My goal is to;
1/ Pay down debt as efficiently as possible and secondly,
2/ Create enough for a deposit for another investment property down the track (say 18 months or so).
Currently I have two investment properties cross collateralised with the CBA with an IO rate of 6.66% each. It's the Wealth Package. The fee is $350 per year.
Property 1/ Valued at $500k. Owe $315k now by paying down an extra $44,300 in it's redraw.
Property 2/ Valued at $300k. Owe $92,200 now by paying down an extra $12,100 in it's redraw.
My salary is $48k .
My question is, what is the best way to structure this in that I want to reduce debt the quickest way without paying P+I? Should I split from the CBA and have two separate lenders (one for each property)?
Should I have a LOC 'or' an offset account and should it be set up against just one loan/property? Currently I'm paying the combined monthly repayment of $2,328 and the rent I receive monthly from both properties is $2548. I'm living very spartan and have no persoanl loans/mortgage (but no PPOR). I live off my credit card and pay off the balance on the day due. I've just been throwing an extra $1000 or so a month on top of my repayments to lower the debt. Is it better to do this on the smallest debt ($92,200) as opposed to the larger one which I started paying down on ($44,300)? How much will my repayments go up if I restructure to an offset account and are there any better rates out there?
Thanks for reading! I'd really appreciate anyone's advice on what the best thing would be to do? Many thanks in advance!
Gatsby!TerrywParticipant@terrywJoin Date: 2001Post Count: 16,213
I would also suggest you stop paying down the loans. Do you have a 100% offset account set up? IO with all the spare money into an offset account would be the way to go. Otherwise you are paying down deductible debt and the money is trapped in the loan – you can withdraw it but only with tax consequences.
I assume that one day you may want to buy a PPOR or spend money on personal stuff, so it is best to save up the cash in the offset which will assist by saving you the same interest, but be better from a tax position. If both properties are owned by the same person then it wouldn't matter which one had the offset.
It can be improved even further.I would seek expert tax advice about setting up a LOC on one of them to pay the interest on one or both of them and all other expenses. You have a fair bit of equity in one. Not having a PPOR loan will strengthen your position. This will build up a large cash reserve quickly and enable you to pay cash, or have a large cash deposit for a PPOR>Jamie MooreParticipant@jamie-mJoin Date: 2010Post Count: 5,069
If you're wanting to purchase more IPs in the future it would be best to uncross your existing loans, convert them both to IO and have an offset attached to either (or both).
Having them uncrossed will make life a lot easier when you go to purchase more IP's down the track.
By setting them up as IO with an offset, you have the flexibility of making additional repayments (into the offset) and accessing these additional repayments whenever you like (as Terry as mentioned above).
You don't neccesarily have to leave CBA to accomplish this – however, there are other lenders that are likely to give you a better deal.
Many thanks for the reply Terry and Jamie. I met with the CBA today and I have had the two properties discharged from being cross collateralised so that now each one stands alone. I went through the strategy that I outlined in my original post (throwing as much money into the redraw as I can while living on my credit card and paying it off in full on the due date) and the lender I spoke to didn't think that I would benefit anymore by having an offset account set up????
I have to wait a week or so until CBA process the two IP's from being cross collateralized. Also is there any merit in reducing the balance on the lower IP debt rather than the higher IP debt so that it's paying down quicker? Am I best to now take one property to another lender and are their better interest only rates than 6.66% which aren't loaded with fees, etc, that would make it unworthwile?
I want to go with an offset account but will having an offset used as an all in one savings account cause tax implications? Terry I'm keen on the LOC suggestion? Any help much appreciated in advance!
Gatsby!Jamie MooreParticipant@jamie-mJoin Date: 2010Post Count: 5,069
How long have you had the IPs? CBA will slug you a nice little $700 early repayment fee within the first 4 years – and another $350 for exiting. Plus you probably just paid a small fee for uncrossing them. I'm thinking it's probably just best to stay with them for the time being.
Chances are the branch staff won't have any idea about what you're trying to achieve with the IO loans and the MISA attached. Just persist and smile
Thanks for your reply Jamie. The fees to exit are as you said ($700 per property ). I'm thinking maybe just to put an offset account against one property as suggested. Will using an offset account as an all in one account cause tax problems if I withdraw money to pay bills, etc? Many thanks again!
Adrian!TerrywParticipant@terrywJoin Date: 2001Post Count: 16,213
I wouldn't take tax advice from a CBA banker. Do your own research and then see a professional.
An offset account is a savings account so there should be no tax implications of using it. If you use a so called all in one account which is a loan (LOC or redraw) you will end up in an awful tax mess. See the post http://www.somersoft.com/forums/showthread.php?p=717891 where this has happened to an unfortunate person who used the deposit/redraw facility on his loan and then later moved out and has tried to claim the interest on the loan.
For the borrowing to pay interest strategy you need to seek prof advice on the set up and probably apply for a private ruling.