Hi All
If anyone had the time to give me a little bit of advice – it would be greatly appreciated!
My de-facto & I currently have 2 properties – Our PPOR & 1 IP. (I'm getting the hang of these acronyms!)
Our PPOR is valued at approx. $800 000, with $365 000 still owing on it. (Variable Home Loan – paying a fair bit more than minimum required…)
Our IP is valued at approx. $650 000, with $465 000 still owing on it. (Fixed at 7.64% until Oct 2010
– plus we set it up paying Principal & Interest… apparently not a good idea from what I have read recently…)
Our IP is rented out for $700 p/w.Our combined income before tax is approx. $180 000.
I feel that we are in a good position to make the most of our current situation, but can't work out the best strategy to improve on what we have at the moment.I would like to start to build a portfolio of IP's – should we be looking at getting a LOC to start with? What kinds of features should I be looking for in a LOC product? Is there anything to be careful of? What else could we be doing better?
Any advice that anyone has for me would be wonderful!
Thanks in advance…
The PPOR with variable rate is fine provided you keep to the objective of paying this off ASAP.
The IP with fixed rate and principal and interest – OUCH OUCH!! I would try and change this to interest only as long as your bank dont penalise you hard, they shouldnt anyway. I guess there is nothing you can do with the fixed rate except ride it out till Oct 2010 and you will have another decision to make then.
You also need to ensure the IP will negative gear your combined income to bring it down below $150k if you are not already doing so. You are paying a very high tax rate for the $30k above $150k highest threshold. I think the strategy is 2 fold:
1. Pay off PPOR by parking all excess cash in an offset account to minimise interest. The principle portion will be a lot more which is what you want to accelerate the payoff.
2. Allocate funds towards another property. As long as both your jobs are secure and you are able to get financing, I would advise buying another IP – brand new (max out the huge depreciation as well against your $180k income), interest ONLY loan so that repayments are kept to minimum, and location in a high up-side suburb to max out capital growth potential.
Alternative is to rent out PPOR if you can change the loan to interest only and only if it is newish and have good tax benefits and cashflow positive since you only have $350k to go. Otherwise stay where you are and consider 1 & 2.
Hope this helps!
Hi ClarieBear, Welcome to the forum. You certainly have a fair bit of equity built up with your two props, certainly enough to fund the 25% required for another IP or two (or more). LOCs don't really have features, they just have an interest rate as low as you can get it! Debt servicing ratio may be your limiting factor.
You could switch your IP to IO, but you won't save a huge amount (by paying principal off your home loan instead) while it's fixed at 7.64. Assuming you're both in the 39.5% tax bracket, then your effective interest rate is 0.605 x 7.64 % after tax, ie 4.6222%, only slightly less than you'd be paying with your variable at the moment, which I assume would be in the low 5's. That's the same after tax because it's private debt of course.
This may change in the near future when your variable rate increases a bit more.
Certainly when your fixed loan expires, you'd be better off concentrating any extra payments on your private debt, not on your investment debt, ie definitely switch your IP debt to IO then if not now. Switching it now may improve your debt servicing ratio though, ie it may improve your borrowing capacity.
cheers, S/C.AW 180k is their combined income. You're a bit out of date by the way, the current tax table is 39.5% from 80k to 180k.
Cheers.SC, you’re right and thanks for pointing that one out. I have not done my own tax for a couple of years now.
Hi all
Thanks for the advice!
I have found out today that we can switch our IP Loan from P & I to IO for $300.
If we want to switch to a new loan altogether, the cost would be $13 500.Still frantically researching!
Cheers
Also….
My partner is in the 39.5% tax bracket you mentioned, and I am in the one below it. (30%?)Claire
– plus we set it up paying Principal & Interest… apparently not a good idea from what I have read recently…)
You must be logged in to reply to this topic. If you don't have an account, you can register here.
