We have 2 IPs, last one just settled on Friday. Up until now we have been using our LOC, (it is for investment purposes only) which is on our PPOR, to pay for the IO shortfall on IP one. The shortfall was about $10K last financial year. I'm wondering whether to continue using this LOC to pay the shortfall on the new IP as well, or use our income as well? Should I let the LOC draw down to the limit and then refinance using the equity that has grown again in PPOR. This went up by $100K in 12 months, yes $100K due to a sudden boom in our regional town. First IP has also shown growth of $30K in 12 months. If we do refinance, I'm sure we will have to go lo doc or no doc, but with the news of late, are these going to still be available??
I'm also not sure if we have done the right thing as we have used all properties to get the 2nd IP, x-collaterised?? On reading some of the topics in the forums, maybe this was not a good idea. I'm learning all the time, but hopefully not to our detriment.
JennyokkamooieMember@okkamooieJoin Date: 2007Post Count: 39
I would probably continue to have the property shortfall grow in the LOC until you wanted to go for the next IP and then have your current property and your PPOR revalued and increase the LOC at that time. Not much point rocking the boat unless you wanted to do something with it.
DonTerrywParticipant@terrywJoin Date: 2001Post Count: 16,213
So you are paying the shortfall of the repayments less the rental income from the LOC. ie you are borrowing to pay for expenses. Many are not in favour of this, but I believe there have been a few recent private rulings by the ATO accepting this and allowing the interest on interest to be claimed. This is similar to those cashflow loans.
Hi Terry, I understood that this was the way of many investors who are perhaps cash flow restricted, and I'm not sure what you mean by interest on interest?
JennydreamingMember@dreamingJoin Date: 2003Post Count: 42
Have you adjusted your tax with the ATO to reduce your weekly tax bill, might help with cash flow.
That was another issue that we hadn't decided on, whether to do a tax variation to increase the cash flow now, or claim it in one hit at the end of the year and put it back into the LOC for future draw downs. Guess it's six of one, half a dozen of the other whichever way we decide to go. I was looking at what would be the best, to use our own cash or OPMs ie the LOC. I'm still getting used to the idea of seeing the LOC growing bigger, as doing the debt thing after 30+ years of not having any is out of our comfort zone. However our properties are also gaining as well. Just a comfort thing I have to get used to, I guess.elkamMember@elkamJoin Date: 2006Post Count: 722
May I ask what you are doing with your income?. Are you using it to pay down the home loan on your PPOR?
If so, that's good as this is non deductible debt and you can draw the money out later via the LOC for further investing when you want it.
If your home is fully paid off then I don't see any reason not to use your excess income to reduce the LOC.
It's just that you say that you have had no debt for 30+ years so I though that maybe you were just saving your income in a savings account which is not the best place for it.
Just my thoughts
Elkaffc1883_1996Member@ffc1883_1996Join Date: 2007Post Count: 24
In most cases, to "go lo doc or no doc" you will need to have held an ABN (and be GST registered) for a minimum of two years.
Perhaps I'm wrong about this?? My situation is similar to yours so I'd be happy to be corrected by and of the brokers on this forum.
Regards – Ben
I said we've had no debt for 30+ years, should have been 10+ years as we have owned our PPOR for about 10 or so years and not used the extra income on anything other than living expenses. Mind you, our repayments were only about $96 per month back then We are on average incomes, ie $55K combined, enough to get us by for now even if we put a little into the IO loans. We were told about using the LOC for drawdown. I ran my own business for a while, no big deal, but I still have an ABN (not GST registered). I'm just not sure how we will pay for the loans once the LOC runs down if we can't do a no doc or lo doc loan to refinance unless the rents go up enough to cover them. Husband only has 5 years before retirement so we have a plan to increase our portfolio as much as we can before then.
The Capital Growth looks good and if the rents do go up they should become neutral cash flow, however I want to make sure I have a plan B in place…… just in case! or Plan C…. sell…. and we don't want to do that.