Hi everyone,
I'm still in my early days of investing but am keen to keep building my investment portfolio. Currently I have 2 properties:
1. Recently valued at $207,000 and owing $182,000 on a P&I loan with rental income currently $10660 a year.
2. Recently valued at $82,000 and owing $86,000 on an interest only loan for 5 years then converts to P&I as well, with a rental income currently $5720.
Both are on a variable interest rate currently 7.65% and there is no penalty for me to pay off as much as I like on either loan. Both properties are currently tenanted so I am able to use negative gearing. I want to build up some equity now so I can use as a deposit on my next IP when I am ready. My question is which loan should I be putting all my spare money into whilst paying the minimun on the other?
Hoping someone can point me in the right direction, thanks for your help.
Dan.
You may like to investigate at your bank if you can get an offset account linked to the higher loan. You will reduce your loan balance if you get the right offset account and you can access the spare cash at any time when needed.
The higher loan is costing you interest as you only get some of it back as a tax rebate. Also the loan to value ratio is 88% so a line of credit type loan allows an LVR of 80% max .Thanks for that duckster.
I forgot to mention that my bank is also holding a block of land which I own out right as security which is valued at $50,000. If you throw this into the calculation my LVR would become about 79% so maybe I could just squeeze in for a line of credit loan. I will have to investigate this further as you said.
However the loans that I currently have do allow me to withdraw any excess funds I deposited free of charge, which I could use as a deposit for my next IP. Is this similar to having a LOC loan?
ps. I gather from your post that if I wasn't to change anything yet I should be concentrating on paying the higher loan off? This was my thought as well..
Hi Dan,
There are few things you should do:
1. Change the loan on Property #1 from P&I to IO.
2. Remove the cross-collateralisation on your propert & block of land.Given the loan amount on property #2 is higher than the market value, it might be a good idea to start parking your spare cash in it.
Hi Dan,
I agree with "PropertyPower"
Good advice.
Don't pay off either.
Change all loans to IO.
Save money for your next investment in a high interest account in a lower tax paying spouse. Not much point in an offset attached to an IP but you can do it if you prefer.
I imagine you might want a PPOR soon. If so you shouldn't pay down either IP cos if you redraw for a PPOR then it wont be deductible. So use a seperate account either a high rate one or an offset. But pay nothing above the interest on your IPs if you plan on buying a PPOR.
Thanks for the help guys, really appreciate it. I will definately be looking closely at changing the loan to be IO.
Simon you are right, my next purchase could be a PPOP, so in that case won't pay down the IPs. However if I was certain that my next purchase was going to be another IP or possibly some shares, would it be in my benefit to reduce the principal on one of the loans to later use as a deposit instead of putting into the savings account?
Thanks again.
Dan.
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