If this was your situation, what would you do?

Gave up half way though.

Paragraphs would help read it.  Maybe I'm getting old. LOL

VF, It comes down to your aversion to debt, as you have already stated you own Sydney property outright. If your plan is to own several properties, then IO loans are the way to achieve this sooner. As you stated that your Brighton property will one day become an IP, you should consider switching this to IO sooner rather than later. You can always look at an 'Offset Account' in the mean time until you make the decision to build and move to save on any interest outstanding.

To finance your next 'dream' consider getting a Line Of Credit against your Sydney property should you not have success with the bank on an outright loan for new property, or try a combo with 80% borrow for new house and remainder from LOC.

If you sell Sydney, don't forget the capital gains and costs which will be incurred.

Make sure you both fully understand your planner and he understands your wishes, seek a good mortgage broker to set up loans and accounts correctly to maximise tax implications and financial outcomes for your pocket.

Consider also estate planning and ownership structures – sole, joint tenants, tenants in common, trusts, companies SMSF etc. Consider what ifs:

death, incapacity, bankruptcy etc

did you ever live in the property that was 10 mins out from Sydney?

if so you might want to consider the 6 year exemption rule on capital gains tax if you plan to sell in 5 years time. Perhaps selling in 4 years time… (if you moved from there into your current PPOR of 2 years) that way any capital gains made in the last 2 years and next 4 years would be exempt along with any years that it was deemed your ppor prior.

That is not legal. You can't just swap loans around. The loan is only deductable if you used it to buy an income producing asset. The can't just pay themselves money and make it deductable. It's done (for whatever reason) and cannot be changed now.

But as I said if the PPOR you are living in now will become an IP STOP paying it down otherwise you will have another IP with no deductable debt.

You're forgiven. I have an Android smart phone and tablet as well as 2 top end laptops all running various browsers. They all have issues with this dog of platform. What should be a relatively easy task but takes twice as long and requires a few additional skills to be competent at working with this dog of a… I mean text box.

Hi Patterson

Not a silly question at all and one that most investors have no idea of.

Let us assume you purchase a property for your own occupation and take a loan of $500K secured against.

You pay down the loan down to $400K and decide to rent it out and buy another principal home for $500K.

You decide to access the $100K equity in the first home as deposit. 

The problem is the $100K is now non deductible as it is being used for non investment purposes.

Had you set the initial loan up as an interest only loan with an offset account (Appreciate most lenders in the UK don't offer such products) you would still be paying interest on the $400K ($500K less $100K in offset). When you decide to move out and rent the property you withdraw the $100K from your savings and use as a new deposit on your new PPOR.

The interest on the first loan is now charged on the increased balance of $500K increasing your deductible interest accordingly.

As interest rates increase over time having your Broker structure the loan correctly can make a big difference.

Cheers

Yours in Finance

Interest only is worth a good hard look ,as it increases your ability to hold more property ,for less weekly spend

and concentrate on reducing your non tax deductable personal home

my loans all clicked over to  p and e after a few years anyway in which case you can re evaluate

Try REALLY HARD not to cross collateralize !

if you need to sell a property cos its a dog or to pay down some debt ( say if interest rates went up one day in the future ) you can end up paying a lot of bank fees on a couple of properties to do one simple task….

And refinancing can be a hassle cos everthing is interconnected ( dont try refinancing or buying a new one when you are" in between" tennants on one house ! )

keep it simple , dont get too fussed about tax avoidance ……its a little cherry on top not the main aim of the game !

cheers

Thanks Jamie, that makes a lot of sense but doing the maths my way it doesn't come out as much difference either way unless I am missing something.  Lets see if I can explain my point the way I understand it without making this too confusing.

If you do as you say in the article and pay down the loan to $100k this means you are now bringing in $500 per week ( or $26k per year ) on a $100k debt.  The $100k is costing you $7k per year in interest.  In my job I earn well so lets say a figure of $150k.  We need to add my wages to my property income $150k + $26k rent per year then deduct the interest on the loan at %7k giving a total of $169k.  My wages are taxed at 48% so I need to deduct 48% from my extra $19k leaving me with $9880 extra money using this method. but I will be paying $14k extra per year on the $200k used as deposit on my PPOR so $14k – $9880 = $4120.  $4120 will be my loss using this method

Second method.  52 x $500 = $26k + $150k = $176k – $21k = $155k.   The $5k extra taxed at 48% leaves me with $2600 after tax and I am also not paying the $14k per year of interest on my PPOR.   $2600 up using this method.

While typing it out I realised  that the second way is far better and hopefully it is typed in a way that it can help others too.  IF someone could check that over and tell me that I understand what Jamie was trying to highlight that would be great.  I don't know how I thought that they would be similar figures now but it made sense at the time.  Confusing subject when you are new to all this but I will understand all of this well in years to come.

Thanks again for helping.

Paul