All Topics / Help Needed! / Should I refinance?

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  • Profile photo of simbacatsimbacat
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    @simbacat
    Join Date: 2007
    Post Count: 5

    Hello,

    I am hoping someone might be able to help me with some general advice…

    I bought a one bedroom apartment to live in approximately 2 1/2 years ago. When I purchased, it was with the view to live there for a while (not as an investment). I lived in this for the first 18 months, and moved out when I got married (we are now renting a larger place). I have had a tenant in there for the past 12 months.

    During the time I was living there, I made several additional repayments on the mortgage, in addition to the large deposit I had saved. I have a variable interest rate mortgage.

    Since I have had it as an investment property, I have not changed or refinanced the mortgage. I am just meeting minimum repayments.

    My question is, should I consider refinancing or changing to a fixed rate loan, now that it is an investment property?

    Also, my husband and I are looking at buying our own place early next year, and we would like to hold on to the apartment as well.

    Obviously, this is all very new to me, but I am trying to learn as much as I can now so I don't look back and think I have made a big mistake!  Thank you in advance for any advice you can give me…

    Profile photo of propertypowerpropertypower
    Member
    @propertypower
    Join Date: 2006
    Post Count: 312

    Hi simbacat,
    First of all, welcome to the forum.
    You should look at converting to interest only loan. This will reduce your minimum monthly payments but does not stop you from making additional payments.
    With regards to refinancing, without knowing the property value and loan amount it is hard to provide any suggestions.

    Profile photo of bardonbardon
    Participant
    @bardon
    Join Date: 2004
    Post Count: 557

    Hey simbaact consider transferring into a trust and getting maximum loan 106% if you can and the interest will be tax deductible and you can use spare cash towards new house to live in.  Depending on state you may have to pay stamp duty on transfer but it can still be worth it in the long term.

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

    I agree with Bardon and selling the property into Trust is certainly worth exploring.

    It is difficult to make coment without the actual numbers involved but could certainly give you a leg up when it coes to buying your own property.

    I am not of any State where you do not have to pay Stamp Duty as it is considered to be a sale but do the exercise on aper is certainly worthwhile.

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
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    Profile photo of Mortgage HunterMortgage Hunter
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    @mortgage-hunter
    Join Date: 2003
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    You don't need to refinance just because you are now renting your IP.

    Selling into a trust does work but it adds a layer of complexity that you may not want.  The same can often be achieved by selling to a spouse or selling a half share to a spouse.

    I suspect you might be best sitting down with a broker and discuss your options – but be careful whom you choose.  He will only make a fee if you do refinance so choose someone you believe has your best interests at heart.

    Cheers,

    Profile photo of simbacatsimbacat
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    @simbacat
    Join Date: 2007
    Post Count: 5

    Thank you all so much for your feedback so far.

    Propertypower & qlds007…… I bought the unit for $289,000 in 2005. The mortgage was for $217,000, and is now down to $189,000. It is currently rented out for $320 per week, and from recent sales in the block would estimate that it might sell for $320 – $330,000 at the moment.   I hope this helps…. Thanks again

    Profile photo of Mortgage HunterMortgage Hunter
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    @mortgage-hunter
    Join Date: 2003
    Post Count: 3,781

    I would consider "selling" the property to your husband.   Sell it for the full valuation price and he should borrow enough to pay you the full amount plus all of the expenses associated with the transfer.

    He will now have a fully deductible loan for the whole amount.

    You will have $140 000 that you can use for the new home.

    I would prefer to see you use a 20% deposit only and put the spare cash into an offset account.  Make the new loan IO and save your repayments in the offset.

    Then should this happen again (where you move and rent out the property) you cab "redraw" your equity from the offset and have the full loan left which is deductible.  Hopefully you have saved enough in the offset account for a deposit on your new home.

    This is a more tax efficient setup than your current one.

    other people have suggested using a trust to achieve the same result.  A trust is an artificial "person" that is created to do what I proposed your husband do – buy the unit from you.  It does work well and has advantages but it also introduces more costs and a layer of complexity.  You should get professional advice before taking that path.

    Hope this helps.  Please post any questions direct here so that all of us can keep learning by following this great thread!

    Cheers,

    Profile photo of simbacatsimbacat
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    @simbacat
    Join Date: 2007
    Post Count: 5

    Thanks Mortgage hunter… I am not sure if I am missing something though. What is the benefit of "selling" the unit to my husband, over getting a new mortgage in my name for $330,000 to free up the $140,000 to put in to our new place. Is that possible?

    Thank you

    Profile photo of Mortgage HunterMortgage Hunter
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    @mortgage-hunter
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    That means he now has a fully tax deductible debt of $330K (the new mortgageis in his name).

    You now have a lump sum for the new PPOR.

    If you didn't change anything you would have to borrow much more for the new home and none of this debt will be tax deductible.

    Is that clearer?

    Profile photo of simbacatsimbacat
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    @simbacat
    Join Date: 2007
    Post Count: 5
    Thank you again for taking the time to help me through this!

    I understand the part about using the $140k for the new property we are planning to live in, and I understand about the fully tax deductible debt of $330k for the IP.

    The part that I think I am missing is why the unit would have to be "sold" to my husband to do this. I guess I just thought that I could get a new mortgage in my name for $330k, pay off the existing mortgage and take the $140k for the new property. (I am not against having it in his name in any way, I just want it set up the best way for us).   
    Profile photo of kum yin laukum yin lau
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    @kum-yin-lau
    Join Date: 2006
    Post Count: 342

    Hi, I think what it means is that if there's no change of ownership & you refinance to buy a house to live in, the additional money you get $140000, is NOT TAX DEDUCTIBLE because the reason for the refinance is to purchase PPOR.

    On the other hand, if you 'sell' the IP to your husband, then the entire proceeds of the transfer of ownership becomes totally tax deductible as your husband would be deemed to have borrowed the entire amount to fund the IP.

    This works out to about $3000 pa assuming around 8% interest & 30% tax. That's on an additional $140000 loan. You will need > 100% funding to get $140000 extra.

    For a small amount of savings, the effort & paperwork doesn't seem very worthwhile, ditto the idea about the trust. The costs of adminstering the trust is probably higher than any returns.

    Why not simply put the IP loan on interest only repayment? Then use ALL available monies to pay down the new PPOR loan. Based on the numbers you provided, that appears to me the simplest method.

    No one can tell you what to do so I'll take care to add that I'm giving advice, just explaining what I think the situation means.

    Good luck,
    KY

    Profile photo of kum yin laukum yin lau
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    @kum-yin-lau
    Join Date: 2006
    Post Count: 342

    OOps, that should read "I'm not giving advice"
    KY

    Profile photo of diclemdiclem
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    @diclem
    Join Date: 2003
    Post Count: 537

    Hi Simbacat,

    KY is correct in this first part of his post. If you simply refinance to the full loan possible, the extra money above the 189k current mortgage would be seen as used to fund your new residence. Not used for the purpose of purchasing your investment unit and therefore not tax deductable.
    By selling to your husband, he can take a loan for the maximum that he is allowed (at least 80% of the value) and all of his new loan would be tax deductable (to him).
    The bonus here is that the money that is the difference between the current 189K loan and your husbands new loan is yours to use towards your new property.

    Now i'm not sure if there is stamp duty payable when selling to a spouse, I think not, anyone?
    Also there may be a small capital gains tax bill, anyone?

    Profile photo of simbacatsimbacat
    Member
    @simbacat
    Join Date: 2007
    Post Count: 5

    Aaaah, a penny just dropped!
    I didn't realise that the $140k portion of the new mortgage for IP would not be tax deductible if it is then used towards PPOR. It is all getting a bit clearer for me now.

    Profile photo of DraconisVDraconisV
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    @draconisv
    Join Date: 2006
    Post Count: 319
    simbacat wrote:
    Aaaah, a penny just dropped!
    I didn't realise that the $140k portion of the new mortgage for IP would not be tax deductible if it is then used towards PPOR. It is all getting a bit clearer for me now.

    Thats if you refinance(and get 140K) and the proceeds go to paying off the PPOR.
    With refinancing the purpose of the funds is the factor that decides whether it is tax-deductable or not, they have to be used in investments for it to be tax-deductable.

    But if you sell your property to your spouse, then you just get the money, like any person gets when they sell their house, you could buy a car, go on a holiday, pay off your PPOR, do whatever, the tax-deductable debt is now going to be the $330K debt to your husband.

    This selling is to allow you to pay of your PPOR, its just to help you in tax effective means, though I have no idea if the numbers stack up well, i would be interested of the outcome.

    Regards,
    Chris.

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