My PPOR is worth $500k and my mortgage is $200k.
I am going to meet my mortgage broker next week about the possibility of buying an investment property around $300k and using the equity in my PPOR to finance this.
I don't quite understand how it works – he says my PPOR mortgage balance will remain the same at $200k and rest will be used to borrow to finance the IP.
Is there anything I should be mindful of when using equity to purchase an IP?
Seems too good to be true (i.e. not having to fork out a deposit, balance of my home loan on my PPOR remaining the same, etc)?
If I sold my PPOR for $500k, would I still make a profit of $300k (after paying $200k back to the bank), or will this use of my equity change this?
Does this mean my properties are cross collateralised (which I heard should be avoided)?
Thank you.
Beware – sounds like he is going to cross collateralise your properties. THis is dangerous and unnecessary.
Basically there are 2 ways to do this
Values
$500,000 PPOR
$300,000 IP
$800,000
Loans
$200,000 PPOR
$300,000 IP
$500,000
LVR = 500/800 = 62%
The security for the IP will be the IP and also the PPOR = No No
========================
A better way
Loans
$200,000 for the PPOR secured by the PPOR
$200,000 LOC secured by the PPOR. This will be used for the investment
$240,000 loan secured by the IP
The remaining $60,000 and stamp duty etc for the IP will come from the LOC secured on the PPOR. Interest should be deductible if set up correctly and this will allow you to borrow 105% of the investment property value and have all loans stand alone with no cross collateralising of security.
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
Many thanks for your advice, Terry.
I will definitely stress to my mortgage broker to avoid cross collateralisation if this is what he had planned. Will also mention the LOC you advise of and see what he has to say.
I realise I sound like a complete amateur when I post this, but I am new to this and my mortgage broker sounds like he is speaking another language.
These were his exact words, if your good self or any other posters who are familiar with this topic can translate for me in laymens' terms:
"How it would work you would keep your property at $200k and continue to pay that P&I and try and pay that down as you are doing, because there are no taxable benefits involved with your principle place of residence.
Then you would borrow the full amount plus stamp and settlement costs as they are tax deductions on your investment property.
If you bought for $300,000 for example you would borrow $315,000ish. The loans would be $200,000 plus $315,000 : Total Approx. $515,000. Values Approx. : $815,000 Loan to value ratio of approximately 63%, so well out of mortgage insurance territory."
Does this sound like he was trying to set up finance so it would cross-collateralise, or perhaps it isn't clear from his wording?
Many thanks
Hi Vincent,
Quote:The loans would be $200,000 plus $315,000Since he makes no mention of a THIRD loan (like Terryw did) this does sound suspiciously like he was going to xcoll the two properties.
Note that Terry's idea actually prepares for further borrowings against your PPOR via the LOC up to the 80% mark (still no Mortgage Insurance at that point – that starts at 80.1%. This could provide Deposit and Costs for a second IP and maybe a third without having to go get another loan. Of course, you would need to pass the Serviceability test to be able to get extra loans of $440k. That brings your wage and other loans into play (e.g. credit cards, etc). But hey, if your wage can handle it, why not?
If you can "handle" a big credit-card-type loan without going crazy buying junk that depreciates – overseas trip, new car, etc – then go for it. It is nice to have extra funds "on tap" especially if a deal of a lifetime comes your way and you need to settle quickly….
Oh, and be sure that you DON'T mix your personal spending with the IP costs via the LOC. Keep it PURELY for IPs or other investments that provide tax relief. And look at setting up an Offset account against your PPOR loan too.
Benny
PS I am NOT a registered adviser like some of the others, so my words are merely my opinion, not advice !!!
PPS Is your Mortgage Broker aligned with any particular lender???? Could be a good question for him. He sounds like he might be……
Vincent8 wrote:Many thanks for your advice, Terry.These were his exact words, if your good self or any other posters who are familiar with this topic can translate for me in laymens' terms:
"How it would work you would keep your property at $200k and continue to pay that P&I and try and pay that down as you are doing, because there are no taxable benefits involved with your principle place of residence.
Then you would borrow the full amount plus stamp and settlement costs as they are tax deductions on your investment property.
If you bought for $300,000 for example you would borrow $315,000ish. The loans would be $200,000 plus $315,000 : Total Approx. $515,000. Values Approx. : $815,000 Loan to value ratio of approximately 63%, so well out of mortgage insurance territory."
Does this sound like he was trying to set up finance so it would cross-collateralise, or perhaps it isn't clear from his wording?
Many thanks
Yep, he is trying to cross-collaterise. Basically your broker is lazy and wants to only write the one loan instead of structuring it properly. You can avoid mortgage insurance by doing separate security loans as well so he doesn't have an excuse there.
In a nutshell, the interest on your PPOR loan can't be claimed come tax time while the interest on the IP can. Therefore to maximise your financials on your tax return, it's beneficial to pay down your PPOR loan rather than your IP loan (as you're going to pay interest no matter what so you might as well pay a higher ratio on your deductible IP loan). This means leaving your IP loan borrowings of $315K at interest only and your $200K PPOR loan borrowings at P&I (as well as directing excess funds to an offset account linked to it).
However the way that your broker has it structured is not the way to proceed. Terryw has suggested one way it would be done, there are others, all better than their proposal.
Cheers
Tom
Vincent8 wrote:I realise I sound like a complete amateur when I post this, but I am new to this and my mortgage broker sounds like he is speaking another language.
Nothing wrong with that at all.
At least you've gone out and searched for additional information so you'll know whether your broker is structuring your finances correctly…or will at least suspect if something doesn't sound right.
Let us know how you go.
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]
Hi all,
Many thanks for your helpful replies – I appreciate it. I did double check this with my mortgage broker today and you are all right, he was trying to cross collateralise.
I told him I didn't want this, so he will get back to me with other products where this can be avoided. However, he did advise that I may lose out in some tax benefits and also may end up having to pay mortgage insurance if I do not cross collateralise.
Tom, that is interesting that you think I could avoid mortgage insurance here. When I get the full figures from my broker tomorrow, I'll let you guys know. Will definitely be borrowing IO for the IP.
With thanks.
Vincent8 wrote:Many thanks for your advice, Terry.I will definitely stress to my mortgage broker to avoid cross collateralisation if this is what he had planned. Will also mention the LOC you advise of and see what he has to say.
I realise I sound like a complete amateur when I post this, but I am new to this and my mortgage broker sounds like he is speaking another language.
These were his exact words, if your good self or any other posters who are familiar with this topic can translate for me in laymens' terms:
"How it would work you would keep your property at $200k and continue to pay that P&I and try and pay that down as you are doing, because there are no taxable benefits involved with your principle place of residence.
Then you would borrow the full amount plus stamp and settlement costs as they are tax deductions on your investment property.
If you bought for $300,000 for example you would borrow $315,000ish. The loans would be $200,000 plus $315,000 : Total Approx. $515,000. Values Approx. : $815,000 Loan to value ratio of approximately 63%, so well out of mortgage insurance territory."
Does this sound like he was trying to set up finance so it would cross-collateralise, or perhaps it isn't clear from his wording?
Many thanks
Sounds like a cross collateralising to me.
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
Vincent8 wrote:Hi all,Many thanks for your helpful replies – I appreciate it. I did double check this with my mortgage broker today and you are all right, he was trying to cross collateralise.
I told him I didn't want this, so he will get back to me with other products where this can be avoided. However, he did advise that I may lose out in some tax benefits and also may end up having to pay mortgage insurance if I do not cross collateralise.
Tom, that is interesting that you think I could avoid mortgage insurance here. When I get the full figures from my broker tomorrow, I'll let you guys know. Will definitely be borrowing IO for the IP.
With thanks.
Sounds like the broker is inexperienced and/or doesn't understand structuring or tax.
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
Vincent8 wrote:Hi all,Many thanks for your helpful replies – I appreciate it. I did double check this with my mortgage broker today and you are all right, he was trying to cross collateralise.
I told him I didn't want this, so he will get back to me with other products where this can be avoided. However, he did advise that I may lose out in some tax benefits and also may end up having to pay mortgage insurance if I do not cross collateralise.
Tom, that is interesting that you think I could avoid mortgage insurance here. When I get the full figures from my broker tomorrow, I'll let you guys know. Will definitely be borrowing IO for the IP.
With thanks.
Hmmmm……time to get another broker.
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]
Vincent8 wrote:Hi all,Many thanks for your helpful replies – I appreciate it. I did double check this with my mortgage broker today and you are all right, he was trying to cross collateralise.
I told him I didn't want this, so he will get back to me with other products where this can be avoided.
However, he did advise that I may lose out in some tax benefits….
Incorrect
Vincent8 wrote:…and also may end up having to pay mortgage insurance if I do not cross collateralise….And incorrect as well.
Standard investment loan structuring 101.
Cheers
Tom
PLC wrote:Standard investment loan structuring 101.
Cheers
Tom
You're right – it really isn't rocket science. It baffles me how the majority of loan writers (brokers and bankers) can't grasp this simple concept – or maybe their just being lazy. Oh well – keeps us in a job
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]
Or alternatively as was the case when i was State manager at the Dragon some 19 years ago our staff were paid bonuses on a variety of key performance measures.
One of those measures was the number of properties you could get secured for a single loan.
Others of course included how much insurance you could sell or number of useless bank accounts you could sell.
Needless to say i didn't last very long with them.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Richard – what was the record number of properties securing one loan?
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
Hi Terry
Very good question and must can't answer that but until recently SGB Pro pack had a condition in the T & C that said that all loans were crossed and this condition overode all other conditions.
With 6 months I left and started Broking . That was 1994.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Terryw wrote:A better way
Loans
$200,000 for the PPOR secured by the PPOR
$200,000 LOC secured by the PPOR. This will be used for the investment
$240,000 loan secured by the IP
The remaining $60,000 and stamp duty etc for the IP will come from the LOC secured on the PPOR. Interest should be deductible if set up correctly and this will allow you to borrow 105% of the investment property value and have all loans stand alone with no cross collateralising of security.
I'm very glad you posted this example as this is exactly how I setup my loans when I started purchasing IP's recently.
However, I've got some follow up questions:
1) Currently my LOC (secured by the PPOR) interest is being capitalised, is this correct or should I instruct my bank to pay the interest for these capital expenses from one of my other Investment Transaction accounts?
2) Debt Recycling
(a) When my IP's gain equity and I go back to my Lender to pull out additional funds will I simply retain the same loan account but the amount increases or will I have to keep creating new loan accounts everytime I take out i pull out more equity?
(b) Once I have access to these additional funds, should I be dumping the lump-sum and 'reimburse' back the LOC account which I used to pay the initial deposit/acquisition costs, thus lowering the balance and the debit interest charges?
jate wrote:I'm very glad you posted this example as this is exactly how I setup my loans when I started purchasing IP's recently.
However, I've got some follow up questions:
1) Currently my LOC (secured by the PPOR) interest is being capitalised, is this correct or should I instruct my bank to pay the interest for these capital expenses from one of my other Investment Transaction accounts?
I actually don't know for sure about this, so I would be interested in others answers. But I have read that the ATO doesn't like people claiming deductions for interest on interest, so if you're paying your IP interest from a LOC, and then claiming the interest on both the IP and the LOC then you're getting into murky areas. It's especially murky if you have a PPOR and you're making extra payments because of this setup. I'm interested to hear an accountants view of that though.
In my case I pay the interest on the LOC and IP loans from my own account and claim the IP and LOC interest at tax time.
jate wrote:2) Debt Recycling
(a) When my IP's gain equity and I go back to my Lender to pull out additional funds will I simply retain the same loan account but the amount increases or will I have to keep creating new loan accounts everytime I take out i pull out more equity?
(b) Once I have access to these additional funds, should I be dumping the lump-sum and 'reimburse' back the LOC account which I used to pay the initial deposit/acquisition costs, thus lowering the balance and the debit interest charges?
For a. It's situation dependent, my bank can create a new LOC and pay out the old with the new, therefore transferring the balance. This is ok I guess, but you'd need to keep it for investment purposes only. If you wanted to draw on equity to go on a holiday, then you'd want a new account.
For b. Are you talking about additional funds from equity or from cash? If it's from equity then you're not really reimbursing, if it's cash then it depends on your situation – if you have a PPOR that you're paying down then I would leave your money there or use it for some other reason.
Why are you paying interest with the LOC? Whether it is deductible or not will depend on a few things. At the very least you should get some tax advice.
"Pulling funds out" worries me. Withdrawing from a loan is creating a new loan. The interest on this new loan will only be deductible if the bororwed money is used for investments.. If this is 'parked' somewhere you can lose deductibility. Since it is a loan increase rather than a split this can create further problems by creating a mixed loan.
If you borrow to repay a LOC this is just refinancing one loan with another so is generally a good idea.
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
Terryw wrote:Why are you paying interest with the LOC?What I meant is that my LOC account, which is used 100% for Investment purposes only. Such as deposits for IP#2 and IP#3.
I am planning on tax-deducting the debit interest incurred on this account.
Currently CBA has it setup with the debit interest for this LOC account is being capitalised.
Is there any problems with this setup from a tax-deduction perspective?
Hi Jate
Hate to say it seems go from bad to worse.
Think you definitely need a complete loan check.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
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