Hi. I am looking to purchase my first IP. I have a house in which I live and mortgage, which has equity enough. My hope is that this first investment will lead onto others.
My current understanding about loans is that I can go to my bank and they will give me a second loan based on my equity in my home.
I have been researching IP information and it came to my attention that someone said a lot of investors only get one investment property because their loan structure is not right and you need to get it right from the start.
So… what is the best loan structure for multiple properties?
And also, I like the idea of someone paying off my loan slowly with their rent. What is wrong with getting a principle and interest loan for my IP?
HI Newjo,
You need to ensure that the loans are standalone facilities. You need to also ensure that you are borrowing as much as you can against the IP and paying down your PPOR as quickly as possible. Therefore, having an IO loan on the IP would work well.
You would want to have an offset against the PPOR and pay as much principle into that offset as possible so that you are paying down the 'bad debt' sooner than the 'good debt' (negatively geared debt).
How much equity do you have in your PPOR and how much is the IP purchase amount?
Regards
Shahin
TheFinanceShop | Elite Property Finance
http://www.elitepropertyfinance.com
Email Me | Phone MeResidential and Commercial Brokerage
Thanks for your answer
I have 150K left in my PPOR plus an additional 30K of redraw and the last valuation was 400K but I fear the value has dropped since then.
What is the benefit of offset if I can just put my money into redraw as I currently do? Does an offset account decrease both properties?
I worry about an interest only loan because then I am purely gamboling on the CG as opposed to some kind tenent paying off my mortgage. Have I the wrong mindset? Without the CG I am just as well off paying my own mortgage without the hassle???
Sorry if that sounds negative but it is what I worry about and curious for the thoughts of investors, and/or putting my mind straight about the importance of CG…
Hi folks ,
I have 3 properties , 2 owned outright and 1 repaying PI loan and have been told before by a broker I should convert it all to
Line of Credit setups , before buying any further properties .
Just thought I would throw that into the ring .
Ian
Perth Western Australia
newJo wrote:Thanks for your answerI have 150K left in my PPOR plus an additional 30K of redraw and the last valuation was 400K but I fear the value has dropped since then.
What is the benefit of offset if I can just put my money into redraw as I currently do? Does an offset account decrease both properties?
I worry about an interest only loan because then I am purely gamboling on the CG as opposed to some kind tenent paying off my mortgage. Have I the wrong mindset? Without the CG I am just as well off paying my own mortgage without the hassle???
Sorry if that sounds negative but it is what I worry about and curious for the thoughts of investors, and/or putting my mind straight about the importance of CG…
The point of having the investment loan IO is that the debt on your PPOR is more expensive, as it's not tax deductible, you should therefore pay that off as a priority over any investment debt.The advice you have been given is not to not pay off debt, just pay off the more expensive debt first.
slowachiever wrote:Hi folks ,I have 3 properties , 2 owned outright and 1 repaying PI loan and have been told before by a broker I should convert it all to
Line of Credit setups , before buying any further properties .
Just thought I would throw that into the ring .
Ian
Perth Western Australia
Depending on the exact advice this may not be the best option.
If you convert an investment loan into a LOC have try to deposit all your incomes and cash into it then you will rapidly cause yourself a tax problem. You will quickly end up with none of the interest being deductible.
If you set up a LOC on one or more and then only borrow from this for the 20% deposit for the next property and only pay the interest on this loan every month then you would be doing good.
You also have to consider asset protection and other implications of your property structure.
In your situation you may want to consider using a discretionary trust, or perhaps two of them, to purchase future properties and to allow the trust to use one of your properties as security by letting a bank take a mortgage over it.
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
Ok so lets assume your property value is $350k – then the equity you have @ 80% would be $130k (i am not factoring the redraw amount). This would mean you have at least $130k to contribute to the purchase of your next IP. This also means that with a deposit amont of $130k you can purchase a property (without paying LMI) for about $520k. So from an equity/deposit point of view you have no issues. Now you need to ensure that there are no issues when it comes to your serviceability.
The benefit of the IO in this situation is that you are accumulating the principle repayments on the side yet still paying interest on the loan amount minus the accumulated funds sitting in your offset. Depending on your future investment strategy this can be beneficial in helping to fund for future IP purchases or other things such as renovations.
Regards
Shahin
TheFinanceShop | Elite Property Finance
http://www.elitepropertyfinance.com
Email Me | Phone MeResidential and Commercial Brokerage
Thanks Terry , My gut feeling is to stay with what I know using normal PI loans and the collateral I have to help me into the
next properties .The investors club broker I went to see advised Loc and encourage people to use equity to fund retirement with. Not a good idea to me .risky if market drops same problem as people with only super to retire on if markets fall so does income.
Ian
Perth
Sorry NEWJO steering off your subject a little ,but thought the queries might help answer some of your situation.
Hi Slow
Yes all of the Investor Club Brokers do that because they have no idea.
Why would you ever want to fund your retirement with debt / equity.
I prefer to fund mine with good old fashioned rental income.
Do not use a LOC as a product to fund your next IP as Terry mentioned it is fraught with problems.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Thankyou what great responses! I have been somewhat ignoring this whole aspect as I feel quite loyal to my bank and figured they would know what to do but of course that is a pretty risky attitude. (They took a chance on us when no other bank or broker would look at us).
Offset is certainly the way to go then. In the back of my mind I do wish to buy a new PPOR at some point and my PPOR is CF+ as it stands. (But not soon).
Also very good to know that a combined loan is not the way to go. And yeah, the whole IO stuff makes sense but it does make the CG weight more heavily in my mind.
@slowachiever no that was perfectly fine, we are talking loan strategy after all and that is a possible option
Although not good for me I don't think.newJo wrote:I feel quite loyal to my bank and figured they would know what to doHi Jo,
Recommend you grad yourself a good broker – your 'loyalty' could become very costly further along your journey – if it hasn't already.
A banks first priority is not to you – it is to their share holders. For this reason they will more often than not structure your loans so that their interest is looked after, not yours.
The second point I would make is that, in some respects, getting the finance rights is equally as important to getting the property selection right.
Grab yourself a good broker – a few have already responded to this post and this would be a good place to start.
Offset allows for greater flexibility when you need to use the funds since they are just sitting in the bank and can therefore be used to pay off your taxes when PPOR is converted to IP in future. I would advise you to go for the offset of the PPOR because it helps in reducing the interest charged on the loan. you might get more help on loans at this link http://www.bigpondmoney.com.au/credit-loans
Hi Newjo
Not sure if it helps but I wrote this easy to understand article on loan structure recently for one of the investment mags.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
Offset is similar to redraw in that it reduces the interest payable on the loan by the same amount, the difference is that with an offset, the funds are sitting in a savings account which allows you greater flexibility when you need to use the funds, and also helps you for tax purposes if you convert the PPOR into an IP at a future date. Offset only helps the one loan account it is linked to.
In terms of IO loan for the IP, the reason that is done is because it stands to reason that one would want to pay off their non-deductible debt (PPOR) quicker than the deductible debt (IP). Why pay the principle off the IP off when you can divert that principle to the offset of the PPOR thereby reducing the interest paid on that loan, and claiming the maximum interest on the IP for tax purposes? More money in your pocket instead of the government.
As Shahin mentioned, you need a separate loan for each facility. This means when accessing the equity in your PPOR, you take out a split loan for the deposit and costs for the IP. This means the loan in not a mixed purpose one and the investment part is distinguished.
Whatever you do, don't allow the bank to combine both securities into one loan. They have a habit of doing that. Not good for you.
Cheers
Tom
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