LOC for maintainence and repayment surplus

On a similar chain of thought. 

I am learning that it is a good idea to work hard over the years to pay down my non-deductable debt on my PPOR and pay only interest on my IP.

My question is that if after I have paid off my PPOR (wouldn't that be a great day). What if I decide I would like a new home, a new PPOR. It is unlikely that I would want to sell thus I would keep as an IP but I am wondering am I able to somehow get my money back out of that home to put into a PPOR and thus be able to claim the tax benefits on the home that is now IP?

Terryw that sounds really interesting what you are saying about the loc for cashflow. I don’t quite understand it 100% though, are you able to give me an example of how it would be used?

Is the loc on the ppor or ip? I’m assuming ppor so you could use it for multiple investments? That sounds really good though!

Thanks Cmason. I thought of that error just after pressing post. should have said per year not per month. Not much really is it, $10k saves me $54.50 per month (better than nothing I guess)

Tax deductibility depends on the purpose the borrowed funds are used for. Taking money from a loan account = borrowings.

So if you refinance the interest will only be deductible if the money is used for investments. If you set up a LOC to 80% of the value but deductibility will depend on what the money is used for.

If your loan starts off at say $300,000 and you pay it down to $100,000 and then decide to move out so refinance it to $300,000 again, the interest on the extra $200,000 will only be deductible if these funds are used for investments.

Whereas, if you had a $300,000 IO loan and put $200,000 in a 100% offset you will be paying the same interest but without the problems as if you remove the $200,000 from the offset the loan hasn't changed and the interest on the whole $300,000 will be deductible if the funds were used to purchase the house originally and the house changes to an investment property.

It is frustrating to me that mortgage brokers continue to recommend using the same lender for your first IP as your PPOR . Often using the old red herring of avoiding LMI. These are often old bankers who were brought up to do exactly that. The real reason is that lenders now have security over 2 properties with an end LVR of 50% or less instead of 80%.

I have a number of clients who have come to me with multiple IP's all with one lender, either on the banks 'advice' or a mortgage broker. Often mortgage brokers only use 1 or 2 lenders, they have come from that bank, know their policies and just put people into their products, sometimes because it is easier, sometimes because of commission.

For a person wanting to build a property portfolio, it is time consuming and often costly to extract from. I do it one IP at a time and go through the hassle of refinancing, multiple valuation issues, funds kept because of the cross guarantees etc.

Terry is spot on above in terms of financing strategy, do it smart, use the system, reduce non deductible costs as soon as possible, minimise cash outflow. You need to make sure you have the other risk minimisation strategies in place as well, a health safety net, income protection, trauma insurance etc.

At the end of the day, wealth is assets less liabilities. The timing to increase one or decrease the other depends on where you are at in your investing cycle. It is difficult to do both early in, far better to concentrate increasing assets than trying to reduce liabilities. At the later end of your investing cycle, then you focus on reducing debt.
Good luck
Greg

Hi Newday

good work,

Talk to your tax advisor about your situation. It may be possible to leave it until your ppor is fully paid off – but this will also depend on limits to LOCs and products too.

The biggest trap with LOC is that people use them for investment purposes and use them to pay personal expenses. A LOC should be set up to have all your rent paid into that account and then all your IP's outgoings  paid from that account. No personal expense should be paid from the LOC because the tax department will crucify you.

if you didnt have a PPOR and were renting and had 2 IPs could you do this type of thing, ie. put all rental income into one offset account against a negitive geared property, to reduce the depb quickly to make it positive?