25K cash back into the home loan a/c to reduce the daily interest for the IP? I can do the funds transfer back to my everyday a/c online instantly for daily expenses, so no issue with accessing the cash. Given this is my IP and my tax rate is 30%, is this a wise thing to do? Or, should I open savings a/c that's returning me an interest of say 4.5% for the $25K cash and leave the home loan as is?
2) If let say I have an opportunity to earn say 6.5% – 7% yearly dividend (higher that current average home loan interest) for a relatively low risk unit trust investment but I have to lock in the cash in there for a period of time, would it be wiser to put my spare cash into these unit trust instead? I will keep some for daily expenses of course.
2) I refinanced the home loan end of last year and changed it to interest-only with the purpose of unlocking some equity and to turn it into an IP. I was only able to borrow up to 80% of market value if I want to avoid the Lenders Mortgage Insurance. Is there a lender out there that can lend me more than 80% of market value today, that gives me competitive rates, without charging the LMI? If there are, I would like to consider unlocking some equity on the property and use it to invest elsewhere.
Cheers.
1. I wouldn't. Sounds like you'll be mixing investment and personal expenses. Can you set up an offset against the IP loan? Do you have a PPOR loan or other consumer debt that can be paid off first?
2. Can't see why not and it's ultimately your decision. Hold into some cash for a buffer though.
3. There are lenders that go beyond 80% – all charge LMI unless you're in a certain profession – ie medicos.
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 Jamie. I don't have any other debt/loan with interest higher than the unit trust dividend rate I mentioned in (2).
I'm now considering of buying some unit trust and leave some cash for expenses. Maybe open a savings a/c with interest earning for the spare cash.
At least it earning something other than 0%.
On LMI. Say if I go beyond 80% loan for the IP and paid the LMI, can I claim this as expenses come tax time? If this is possible, would it be wise to unlock some more equity on the IP and invest it elsewhere – for example in the unit trust I just mentioned?
Cheers.
You don’t give enough details to make an assessment, but
1. Paying down a loan will result in tax complications if you need to use this money back later.
2. Ideally borrow to buy income producing investments and keep your cash for personal expenses.
3. What did you do with the extra money borrowed? There could be complications resulting from this.
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, here's some more info on the IP.
We bought the property in 2009 (new apartment), moved in Jan 2010. My wife and I lived in it as PPOR until July this year, as we are relocating interstate. The property have just been let to a tenant only starting this month on a 12 months lease. I engaged a property agent to manage it and also got the depreciation report done.
Around Nov last year (while it's still a PPOR), I refinanced the property up to 80% the market value at the time to avoid LMI, changed the loan to interest-only, and invested the drawn equity in a unit trust I mentioned.
I did hear from a mate of mine that once the property becomes an IP, it is best not to mess around with the loan – though I'm not quite sure what he meant by that. Probably the complications you were talking about. I'm happy to just leave it as it to avoid any complications.
I'm a conservative investor. That is why I chose property and unit trust with stable dividends as my preferred investment choice – as opposed to shares. Down the track, I'm considering selling the the IP, cash out and look at overseas property (in Asia) where there are more potential for growth at the moment.
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