[GlennsaMember@glennsaJoin Date: 2009Post Count: 19]

March 23, 2010 - 11:30 am

YoungInvestor wrote:

The unit has wooden floors so hopefully no pet smell,

I can personally attest to the fact that enough cat/dog pee on floorboards, especially left to sit (like while mum and dad are at work), will soak into the boards.  It's a liquid, wood is porous – even if the floorboards are sealed it's probably not good enough.

Generally fine in winter, but in summer when those rooms bake on a hot day – peeeee-yewwww

[GlennsaMember@glennsaJoin Date: 2009Post Count: 19]

October 12, 2009 - 11:02 pm

oops, double post

[GlennsaMember@glennsaJoin Date: 2009Post Count: 19]

October 12, 2009 - 11:00 pm

Glennsa wrote:

Sitbon09 wrote:

1.  re ;'thus cross collatoralising and avoiding mortgage insurance'.  How does this work?
2.  What is PPOR?

In basic terms, banks will typically loan you up to 80% of the purchase/property value without hitting you up for mortgage insurance (remembering mortgage insurance does NOTHING to protect the borrower). 

In my case I was borrowing 105% of the value of the property, but because I used the equity in my primary place of residence (PPOR) and my overall equity position still had over 30% equity I avoided mortgage insurance. 

However, doing it in this fashion does mean I am cross collatoralised/cross securitised and without getting into a long post, if my investment property tanked in value, and it pulled my overall equity position down below 20%, the bank could choose to hit me up for mortgage insurance ACROSS ALL PROPERTIES. There can also be other fun had in regards to selling property and what values may or may not do to overall equity.

Glennsa

[GlennsaMember@glennsaJoin Date: 2009Post Count: 19]

October 12, 2009 - 10:59 pm

Sitbon09 wrote:

1.  re ;'thus cross collatoralising and avoiding mortgage insurance'.  How does this work?
2.  What is PPOR?

In basic terms, banks will typically loan you up to 80% of the purchase/property value without hitting you up for mortgage insurance (remembering mortgage insurance does NOTHING to protect the borrower). 

In my case I was borrowing 105% of the value of the property, but because I used the equity in my primary place of residence (PPOR) and my overall equity position still had over 30% equity I avoided mortgage insurance. 

However, doing it in this fashion does mean I am cross collatoralised/cross securitised and without getting into a long post, if my investment property tanked in value, and it pulled my overall equity position down below 20%, the bank could choose to hit me up for mortgage insurance ACROSS ALL PROPERTIES. 

Glennsa

[GlennsaMember@glennsaJoin Date: 2009Post Count: 19]

October 12, 2009 - 10:40 pm

Qlds007 wrote:

Certainly you dont need to cross collateralise the securities to be able to borrow 100% + of the purchase price of any new property and it is a strategy we would rarily recommend.

Yup, I have gone against the norm and will look to avoid in the future.  I'll be honest and say this time we were a little lazy with how we have gotten the loans by going to our existing lender (rate isn't the best, but it is far from the worst) and not using a broker (also because we wanted the LOC to capilise the interest instead of being a deposit).  Certainly with the next purchase we will do things differently.

Glennsa

[GlennsaMember@glennsaJoin Date: 2009Post Count: 19]

October 12, 2009 - 9:56 pm

G'day Paul,

PaulTextor wrote:

Do you mean that you will be paying aprox. $100K in extra repayments in the next 12 months, i.e., around $2K per week?

Yes, our minimum $400 a week repayment + $650 a week rent from the IP + additional payments of another $825 a week totalling $1850 a week will pay out our PPOR mortgage by the end of next year.  Ahh I just tallied it up ($96k) and see where the confusion may be stemming from, we also have a tidy sum in our savings account which is offset against mortgage which is what will also allow us to payout at the end of next year.

We are in a position of two full time incomes, no kids and no other debts or major expenses.  With some sacrifices for the next 12 months (and the knowledge of a full redraw if things go wrong) we will be able to smash the loan.

Some may say instead of slaughtering our own mortgage with that kind of extra money we could afford another four or five IPs now.  Sure, that is an option, but this is our first forray into IPs so we want to ease ourselves in, so to speak, and also with the window of paying out our own mortgage so very very close it would be nice to be "bad debt" free from that perspective.

Quote:

And is there an existing lease paying $650 per week, or is this just what you hope to get based on research etc?
sorry, i'm just trying to get my head around the numbers.

The apartment is currently tenated at $650 a week which is the second tenant at at that amount.  There is another in the same building which is also tenated for the same – a different managing agent looks after it and I have had a long chat with them.  Does that mean we are garraunteed that sort of return, no, but the historical data is promising.  No need to be sorry, I've had lots of questions of the last months that have been freely answered.

Glennsa

[GlennsaMember@glennsaJoin Date: 2009Post Count: 19]

October 12, 2009 - 5:47 am

Hi James,

None of your three options mention staying in the townhouse and using the equity to fund a purchase/s, or do you not want to live in it anymore?

Our IP purchase that is underway at the moment has involved taking out loans to 105% of the purchase price using our current equity as collatoral (thus cross collatoralising and avoiding mortgage insurance) but we are essentialy buying an apartment with no savings down.

Our mortgage should go bye bye end of next year, if everything goes to plan, and we will be using the further unlocked equity to fund purchases of more IPs.

However your last line about being unemployed could be a sticking point on the accessing equity front as the banks will initially look at your ability to service a loan if un-tenanted…

Glennsa

p.s. Congrats on paying out your mortgage too btw!!!

[GlennsaMember@glennsaJoin Date: 2009Post Count: 19]

October 11, 2009 - 10:29 pm

Quote:

On the tax issue, I guess it doesn't hurt to ask for a private ruling, but if you were a betting person, you would imagine the answer would be 'no way'. Best of luck though. Let us know how you get on if you decide to get a private ruling.

On Thursday we saw an accountant who specialises in property investment and I asked about the private ruling question.  She said it was an option, although hinted that it may be better to ask forgivness than beg permission. 

She did this in the light of how we have structured the loans as all being split up – so seperate PPOR loan, LOC loan and IP loan.  Apparently the two major factors in the Harts decision was the loans were all in the one bucket and it was marketed by the lenders as a way to reduce tax.

Does it mean I'm 100% safe, not totally – but I am satisfied through my research and advice received that we should be OK

Glennsa

[GlennsaMember@glennsaJoin Date: 2009Post Count: 19]

October 11, 2009 - 10:15 pm

The General wrote:

I'm sorry. I read the whole post including Terrys links. What am I missing. How can the loan repayments drop from $400p/wk to $52p/wk when the same loan amount still exists and the interest rate is roughly the same? And how can one pay off $140k with a $650p/wk rental and a $100k line of credit? (One must remember that I am sure that there are other expenses that need to be covered (whether personal or investment)

Hi Nathan,

The important part to note is in one of the dot points from my first post:

* $500k PPOR with $140k owing with $400per week minimum payment (we're paying considerably more currently)

So before we get this IP squared away we are already making a lot higher repayments than the minimum $400 a week.

That $400 a week is based on a loan that started at $230k principle and interest.  Regardless of how much we pay off the loan unless there is a dramatic shift in interest rates or we refinance at a lower $ amount, the repayments will still be around $400 a week.

If I capitalise the interest of the IP into the LOC (and other expenses) for the first 12 months the LOC will grow to around $45k.  By capitalising the interest I put 100% of the rent onto my PPOR mortgage  which with our extra repayments already should bring out PPOR mortgage to a payout date of this time(ish) next year) instead of late 2011 to mid 2012.

The PPOR loan is principle and interest based on $230k @ $400 a week (minimum)
The LOC is an interest only loan and at $45k will mean repayments of $50 a week

With the LOC while being 100K another important thing to remember is we only pay the interest on what the current balance of the LOC is.

To possibly pre-empt another question, how do we pay out the LOC?

We probably don't, there are a couple of strategies that could be employed but the one will most likely consider is once there is enough capital growth in the apartment we will restructure that loan to absorb the LOC. 

This current methodology is with the sole goal of paying out our PPOR in as short a time as possible.  Future IP purchases will mostly be done using a LOC to supply the deposit and expenses to allow us to finance the IP without cross collateralising.

I hope that explained it p.s. seeing the conveyancers on Wednesday with 10% deposit in hand to exchange contracts, things are really starting to move now.Glennsa

[GlennsaMember@glennsaJoin Date: 2009Post Count: 19]

September 28, 2009 - 8:25 am

Thanks Terry & Richard, I really appreciate the time you have given me.

mxd, when I first heard of how this is supposed to work I thought it was risky as hell, primarily because I didn't know then what I know now.  That's why I have been asking the questions and doing as much research as I can.  In my more educated (although not professional) opinion, I feel a lot more comfortable moving forward with this.  Sure we could wait another two years, but that may well mean lost oppurtunity in regards to property we could invest in given the equity.

Glennsa.

[GlennsaMember@glennsaJoin Date: 2009Post Count: 19]

September 28, 2009 - 3:49 am

Thanks for the information, Terryw.  The legalese is starting to do my head in, but I think I understand the "issue" is that when they were capitalising their interest, they were claiming a deduction on not only the interest from the IP loan, but the interest on the interest in regards to the Line of Credit – so a double dip as it were.  Also implications that by paying off your PPOR and rasiing a LOC to the same amount you could be seen as trying to transfer your non-tax deductable debt to a tax deductable position.

Am I at least half getting it? 

Glennsa

[GlennsaMember@glennsaJoin Date: 2009Post Count: 19]

September 27, 2009 - 11:37 am

Thanks for the link, Terryw.  While I appreciate it is a private ruling it is still further information that it is a valid strategy. 

I would be interested in a basic explanation of why it could/would be seen as a tax avoidance scheme – or is it because you're paying down your own mortgage some people wouldn't then claim the rent as "income"…?

Sophieh, I can hardly take credit for the idea, but it does seem creative. To modify your detail slightly:

at the end of the 12 months essentially you will have turned a $230k principle and interest mortgage with $140k balance into a $50k interest only line of credit, is that right?
 
So in our case, yes.  I think it would work well for people like us whose mortgage end date through additional repayments is reasonably close already (say less than three years).  By working a little out of the square instead of just being mortgage free on the PPOR – which in itself IS a good thing – we could be mortgage free on the PPOR and have an IP well underway in the same time, if not sooner.

[GlennsaMember@glennsaJoin Date: 2009Post Count: 19]

September 25, 2009 - 3:08 am

Thanks for the reply, Richard.  It was your posts I was referring to re the LOC for the 20% deposit.

For this first one we are looking to be mortgage free on our PPOR in 12 months and certainly for future IPs your advice is something we will look at very very serisouly.

For what it is worth, have fired just now fired off what will hopefully be a final offer on an apartment we have been eying off.  Wish us luck!

[GlennsaMember@glennsaJoin Date: 2009Post Count: 19]

September 24, 2009 - 10:03 pm

As an update my bank finally got back to me.  I was asking a question about interest only property loans and whether we could make additional payments if we wanted to.  The answer was as long as on a variable rate (not a fixed contract) then no problem, just nominate the account you want the interest to be deducted from as a minimum and make any additoinal payments when you choose.  That allowed me to segue nicely into asking if a Line of Credit could be the nominated account to which the answer was "Yes, a lot of people do that.  As long as you don't exceed your approved LOC limit that will be fine."

So getting good confirmations on it now which is allowing our minds to rest a little easier.  We're meeting with the accountant in two weeks so we will definitly ask the tax deductability questions.

Glennsa

[GlennsaMember@glennsaJoin Date: 2009Post Count: 19]

September 22, 2009 - 10:38 pm

Who pays for it when it is blown up?

Glennsa

[GlennsaMember@glennsaJoin Date: 2009Post Count: 19]

September 22, 2009 - 2:00 am

Thanks for the reply, Terryw.

Certainly not looking at it from a tax avoidance perspective, solely from a paying down my PPOR as fast as possible perspective.  I'll have a look through your previous posts as I am wanting to get as much information about this as I can.  Thanks again.

p.s. for the record we will have everything going through an accountant (recomended by a couple of property investors I know personally) who specialises in property investments.

Glennsa

[GlennsaMember@glennsaJoin Date: 2009Post Count: 19]

September 22, 2009 - 1:13 am

Thanks for the replies, Proasset and Matt.

In theory it all looks to be gold – an IP at zero out of pocket costs for the first 12 months with a more than serviceable debt at the end which can also be refinanced into the IP as its capital grows over the next few years (making some assumptions about growth of course).

Mentally my sticking point is using the LOC to pay the interest of the IP loan sounds like using one credit card to pay off another, and because I haven't bought an investment property yet – or used a LOC or an overdraft – it seems suprisig a bank would allow it to be used that way.

But I take on board what you both have said breaking it down to its most simplest terms – if the bank has approved it, and you can service it, what is to stop you drawing it out and p!ssing it away in a night at the casino.  Same same.

Glennsa