Use of equity in PPOR to place a deposit for IP

No.

It is similar to urinating into a bottle of milk and realising your mistake and withdrawing the urine.

Some people don't get the concept. They think it only a small mistake – which it is. But it has far reaching consequences.

So using the urine example usually gets the concept across. If they still think it is ok, I ask them if they would drink the milk after the urine has been removed.

thanks Terry I got concept now

Unfortunately so many people do this mistake – it;s not funny! Even accountants can't get it right !

I asked my accountant can I put money back and this is her reply : "Yes, that will be okay. No problem with apportionment if it was only a couple of weeks."

Any comments?

Hey Guys

Have just done a quick search and came across this thread and as I am just about to use some of my equity in my PPOR to buy an IP I thought I'd better ask to make sure I get it right first time.  Here's a little information about my situation – I owe 340k on my PPOR which is worth about 520k.  This mortgage has a 100% offset account and a redraw facility too.  I am looking to spend about 310k on the IP and I would like to put 20% deposit down to avoid LMI so I need to borrow about 62k plus expenses.  I have found a couple of properties I am looking at putting offers on.  After reading this thread I now know not to put the new funds in the offset so my question is should I borrow the 62k plus expenses and "park" it in my existing loan on top of the 340k and then use the redraw facility to get access to it when I need it or is there somewhere else the 62k plus expenses should be "parked". 

Thanks

David

It really depends on your future strategy – i.e. how long before you want to again purchase another property? Do you have an aggressive IP purchase strategy? The answer to this question will dictate how much equity you should use.

If your property is worth $520k (btw its worthwhile doing an upfront valuation to determine the value so that your numbers are correct) then at 80% LVR you will have $76k in equity. @ 90% LVR you will have $120k (I have already deducted the approx LMI premium from this) in equity.

If you are purchasing an IP for $310k (depending on the State of course) – you will require $73k (plus another $2k for building and pest inspection and legal fees) in deposit if you want to stay under 80%. However you will only require $41k if you go up to a 90% LVR. The benefit of going to 90% is that you have available equity to purchase further properties if that in fact is the plan. Also the LMI premium that you pay will be tax deductible for the first 5 years.

The above situation is extremely common whereby a separate account is set up against the PPOR for the newly borrowing funds and it has its own offset so you will be charged interest when you begin to use the funds (ie. when you have purchased and settled on the new IP). 

Just make sure your lender doesn't have any restrictions when it comes to offsets, e.g. ING allows a max of 2 offset per client which is quite inflexible when you have multiple properties and multiple splits. 

Hey Guys

Thanks for all the responses, I think I understand a bit better now.  I need a completely separate account from my current loan and offset?  Richard – my main reason for using a 20% deposit was to avoid LMI as I thought this is what I should be trying to achieve.  However your suggestion to use 89.9 % LVR to minimise exposure on my PPOR does make allot of sense.  I guess it would also increase the amount of deductible interest as interest on my PPOR is not deductible but it is on an IP? TheFinanceShop – I ideally would like to buy this property, then another in the next six months.  I would like to at least neutrally if not positively gear them to try and avoid using any of my savings to hold these properties.  Then as they increase in value use the new equity to buy more properties.

Thanks again

David

Hi Terry,

I had identical situation and had just settled on my first IP. I need your opinion to understand if I've done this right or not. Bank allowed me to borrow $90K as equity of my PPOR as separate loan, when I was settling on $90K loan I advised bank to open new offset account and link it to $90K and put all money into the newly created offset (which they did), same day I wrote a cheque for 10% deposit of IP and given to RE agency's trust account.  Have I done the right thing here?

Later on, I used rest of the money from this newly created offset on final settlement. Even after the final settlement this account still has 8K. I do not want to keep newly created offset as it is costing me admin fee. I had chat to my Account and he advised that i can park this 8K in to Offset linked to PPOR and when it come TAX time, he can proportionate the 8K amount (which has not used for investment purposes). Do you think it is right thing to do? Is there any better way this situation can be handled

thanks

S0805

Hi Terry,

Thanks for your reply. Just to be clear, I haven't yet mixed my 8K with my home loan offset.

You've said

Strictly speaking what you have done has created a mess. Interest wouldn't be deductible because you borrowed money and placed in a savings account. However ato may not be so strict and may allow the dectiin if you can clearly trace the funds.

I quite don't understand this, I understand that I borrowed money and place it savings account(offset), but this was brand new offset account created on the same day when 90K was drawn and only linked to this 90K loan, ,on the same day 32K was given to agent and it had 90K-32K sitting in it for 40 days. On 41st day I used the rest of the money from this offset for my final settlement and at the end of that till now it has 8K sitting in it offsetting my 90K initially drawn. These are the only transactions (both transaction for investment purposes) happened on these offset account.  is this still incorrect method?

Mixing borrowed money with not borrowed will result in even more mess. It will cause the original loan to be a mixed purpose loan and any subsequent repayments must come off each portion.

I Agree on this 100%. The 8K left on my newly created offset account which is offsetting my 90K loan is my problem now, not really sure where to park this money (as i want to close my offset account) . My Accountant has suggested that we take this 8K and put in my Home Offset and in tax time we'll proportionate (deducting) interest on 8K before filing return.  The only way i see out of this is to leave the offset with 8K open unless you think proportionating 8K interest every year should not be an issue from ATO point of view. I am going to use this 8K in future only & only for investment purposes if the need arises otherwise it will be sitting there for good.

Apologies if my questions are repetitive, i need to advise my account which way i should progress and i want to get my head around this.

thanks

S0805