Hi All,
Just after some advice.
We are currently paying off a house in Victoria, it was our PPOR but we are currently renting in QLD, So we are renting this property out for $260 per week.It's valued at around 280k and we owe 90k on the mortgage which to rental income is paying off as well as our addition payments. It will be paid off in 6 years at this rate.Anyway we now want to buy an IP but we want to live in it so I guess it will be our new PPOR.Do we just borrow off the equity to finance the new property? We probably have enough in cash for the deposit.Also would we get an IO loan or pay P&I on it? which we could afford to do, as well as the P&I on the first property?I assume setting up an offset account for the new mortgage would be a good move?Any help would be really appreciatedRegards,Tommy.I would start by paying the minimum off your investment property. Change the loan to IO and get a 100% offset. This way you are saving interest while maintaining a high balance for tax deductions. Everytime you you pay down the loan you are paying more tax – and will have less money for the new PPOR which will mean more interest (which cannot be deducted).
When you change the loan to IO, set up another loan – this can be used for 20% deposit and funds for the new one. I would still get an IO loan for this one too and a 100% offset account. When you live in it keep all spare cash in this account to save non-deductible interest. With an IO loan you can always pay extra if and when you want to.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
I am with Terry you probably have not had the loan structured correctly in the first place so need to take steps quickly to avoid further issues.
Establish a separate line of credit on the current IP and use this to fund the deposit and acquisition costs for the next property.
I am assuming you will qualify for the FHOG so maximise your borrowings and deposit these funds into an offset account together with your salaries and rents.
Keep the loans separate.
Richard Taylor | Australia's leading private lender
Thank you both for your comments,
Unfortunately no I do not qualify for the FHOG as the first property is in my wifes name. (Unless I could get around this
Can someone explain the benifits of using an IO loan? I realise you are paying more tax when you pay the loan down but atleast you are getting somewhere with the property as far as gaining equity when paying P&IOr is the idea to save as much cash as you can for your next IP?
Cheers
I/O loans work on the theory that property markets always rise causing your equity to increase – many have now learned that this is not the case. Basically you pay interest for the term of the loan and the amount that you 'save' by not paying back principle can be used for other purposes.
These loans work well in rising markets but can leave you with a shortfall if the market corrects and you need to borrow more to fund other investments.
why pay a loan down at all when you can save the same interest by using the offset account. One you deposit into a loan you cannot withdraw without tax consequences.
eg. You have a $200,000 investment loan and pay it down to $100,000.
You then buy a new home – you will have $100,000 less cash available. So your new loan will be $100,000 larger.
In the mean time you will be paying tax on your rent while paying around $5,000 extra interest on your new PPOR loan – which won't be deductible – so maybe $2,000 pa in extra tax + the tax on the rent.Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Thanks, I Can see the benifits of using an offset account linked with an IO loan on both properties. Is this possible with fixed aswell as variable interest rate?
It would be alright now @ 5-6%, but what about when they come up again?
If I was to keep the IP for say 10 years, would you ever look at paying the principle off?Hi
as i understand it you can use an offset account with fixed interest rate loans as well as variable. i would have the offset account set up against the loan for your new PPOR so that the largest benefit is in reducing the interest on this loan, as said previously any interest on this loan is not tax deductible. Also i assume this will be the larger of the two loans so it makes sense to reduce this as much as possible. also if you are a disciplined person, use a credit card to pay for everything then pay this off in full once a month, you can set up your banking to do this automatically. this means that the maximum amount of money stays in your offset account. if however, you are not a disciplined saver/spender then this is not such a good option.
cheers
sonya
one other thing, arrange to have the rent from the melbourne property paid into your offset account and only pay the minimum amount of repayment onto that loan when it becomes due.
sonya
So you agree to make both loans IO and have an off set account for the new mortgage? And pay the minimum on the Melbourne Property? (Making this an IO loan aswell… )
Sorry, I just wanted to Clarify.i understand it you can use an offset account with fixed interest rate loans as well as variable.
I am only aware of 3 lenders where this is possible and 2 of those do not actually offer a 100% offset account it is actually an offset redraw account. Big Difference.
There are a couple of other options but loan planning and structuring is not something to be taken lightly.
Richard Taylor | Australia's leading private lender
Richard,
what is the difference b/w "offset redraw account" and "offset account"GOM
An offset acccount is a totally separate standalone transaction account whearas a offset redraw account is part of the loan account where funds sit in the loan and can be redrawn at any time.
In essence they sound the same but for tax deductability purposes theyare very much different.
Richard Taylor | Australia's leading private lender
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