I've come across this forum for 2 weeks and i think its awesome by the way!
Now i am really questioning whether i have my 2 properties set up correctly, any advice would be greatly appreciated.
In July, i settled on a first home which i bought for 251k and borrowed 80% from the bank. This was set up as P&I.
2 months later, i used antoher 20% (savings) to purchase an investment property for 230k. Again this was set up as P&I as i was offered 5.9% and interest only wasn't an option as part of this loan. I though the difference was only $100 a month if i had went with IO hence i didn't mind.
At the moment, i am interested in buying another IP but my broker said that because i've just settled the 2 properties for 2-3 months, the cannot really do a revaluation of the 2 properties so that i can tap into its equity (if there is any considering it has been only 2 months since the first loan, 2nd loan just settled). Broker said that only way i can buy another IP is to have another 20% in savings. Is this correct, and are the 2 loans correctly set up?
Thanks for any advice guys.
You could have structured things more tax effective. Are you living in the first home?
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
As Terry mentioned, you could have definitely structured your loans differently to be more tax effective.
The IP loan should be IO, and the deposit shouldn't have been so high. At worst case if you wanted to put 20% deposit on the IP and didn't want to pay LMI, you should have paid it into the first home loan (assuming it is a PPOR), and then created a sub loan drawing down the 20% deposit for the IP, making it deductible debt.
If your broker knew what you wanted to do earlier on, and you were able to service another IP, he should have advised you to only place 10% deposit on the IP, and then you could have had another 10% for another IP. Is there any reason why you require 20% deposit?
Cheers,
Tom
Hi Songrad
Welcome to the forum and i hope you enjoy your time with us.
I hate to say as has been mentioned the loans have not been set up correctly and this has lead to the issue you are currently having. No you don't need a 20% deposit to fund the next deal but it sounds to me that the Broker has sold you the deal solely on interest rate rather than looking at the big picture and asking you what your immediate and long term goals are.
Further information of course would be needed to provide a more accurate assessment.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
G'Day,
Not entirely true re the valuation. If you have extensively renovated your property within a 2-3 month period then by all means you can re-value your property. I have done this with 2 of my own properties. I renovated and re-did a valuation within 3 months and got the increase. You do need to justify the increase.
Regards
Shahin
TheFinanceShop | Elite Property Finance
http://www.elitepropertyfinance.com
Email Me | Phone MeResidential and Commercial Brokerage
Terryw wrote:You could have structured things more tax effective. Are you living in the first home?yes Terry, i am living in the first home. It is my PPOR.
PLC wrote:As Terry mentioned, you could have definitely structured your loans differently to be more tax effective.The IP loan should be IO, and the deposit shouldn't have been so high. At worst case if you wanted to put 20% deposit on the IP and didn't want to pay LMI, you should have paid it into the first home loan (assuming it is a PPOR), and then created a sub loan drawing down the 20% deposit for the IP, making it deductible debt.
If your broker knew what you wanted to do earlier on, and you were able to service another IP, he should have advised you to only place 10% deposit on the IP, and then you could have had another 10% for another IP. Is there any reason why you require 20% deposit?
Cheers,
Tom
Oh well I don't think i can do anything regarding the first 2 loans now. However going by your advice Terry, say i want to purchase another property around $400k now, i should send my 10% savings into the first homeloan (PPOR) to create a 10% subloan? And would i go about doing this with my bank? Then i can borrow 90% with the 3rd loan?
I'm sorry just that i would like to get it right this time at least, you guys sound like you know heaps about tax effectiveness and that whereas my broker doesn't know much about it at all.
TheFinanceShop wrote:G'Day,Not entirely true re the valuation. If you have extensively renovated your property within a 2-3 month period then by all means you can re-value your property. I have done this with 2 of my own properties. I renovated and re-did a valuation within 3 months and got the increase. You do need to justify the increase.
Regards
Shahin
I have not done any rennovations on either of the properties.
songrad wrote:Terryw wrote:You could have structured things more tax effective. Are you living in the first home?yes Terry, i am living in the first home. It is my PPOR.
Hi Songrad
So you put down 20% deposit and costs. Lets say $50,000.
If you used cash that means you had money which you could have paid into your home loan to reduce the interest and your non deductible debt.
If your loan is at 6% then the interest on a $50,000 decrease would be $3500 per year.
This means you will have $3500 per year less in tax deductions for the next 30 years or so. Roughly a loss of $1000 per year after tax.
Another way to think of it is imagine if you had a spare $1000 per year to pay off your home loan – and that this is paid monthly and imagine the compounding effects
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
Well then it is going to be hard to convince a valuer why he should put a figure > than the purchase price on the property then.
Still be going upto 90% lvr and not using cash.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Righto – so how are you basing such an increase in the value of the properties in such a small amount of time?
TheFinanceShop | Elite Property Finance
http://www.elitepropertyfinance.com
Email Me | Phone MeResidential and Commercial Brokerage
thanks everyone very insightful
I can't add anything here, but this is a very good example of the difference in cost between using a broker who knows what they are doing and a home loan comparison service. The initial mistakes in structuring in this circumstance are not reversible and will result in 000's of dollars in additional tax being payable over the life of these investments.
Having said this, Songrad, don't fret about it, everyone makes mistakes when investing, particularly at the start, your mistakes are relatively small. Just learn from them and get a decent broker for future purchases. Don't make the mistake of thinking that the structural advice you have received in this post is the end of what you need if you want to minimise the cost of your debt.
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