HI all – I’m new to this site, recommended by a friend who has found the interaction very helpful.
I own an investment property in Melbourne – current loan ~187k, market value ~300k. I am looking to buy another property to live in valued at approximately 650k, say 690 including stamp duty. If I combined the loans, this would total 690k+187k = 877k. I have currently ~50k cash deposit, brining debt down to 825k, and within 6 months will have ~100k (from sale of family house that I part own) to pay off in lump sum bringing debt down to 725k. I am able to get the loan and service it (tight but comfortable), but not sure it is the right thing to do. A 725k loan is quite large, and when I tried to calculate weekly interest payments turned out around $480 – a lot of interest on the life of the loan.
On the other hand, if I rented for around $480/week, and had renters in my investment property, and just paid off my investment property (including dumping 100k off the loan) – realistic to pay off within 12months. I would then have ~300k, so for a 690k property would loan ~390k, much lower than the 725k, but obviously would only own one property now.
Third option is to move into my investment property, not the dream location, but could be liveable for short term to pay off quickly. Would want to be out within 12months which would be realistic. Remembering I would still have 100k lump sum to pay off this property leaving 85k, which could be done quickly. And obviously not paying the other rent would help pay off quicker.
I’m not sure if I have given enough detail or whether this makes sense, but would appreciate some advice. Basically, it appears that I would be paying the same amount of interest per week on a loan that I would pay in rent. So factor in the principle repayments and obviously I’m better off cash wise renting, but not sure about the median / long run.
Appreciate any advice :)
MelbPropertyOwner
Hi MelbPropertyOwner
Firstly welcome to the forum and i hope you enjoy your time with us.
It only seems like a fairly big loan as the majority of the loan is non deductible. Had the loan been for investment and the interest tax deductible then subject to your income level it wouldn’t appear that large.
Ok so let us see if there is anyway of transferring some of that non deductible debt. Do you own the property in your sole name or jointly with a partner / wife etc?
Whilst you are coming back to us on that let us cover some basic investing principals.
You do not want to be cross collateralising the 2 securities and you definitely do not want to be paying down the investment loan whilst you have a PPOR loan as it doesn’t make financial sense.
What i would looking to do if you were a client of mine would be to restructure your current investment loan to interest only and be looking to take out an equity loan secured against the investment property solely.
Then with a separate lender you look to take out the PPOR loan using a combination of your cash savings and net equity loan proceeds. The requirements for each loan are different and therefore we would look for a lender to cater for each of these situations.
Definitely do not pay your 100K off your IP loan without getting some professional advice.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Wow what a speedy reply, thanks for your interest. The investment property is solely in my name but new property would be mine and partners.
Re keeping the loans separate; wasn’t sure this was option. When approached bank for pre-approval to see how much could borrow they described as testing my borrowing power which would cover both loans and that they would take over both loans. Maybe I missed something!
And yes totally understand not paying off IP. Pay off what I live in… that is unless I rent right? If I rent do I put my 100k on IP or in savings?
Thanks again.
Hi and welcome aboard :-)
My first comment is to structure your loans correctly – taking out the one large loan will be a nightmare for taxation purposes (some of the loan is deductible whilst some isn’t).
The bank will also try to cross collaterise your properties too – this is a big no no. That’s where they take both properties as security for one another.
Instead, you can tap into equity against your current IP to fund the deposit/costs on your new PPOR. This would need to be set up as a separate loan (so you can identify tax deductible debt – which is your current loan, from non-deductible debt – which is the equity release) – this also avoids cross coll.
You would then set up a third loan to cover the remaining balance against the new PPOR.
How much equity you release in your current IP comes down to a few factors – these include whether you paid LMI previously and the costs of LMI on the next property. A good broker/banker will able to run the numbers and work out the most cost effective option for you.
If the current IP loan isn’t already set up as interest only, it would be worthwhile sorting that out now. The reason is that there’s no need to pay down deductible debt (IP loan) when you have non-deductible debt (new PPOR).
In fact, if your disciplined with money, I’d be inclined to set up everything as IO with an offset linked to your PPOR loan. I wrote an article about the structure for API magazine, it’s available here
Any other questions – ask away :-)
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]
MelPO
You bet your Bank didn’t give you that option as it is not in their interest to do so.
There are so many variable it is hard to give you and real structured advice without some actual numbers.
Bottom line with any structure is to have flexibility to allow you to move forward.
It is something i am dedicating a whole chapter too in my new book.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Thanks – all the advice certainly puts me in a better position when I go talk to the bank. I think best thing is to out any decisions on hold until I figure out best approach and set everything up properly!
If I can ask one last question it would be very helpful….
Is offset account the same as redraw in terms of If I go interest only loan but continue to pay extra into redraw, it is same as offset? I ask as my current bank has no offset and to date I’ve been using redraw acct in this fashion.
Thanks in advance!
Is offset account the same as redraw in terms of If I go interest only loan but continue to pay extra into redraw, it is same as offset? I ask as my current bank has no offset and to date I’ve been using redraw acct in this fashion.
They’re VERY different.
Redraw is classed as “new borrowings” and if you’ve redrawn funds for personal use, you may have contaminated your loan and might not be able to claim any interest.
An offset is a transaction account – and moving money in/out doesn’t have the same taxation implications.
Sounds like you need to move onto another lender (and I hope your current bank didn’t tell you that redraw was the same as an offset).
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]
Shame – I’m pretty sure my bank told me offset and redraw same, only difference I was told about was that offset is like you everyday account ie get your pay paid into it, whereas redraw you deliberately t/f $ into it. I had no idea about implications of moving money about – unfortunately I have been doing this. Maybe I misunderstood.
I’m with a credit union currently but rates are not that low to justify staying if all this is an issue.
Thanks for your advice.
Nothing surprises me these days when it comes to information provided to clients by lenders.
Redraw and offset are definitely not the same thing and vastly different Tax consequences.
The credit unions have a place but they are certainly not price competitive and from the sound of it you could do a lot better.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Hi MelPO,
….and welcome aboard. Already you have had some great answers from some VERY experienced investors/advisers.Since you specifically mentioned one of the first really important questions (“Do I buy, or do I rent?”), I wanted to point you to this thread :-
https://www.propertyinvesting.com/topic/4410491-the-big-picture-for-new-readers-especially/
It is a source I am compiling to lump together some of the vast wisdom of this place, tailored especially for newer investors. I plan to add to it as I find more useful information. I hope it is of some help to you,
Benny
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