Hi All,
Newbie here so be gentle… I'm looking for advice of my current situation and happy to take on professional advice to realise any long term benefits.
Here is my situation. Many years ago my wife and I bought our first IP, we bought it while in our early 20's whilst still living with family. Standard loan which we paid principal and interest. After a year we converted the loan to a LOC. A couple of years later whilst living in company supplied accommodation (we moved around a lot, project to project) we bought another IP and financed it by increasing the LOC. We have the rent going into the LOC and pay all related costs from the LOC. Very simple to manage and its positively geared. Current LVR is approx 45%.
A couple of years ago we finally settled and bought our first PPOR. We had cash for all costs (stamp duty etc) and 10% of principal. Obviously it would have been preferable to get access to the cash in the IP but not the case. We have been hitting the loan on the PPOR pretty hard and allowed the LOC to now max out.
I'm now getting itchy to buy another IP as we have an LVR in our PPOR of 50% and 45% in the LOC. The the question is do I increase the LOC or do things another way. We'll probably find our selves upgrading the PPOR within 5 years and the ultimate goal is to have a reasonable second income from IPs whilst having the PPOR paid off. (Although I have no need to sell the IP's I'm struggling to comprehend the ramifications of CGT whilst they are linked to one loan (LOC). Makes things messy).
Is there any specific advise people have to not be trapped in an unwanted scenario? at the moment its frustrating paying interest in the PPOR knowing its non tax deductible. But of course we're all the wiser in hind sight.
Thanks in advance.
Hi and welcome aboard
I wouldn't increase the LOC – it sounds like the structure is a bit messy at present.
From what I understand, the LOC is covering two IPs and you have a standalone loan against the PPOR?
If that's correct, I'd untangle the two properties in the LOC – so keep everything uncross collaterised and then do an equity release against one of the properties to cover the deposit/costs on the third IP.
You're going to need release equity – so you may as well tidy up the structure at the same time.
Prob best to speak with a decent finance person about setting it up.
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. You are correct, the LOC is covering two IPs and I have a standalone loan against the PPOR.
If I untangle, how does one apportion the loan value of the 2 loans?
Is it a matter of saying when I bought IP2 I had 'x' remaining on IP1, therefore that's the loan for IP1 and what's left goes towards the loan for IP2?
Hi Johnny,
And welcome !! It sounds like you are in good shape, despite a little "untangling" to be done.
I'm sure if you choose to utilise one of the Mortgage Brokers on here, they will be on top of everything. But, should you choose to go another way (via a Bank, or another Broker somewhere), do consider your current situation re your PPOR. Your words suggest you might be retaining it as another IP. If that is to be the case (and even if it isn't…) do look at changing its current mortgage to Interest Only, and set up an Offset account against it. This will do a couple of really nice things :-
1. It will see you paying less and less Interest on your PPOR as the Offset balance grows.
2. Should you then wish to buy another PPOR, you can simply withdraw the monies from the Offset as your Deposit/Costs on the new home, and the existing IO mortgage on the old PPOR is then ripe for a Tax deduction with the mortgage that you set up today (or soon).
Since you have already paid off a chunk of your PPOR, there remains a lot of equity in that place which could then be harvested to buy another IP or two.
You look to be in really good shape to achieve your goal – "the ultimate goal is to have a reasonable second income from IPs whilst having the PPOR paid off."
Benny
Hi Johnny
Not only does the existing loan structure sound messy but also going forward does not sound as though you are maximising your deductible interest.
Whilst there is not enough information to make any real structural suggestion you could also look at doing a Spousal transfer (subject to the location of the properties and the marginal tax rates of both of) especially if you are thinking of upgrading the current PPOR in the future.
Personally i think the loans sound like they need a complete overall as LOC have a place in a portfolio but not when they arre fully drawn.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
johnnyhill wrote:Hi All,Newbie here so be gentle… I'm looking for advice of my current situation and happy to take on professional advice to realise any long term benefits.
Here is my situation. Many years ago my wife and I bought our first IP, we bought it while in our early 20's whilst still living with family. Standard loan which we paid principal and interest. After a year we converted the loan to a LOC. A couple of years later whilst living in company supplied accommodation (we moved around a lot, project to project) we bought another IP and financed it by increasing the LOC. We have the rent going into the LOC and pay all related costs from the LOC. Very simple to manage and its positively geared. Current LVR is approx 45%.
A couple of years ago we finally settled and bought our first PPOR. We had cash for all costs (stamp duty etc) and 10% of principal. Obviously it would have been preferable to get access to the cash in the IP but not the case. We have been hitting the loan on the PPOR pretty hard and allowed the LOC to now max out.
I'm now getting itchy to buy another IP as we have an LVR in our PPOR of 50% and 45% in the LOC. The the question is do I increase the LOC or do things another way. We'll probably find our selves upgrading the PPOR within 5 years and the ultimate goal is to have a reasonable second income from IPs whilst having the PPOR paid off. (Although I have no need to sell the IP's I'm struggling to comprehend the ramifications of CGT whilst they are linked to one loan (LOC). Makes things messy).
Is there any specific advise people have to not be trapped in an unwanted scenario? at the moment its frustrating paying interest in the PPOR knowing its non tax deductible. But of course we're all the wiser in hind sight.
Thanks in advance.
From what you have described probably little to none of the interest on the LOC will be deductible. You would have had money going in and out all over the place. It would be very messy to work out the deductible portion.
Whatever you do I would set up a completely new loan for the deposits – a LOC. But only ever pay the interest on this LOC.
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
Thank you to everyone for your responses.
TerryW – I'm not quite sure how you came to the conclusion that little or none of the interest on a LOC linked to an 2 IPs would not be tax deductible. The LOC is in no way linked to my PPOR loan. Maybe I have incorrectly explained my situation and it has been misunderstood.
johnnyhill wrote:Thank you to everyone for your responses.TerryW – I'm not quite sure how you came to the conclusion that little or none of the interest on a LOC linked to an 2 IPs would not be tax deductible. The LOC is in no way linked to my PPOR loan. Maybe I have incorrectly explained my situation and it has been misunderstood.
Sorry JH, I may be wrong but I assumed you were using the LOC for transactions – money in and out.
How have ever taken money out of the LOC and used it for personal expenses?
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
Terryw – No I don't use the LOC for personal expenses…. Strictly for IP related expenses, council rates, etc.
johnnyhill wrote:Terryw – No I don't use the LOC for personal expenses…. Strictly for IP related expenses, council rates, etc.In that case it is possible that all the interest on the LOC would be deductible – depending on a few things so check with your accountant.
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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