Before I ask my question, I just wanted to say that I've been reading the "Is the great Australian dream dead" thread and absoutely love it. I found it very inspiring and motivating, and very funny at times.
Anyhoo, my question is can you have 'equity' in the form of money in an offset account or does the money have to be paid off a loan directly to be considered equity? Does that make sense?
Thanks for the replies!
The following is taken from the ANZ site and explains what equity is
Equity is the difference between what your home is worth and how much you owe on it.
For example, if your home is worth $300,000 and you owe $100,000, you have $200,000 in equity. And over time, as you reduce the amount you owe on your home or the value of your home grows, your equity increases.
It’s that simple.
So cash in an offset account is not equity. It may however help you grow your equity quicker by reducing your interest repayments.
People are interested in their equity because it's now possible to take out loans against this equity. Having money in an offset account is better. You already have the money.
Is there a specific reason for the question?
Yes, there's a reason. After selling my IP and putting the profits into an offset account linked to our PPOR loan, I wonder if I'd be able to buy another (cheap) IP by securing it with the 'equity' in the offset account…..I would want to borrow 100% of the property price plus costs (if possible) to make the IP loan as high as possible…
What are your thoughts on this?
I'm not a MB but pretty sure that the bank will not allow you to use the cash in the offset account as security for a loan.
You would have to put some or all the money into your PPOR loan itself, then borrow whatever you need (using a split loan to keep the deductible interest for the IP seperate) and then take out a mortgage for the rest secured against the new IP.
For example to buy an IP for $100.000 you could borrow $25,000 against your PPOR to cover 20% deposit and buying costs and $80,000 as a mortgage against the new IP.
Have you sat down and worked out if this is the best way to go. I mean to sell an IP in Canberra which is, as you posted somewhere, a good CF+ property ?. I don't know anything about the Canberra market but would imagine that house prices are still appreciating??
I realise that you are trying to reduce your un tax deductible debt as well as reduce your mortgage repayments for the time you are not working but, with the selling costs, CGT, buying costs plus the fact that a CF+ in a good location is now very hard to find will you be ahead?
If you were willing to post the details maybe some of the great number crunchers on the forum would be willing to help.
Just a thought.
ElkaKipper57Member@kipper57Join Date: 2006Post Count: 252
As you seem to be aware structuring the loan is an important matter, and to have maximum effectiveness of the investment property it does need to be of borrowed funds rather than your savings. Why do you not contact one of us online brokers in here most of us have a free service and you will probably find a better deal than you have to boot. Just a thought
As much as I have debated that exact scenario myself (whether to sell my IP or not) I think, in the end, I feel like I don't have much choice at the moment. We are struggling with cash flow and have been borrowing money from my Mum's equity loan (this is where we've been using money for our reovations) just to cover everyday expenses such as food, fuel, etc. We are by no means living large, but we are still struggling. I could try and negotiate going back to work early, but I really don't want to….I think I would really regret it later. Our little girl is already growing up way too fast, I want to spend as much time with her as possible at the moment, she's only 10 weeks old.
With all that said, my IP is already on the market LOL, has been for 1.5 weeks AAAANNND to my greatest delight (and surprise I must say) properties in the suburb where my IP is are HIGHLY sought after at the moment. As a few local REAs have said "they are going like hot cakes!" Within 10 hrs of the first Open House (yesterday) I have already received an offer… $1,000 above my asking price!! I couldn't believe it. AND there are 6 other parties really interested. So yeah, houses are most definately still appreciating in Canberra. I could maybe even get $20,000 or more for it in a few months time but who knows, I could be wrong.
I was only just thinking about getting another IP, at this stage. Something small, like a 1 bedroom unit where I live now. I think the area where I live now is really going to boom in the future. I would need something that pretty must looks after itself, so we are not putting in much money ourselves (or else I'd end up back at square 1 with the cash flow situation) but I want to put the IP sale profits into an offset account so I don't think that this is going to work…hmm might have to have a more in depth chat with a MB.
Thanks for your thoughts!
Well that's good news. Are you going to auction it? It sounds like that may be the way to get the best price.
Good luck with the sale
Nah, not auctioning it….selling privately….my sister has been showing people through, etc and I'm going to give her $5000 or so for her time and effort….probably less than half of what an agent would charge, and the money's staying within the family