All Topics / Help Needed! / Coverting existing PPoR loan to IO with an offset account to save for an investment property

Viewing 15 posts - 1 through 15 (of 15 total)
  • Profile photo of Pootie TangPootie Tang
    Member
    @pootie-tang
    Join Date: 2010
    Post Count: 19

    Hi everyone!

    I am new to the forum and got some great advice regarding Trusts and investment properties. Big thanks to Terryw who's advice and guidance is great! 

    We are looking to start an investment portfolio and our current situation is as follows:

    PPoR value $345,000
    Owing $200,000 (paying P & I)
    No Savings

    We have no other properties, but looking at purchasing our first IP with the equity in our current home within 12 months, either via a Family Trust or personally (to be decided yet).

    My questions are:

    1. To increase our cash flow, should we convert our existing loan to IO with an offset account? (still not clear on the offset account set up & benefits, can someone explain it to me please) &

    2. Convert the equity into a LOC , so we have a deposit towards the new IP?

    Looking forward to receiving posts.
          

    Profile photo of Jamie MooreJamie Moore
    Participant
    @jamie-m
    Join Date: 2010
    Post Count: 5,069

    1. Yep, if you want to increase cashflow then setting up an offset is the way to go. Basic benefits of offset acount – the amount of cash you have in your offset account will reduce your loan by that amount (the lower the loan amount, the less interest you pay). When you take this money out of your offset account, your loan will obviously increase. Offset accounts put you in control of your money – unlike a P&I loan, when you drive down some principle and want to access some of the equity, you need to refinance. With an offset, you can access the funds as you please. This is a simplistic explanation.

    2. Yep, top-up this loan. Set up a second loan (or LOC) that will be used only for investment purposes. Depending on your current lender, you might be able to top-up to 90% of your properties value. You can this use these funds as a deposit towards your investment property. This way, you avoid cross collaterising your properties and it will make future property accumulation much easier.

    Cheers,

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
    Email Me | Phone Me

    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    I think it is a good idea to use the IO and offset on your home. And a good idea to set up the LOC too. But make sure that when you invest you don't use the money in the offset, but borrow from the LOC.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of Pootie TangPootie Tang
    Member
    @pootie-tang
    Join Date: 2010
    Post Count: 19

    Hi Jamie & Terry,

    Thankyou both very much.

    I will contact the bank and get things happening.

    I look forward to starting an investment portfolio and accumulating property for my growing family of six, as well as reading some of the recommended literature.

    This forum has been interesting and educational, I am officially addicted and love reading the forum posts…… 

    Pootie 

    Profile photo of batgirl_617batgirl_617
    Participant
    @batgirl_617
    Join Date: 2010
    Post Count: 7

    Hi, this is my first post. I think Pootie and I are almost in the same situation only with us, we don't have the equity.

    We bought the land and built a house on it in 2007. Total cost is 420K. Estimated value now is around 440-460K. Amount owing is 380K (286 Fixed and 94 variable). Paying P & I of 2,695/month.

    Got a balance of 5K in our Offset account and 9K available for redraw.

    As we don't have enough amt for deposit for an IP and no equity, someone suggested we rent out our PPOR which would improve our cashflow. Possible rent income is 490wk and then we can rent somewhere else for 375/wk. However, a financial adviser told we can save almost as much if we stay in our house and pay interest only on our loan.

    We'll be saving around 4K more if we rent compared to staying as is and paying interest only.

    Appreciate your advise/comments on this. Many thanks in advance.

    Profile photo of Jamie MooreJamie Moore
    Participant
    @jamie-m
    Join Date: 2010
    Post Count: 5,069

    Hi Batgirl

    Welcome to the forum.

    If you’re keen to buy an IP, you might be able to access some equity in your current PPOR.

    If it’s valued at $460k and your lender allows you to increase your loan to 90% LVR – you should have just around $30k to go towards a deposit and purchasing costs on an IP.

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
    Email Me | Phone Me

    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of batgirl_617batgirl_617
    Participant
    @batgirl_617
    Join Date: 2010
    Post Count: 7

    Thanks Jamie for the reply.

    Actually, CBA did a valuation August last year at 430K which we think is so low. I just based my estimate on the selling prices of same houses in our suburb. So we just accepted that maybe we can't tap on the equity as of this time.

    That's why we are thinking of ways to boost our savings for the deposit of the IP. That is when the option to rent out our home came out.  Do you think this is the best option available to us?  We really want to start this year..Unless..you guys have other suggestions…

    Profile photo of Jamie MooreJamie Moore
    Participant
    @jamie-m
    Join Date: 2010
    Post Count: 5,069

    Hi batgirl

    If you think the val was low you could have another one carried out – perhaps through a different lender which may yield a better result.

    The option of moving out to rent elsewhere in an effort to save $4k a year, to me, seems a little painful. Have you factored in all the expenses with renting out the property? Rates, insurance, PM fees (if applicable), the list goes on.

    What if an expensive unexpected requirement for maintenance occurs and you have to fork out some cash? What if the property has a vacant period? These factors could quickly erode that additional $4k.

    Converting to IO isn’t a bad option – especially if it’s helping with cashflow.

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
    Email Me | Phone Me

    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of traolcoladistraolcoladis
    Member
    @traolcoladis
    Join Date: 2010
    Post Count: 19

    One thing that I would like to raise is:

    If you go for the IP will you be able to afford the additional repayments if interest rates go upto 10% Also will you be able to afford the rates if you are on a single income. I am asking these questions as my friend and his wife borrowed an extra 100k to go into a development proposal.

    This has a great possibility of a great return. Now that  he is in between work it is putting pressure on their mortgage until they can find him more work.

    Just a few other points to consider.

    Profile photo of batgirl_617batgirl_617
    Participant
    @batgirl_617
    Join Date: 2010
    Post Count: 7

    Do you know of a lender who can give us a better yield (valuation)?

    Actually, I already converted the variable portion into IO 2 wks ago. Need to wait until the 10/06/11 (Fixed loan expiry) before I can convert the Fixed loan (the bigger loan) to IO. I considered converting to IO as we are thinking of renting out our home and thus turning it into IP.  But if we stay and pay IO, that seems kinda odd as we are supposed to pay down our mortgage which is a non deductible  debt, right? Can you pls clarify as this is something new to me and seems outside the norm.

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

    Hi batgirl

    In most cases it wont be the lender that carries out the valuation more a specific valuer and that will depend on whose lending panel he is on. 

    Taking a loan as interest only with 100% offset is the same effect as paying P & I although the big difference is that you have added flexibility.

    Cheers

    Yours in Finance 

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
    Email Me

    0-40 Properties in a decade with an unencumbered value of over $35M. Email for a copy of my API article

    Profile photo of Jamie MooreJamie Moore
    Participant
    @jamie-m
    Join Date: 2010
    Post Count: 5,069
    batgirl_617 wrote:
    Do you know of a lender who can give us a better yield (valuation)?.

    Hi Batgirl

    As Richard mentioned above, it’s not the lender that carried out the valuation but rather a company on their panel of valuers.

    My thought was that, depending on the size of the town, you may have a chance with using a different lender (who possibly has different valuers on their panel). Therefore, the valuation might be carried out by a different valuer – and could possibly provide a different (hopefully a better) result than the other valuation.

    In any case, this option wouldn’t be viable until that fixed loan period has expired (the break fees will be too high).

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
    Email Me | Phone Me

    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of batgirl_617batgirl_617
    Participant
    @batgirl_617
    Join Date: 2010
    Post Count: 7

    Thanks to everybody for their valuable input.

    After reading some related posts, there's going to be change of plans.  Won't rent out our home anymore (after some horrible stories I read) and will just stay put and pay interest only on the mortgage with the offset acct. Will try to build up our savings for our 1st IP. When the fixed period expires on June 2011, we will ask for a valuation. Hopefully this time, we can get a better one, which will give us enough equity to use for our 1st IP. Will it be a good idea to get another valuation from another lender at least just to compare?  How much will this cost?

    Also, the 9k in our redraw, should I transfer this over to the offset account (to form part of our savings for the IP) or leave it in the redraw?

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    You sholdn't be using savings for the investment  – or you will be paying more tax. I would suggest you also leave any money in redraw as taking it out will be new borrowings and you will have even more tax problems later on.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of god_of_moneygod_of_money
    Participant
    @god_of_money
    Join Date: 2008
    Post Count: 970

    borrow 110% for investment.. maximise the gearing

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