All Topics / Help Needed! / Which loan structure?

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  • Profile photo of MrmanMrman
    Member
    @mrman
    Join Date: 2004
    Post Count: 18

    I have been to a mortgage broker to discuss a loan and have organised to get pre aproval for a home loan of $250,000 at 3 years 7.55% fixed rate.

    I was wondering if this is the best option as I hvae read about line of credit and 100% offset loans.
    Am I on the right path with the fixed rate loan or should i consider something else. Could someone list the advantages disadvantages.

    My plan is to buy an investmment property with FHOG (Live in it for 6 months) and then rent out but I would like the option of being able to pay extra without any limits. E.g. Repayments = $385 p/w
    Earnings = $800 p/w

    Can I pay $600 p/w whenever i want without any restrictions or is there a limit on how much extra you can pay?

    In my current situation I'm working 2 jobs and make about $800 p/w. I don't see the point in paying $385 and the rest just sitting in my account. I'm leaning towards offset loan.

    Any suggestion?

    Thanks
    George

    Profile photo of PellowePellowe
    Member
    @pellowe
    Join Date: 2007
    Post Count: 11

    Hi George

    There are three main ways to make use of extra funds to benefit your mortgage. Line of credit, redraw, and offsets.  The line of credit is a fully transactional mortgage whereby your loan is more similar to a credit card with extra zeroes in the credit limit, and anything you pay off the balance can be immediately accessed via any method you imagine: phone, internet, ATM, EFTPOS, or cheque.  The redraw facility on a normal term loan can be very limited with high fees, or can be nearly as flexible as the line of credit.  The offset account is where your savings are physically separated from your debts with a separate account and statement, but directly benefit the debts interest charges.

    If you are considering turning your property into an investment in the foreseeable future, you will want maximum deductions, and any money redrawn/withdrawn from a line of credit or via a redraw facility will only be deductible based on WHY you withdraw it that time.  If you withdraw for your groceries or any other non-investment purpose, you will not be able to claim the interest on that money as it's considered 're-borrowed' for personal use.  The clear choice is an offset account because you can benefit your mortgage without actually paying into it, and thus you won't be reborrowing it if you access it later.  Of course, take tax advice from an accountant familiar with your personal situation and goals, not a forum!

    7.55's a competitive rate, just make sure you also compare FEATURES, not just rates.  The obvious question for you is "Can I make extra repayment without penalty", and, "Can I access payments in advance of the scheduled loan balance?"  Ask your broker to present and compare at least two or three different bank's products, features and rates.  Sometimes it's worth trading features for rate – sometimes you can have your cake and eat it too!

    Many fixed loans aren't very flexible, so consider splitting your account with a small variable portion (to minimise the impact of rate changes) as these are usually more flexible – again familiarise your self with the features and fees of each loan after settlement.  A 0.25% rate rise will only increase a $50,000 variable loan by $2.41 per week.  This way you can go hard on a variable portion while all but ignoring the fixed 'split'.  Of course, if you have a 100% offset account, it should be as flexible and accessible as a regular savings account, except every $1 in balance is saving you interest every day.

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

    Hi George

    I think you mean you will be buying the property as a PPOR rather than an IP and claiming the FHOG and stamp duty concessions.

    As has been pointed do not pay  lump sums into your loan and then redraw it for personal purposes and expect to obtain a interest deduction as the purpose test will not qualify. Also you will be suprised how many clients i have that pay off their PPOR and then decide to rent it out and buy another PPOR and realise that under normal circumstances they are unable to claim the interest as a deduction.

    Flexibility is the key word. If you want to reduce your interest burden but like the option of a fixed rate why not have the best of boths world and take an interest only fixed rate loan with a 100% offset account.

    Many MB's are just not creative in their thinking and lack experience when it comes to loan structuring so maybe get a second opinion. Ask you broker how many properties he owns and then decide if he talks with experience or not.

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
    Email Me

    0-40 Properties in a decade with an unencumbered value of over $35M. Email for a copy of my API article

    Profile photo of MrmanMrman
    Member
    @mrman
    Join Date: 2004
    Post Count: 18

    Thanks guys for your replies. Very informative and pointing me in the right direction.

    Qlds007 wrote:
    I think you mean you will be buying the property as a PPOR rather than an IP and claiming the FHOG and stamp duty concessions.

     
    Yeah thats what I mean Richard. Was a bit confused at the time

    Qlds007 wrote:

    Also you will be suprised how many clients i have that pay off their PPOR and then decide to rent it out and buy another PPOR and realise that under normal circumstances they are unable to claim the interest as a deduction.

    I'm guessing this only applies if you completely pay off the first PPOR?

    I'm also not sure if it would be a better idea to get an Investment Property Loan and save the
    FHOG for later. If purchased as PPOR the interest is not tax deductible until property is converted to IP?

    Cheers
    George

    Profile photo of PellowePellowe
    Member
    @pellowe
    Join Date: 2007
    Post Count: 11
    Mrman wrote:
    I'm guessing this only applies if you completely pay off the first PPOR?

    I'm also not sure if it would be a better idea to get an Investment Property Loan and save the
    FHOG for later. If purchased as PPOR the interest is not tax deductible until property is converted to IP?

    Cheers
    George

    Ah… no.    Anytime you borrow money or redraw money from a loan, the only thing that makes it deductible is if you borrowed it for business or investment purposes (the purpose test).  The nature of the security property is completely irrelevant.

    Also, FHOG rules clearly eliminate you from claiming it if you or your spouse/partner have ever owner any kind of property in Australia. You can't get it even if you've only owned an IP.  It's not the 'First PPR Owner's Grant'  (sadly).

    Your last sentence/question is true: interest on a property is not deductible as a PPR, unless and until you convert it's purpose to investment.

    Happy hunting,

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

    Hate to disagree with a new comer to the forum but you are not correct with this statement

    Also, FHOG rules clearly eliminate you from claiming it if you or your spouse/partner have ever owner any kind of property in Australia. You can't get it even if you've only owned an IP.  It's not the 'First PPR Owner's Grant'  (sadly).

    A person is not eligible if they or their spouse (including de facto spouse) have held a relevant interest in any residential property in Australia prior to 1 July 2000.

    However, a person may be eligible if they or their spouse (including de facto spouse) have held a relevant interest in residential property in Australia on or after 1 July 2000 and they have not resided in that property.

    Where the property was purchased post July 1 2000 solely as an investment property and you hav enot lived in that property you are certainly entitled to claim the relevant State administered First Home Owners Grant. 

    Any State based Stamp Duty concession is a different matter.

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
    Email Me

    0-40 Properties in a decade with an unencumbered value of over $35M. Email for a copy of my API article

    Profile photo of PellowePellowe
    Member
    @pellowe
    Join Date: 2007
    Post Count: 11

    Hmmm. Is that a quote from the guidelines?  I'm certainly open to being wrong, and thankful for the heads up if so. 
    It certainly is news to me though…

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

    Yes it has been the case since July 2000.

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
    Email Me

    0-40 Properties in a decade with an unencumbered value of over $35M. Email for a copy of my API article

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