All Topics / Finance / Interest only if no debt on principle place of residence

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  • Profile photo of Bob1Bob1
    Participant
    @bob1
    Join Date: 2011
    Post Count: 17

    Hi,

    I'm new to investing & to this site.

    I have 3 questions that I am trying to find answers for please:

    1. TYPE OF LOAN – In my research I have found that it seems IO loans are the best if you owe money on your principle place of residence – but what if you don't – what is the best type of loan?

    2. SAVING FOR THE NEXT IO – I have been told IO is still the best and to leave the mortgage at the maximum, but it seems others feel it is good to pay down the mortgage and then re-draw the deposit for the next IO.  However, is it better to save in an offset account with a LOC on the principle place of residence, then use this as the deposit for the next one?

    3. CROSS COLATERALISING – I have also found that it is recommended not to cross colateralise, but to use the LOC for deposits on IOs with each IO having the loan against the IO property only.

    Does anyone have any recommendations/comments please?

    Thank you.

    J

    Profile photo of CatalystCatalyst
    Participant
    @catalyst
    Join Date: 2008
    Post Count: 1,404

    You can get a LOC on your PPOR and use this as deposits for IP's. Get an 80% loan (or more if you're that way inclined) for the purchase. That way it is stand alone and not crossed with your PPOR. Each IP is stand alone that way.

    Seeing as you have no loan on your PPOR (well you have the LOC but it's tax deductable). If you have extra cash you can pay down the LOC or put extra money in an offset account attached to the IP. Do NOT pay down the loan dsirectly.
    The reason for this is if you redraw the money you have paid down for personal reasons (buy a bigger PPOR/car etc) you lose that deductability. If you sumply pull it out of the offset account though you still get the full tax deductions.

    Profile photo of Bob1Bob1
    Participant
    @bob1
    Join Date: 2011
    Post Count: 17

    Hi Catalyst,

    thank you for that.

    Also, I have read somewhere (so much info. out there) that it is a good idea not to use cash for a deposit, but instead to use a deposit bond, as it costs much less for this than paying the interest on the deposit.

    Is this the case please?

    Thank you.

    J

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    Bob,

    If you have no non deductible debt then it would be ok to use PI loans for property – especially if this is what you feel comfortable with.

    But, by using IO loans you will be paying less per month in repayments which may mean that you could afford more properties.

    Also by paying down a loan you are tying up your cash. This would be available by redraw or reborrowing, but you would have tax issues if you wanted to use the money for personal reasons – such as a new car or an upgrade of the main residence.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 12,024

    Hi Bob

    The question of whether to use a Deposit Bond over Cash all depends on the length of settlement, the return you are getting on your invested funds etc etc etc.

    The reason Deposit Bonds are used are most people dont have cash to front the deposit as they are borrowing 100% +

    Insurance companies are in the business for pricing risk so charge accordingly.
    The premium can still be cheaper than borrowing the funds directly.

    Cheers

    Yours in Finance

    Richard Taylor | Australia's leading private lender

    Profile photo of Mick CMick C
    Participant
    @shape
    Join Date: 2010
    Post Count: 1,099

    1. LOC is not for everyone especially if your going to do one against your PPOR. I prefer to stick with a standard offset split loan + I/O – it’s cheaper, cleaner, better serviceability, better LVR but less flexibility.

    2. Deposit bond i find are only great for purchase with the extra long settlement, Off the plan OR if your money is bound somewhere else and it doesn’t mature until close to settlement in which you need this “time” extension to benefit financially.

    Bob1 – it’s great that your some of your own extensive research, but just be aware what you read are advice/info that are general in nature ( I/O doesn’t always work for everyone)— always seek pro help for your personal circumstance.

    Regards
    Michael

    Mick C | Shape Home Loans
    http://www.shapehomeloans.com.au/
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    Same Banks. Better Rates. Served With a Passion.

    Profile photo of Mick CMick C
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    @shape
    Join Date: 2010
    Post Count: 1,099

    Also side note- Most of Nathan’s purchases are under his personal name.
    Personal choice.

    Terry has already listed the benefits of a trust…and no it does not mean you can borrow more…

    Regards
    Michael

    Mick C | Shape Home Loans
    http://www.shapehomeloans.com.au/
    Email Me | Phone Me

    Same Banks. Better Rates. Served With a Passion.

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213
    Shape wrote:
    Also side note- Most of Nathan's purchases are under his personal name. Personal choice. Terry has already listed the benefits of a trust…and no it does not mean you can borrow more… Regards Michael

    Hi Michael,

    If you are talking about Nathan Birch, then I asked him the question on somersolf forum, and think he replied that the early purchases were in his own name but more recent ones are going into trusts.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of Mick CMick C
    Participant
    @shape
    Join Date: 2010
    Post Count: 1,099

    Yep Mr Birchy

    Mick C | Shape Home Loans
    http://www.shapehomeloans.com.au/
    Email Me | Phone Me

    Same Banks. Better Rates. Served With a Passion.

    Profile photo of Bob1Bob1
    Participant
    @bob1
    Join Date: 2011
    Post Count: 17
    Shape wrote:
    Also side note- Most of Nathan's purchases are under his personal name. Personal choice. Terry has already listed the benefits of a trust…and no it does not mean you can borrow more… Regards Michael

    Thank you everyone for your help.

    Michael, whereabouts can I find this list please?

    Thank you.

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 12,024

    Bob, have a look at one of Terry's other posts he responded to a similar question and answered it excellently.

    Cheers

    Yours in Finance

    Richard Taylor | Australia's leading private lender

    Profile photo of Bob1Bob1
    Participant
    @bob1
    Join Date: 2011
    Post Count: 17

    Thanks Richard.

    Much appreciated.

    Profile photo of Mick CMick C
    Participant
    @shape
    Join Date: 2010
    Post Count: 1,099
    Profile photo of Bob1Bob1
    Participant
    @bob1
    Join Date: 2011
    Post Count: 17

    Thanks for the link.

    In light of this, I was contemplating purchasing first IP in personal name – not joint – for tax purposes as my income is taxable, taking the LOC on PPOR for the deposit, IO on IP with offset account on both LOC & IO.

    Then, for the second and subsequent IPs, putting in joint names as second income will increase in years to come, with deposit from PPOR LOC, IO on second IP as per the first, with an offset account.

    However, reading the info. re. trusts & the importance of the correct structure before starting out – is it better to create a trust and do it that way?

    I have been told by a loan broker that we should just do LOC on PPOR for the purchase of the entire IP – this doesn't line up with what I'm reading here as it will not help us to purchase multiple properties down the track.

    Any thoughts would be much appreciated.

    Thank you.

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    If you have no personal debt, a discretionary trust may work well. Expecially if you intend to pay the loan down. You need to consider this carefully.

    2 Commnets on using the LOC to purchase outright.
    1. If in the unlikely event that you default on the loan, would you prefer the bank take the investment property or your house?
    2. Using a LOC like this would be dangerous and result in you paying more tax.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of Bob1Bob1
    Participant
    @bob1
    Join Date: 2011
    Post Count: 17

    Thanks Terry,

    yes, certainly not the PPOR – his reasoning was that if something happens the bank will come after your money anyway – no matter how the loan is set up –  sounds like the easy option but not good for further investing.

    Thanks.

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    If something happens the bank will come after the security property first. The mortgage allows them to do this.
    If that is not enough to satisfy the debt then they would come after other property, but much later.

    Was the broker also suggesting you place your wage into the LOC each week to reduce the interest?

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of Bob1Bob1
    Participant
    @bob1
    Join Date: 2011
    Post Count: 17

    We didn't get that far, we've only seen him once.

    He suggested LOC with an offset account so that we can reduce the payment amount should my wage drop (I'm contemplating doing part-time study later), and as I am the only wage earner at this point in time, he said getting the LOC on the PPOR would be the easiest way to get the loan.

    However, I don't see it being a problem getting a loan on the IP with 80% LVR as the deposit will come from the loan on the PPOR.

    He suggested using a loan for the deposit as the interest on this is tax deductible.

    Thanks.

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    Sounds like he may have suggested a LOC for the deposit and and another main loan with the offset?

    But, if he suggested you borrow and place money into an offset then this is dangerous. You would likely lose deductibility of the interest.

    If you do use a LOC for the deposit you should never deposit wages etc into this account or you would end up with a loan where none of the interest is deductible.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of Bob1Bob1
    Participant
    @bob1
    Join Date: 2011
    Post Count: 17

    Re. offset account – no, not borrow to place money into the offset, use current savings.

    After my research here I think it would be good to see him again and work through it as I think the LOC for deposits and then separate loans for IPs is a better setup – with offset accounts attached to each do you think?

    Terry – previously you wrote:

    If you have no non deductible debt then it would be ok to use PI loans for property – especially if this is what you feel comfortable with.

    But, by using IO loans you will be paying less per month in repayments which may mean that you could afford more properties.

    Does this mean that it is better to use IO, as the deductible debit will be the loans (LOC on PPOR & IO loan on IP) and the interest payments on the loans for investing in IPs is tax deductible? 

    From what I understand, PI means higher repayments and less tax deductions – so in theory, to wait for the property to increase in CG, then re-draw for the next deposit is the way to go?

    Thanks.

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