Forums / Getting Technical / Finance / IP to PPOR – Loan Structure

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  • Profile photo of bnsbns
    Participant
    @bnsp
    Join Date: 2014
    Post Count: 5

    Hey there,

    Q. If we brought a unit for 500k with 400k debt and then 2 years later decided to turn it into an IP, and upgrade to say a $1 million house and make that the PPOR (with ofcourse the larger loan), How does one transfer that existing 400k loan for the unit into the PPOR equity loan?

    Is this possible? Will any CGT be liable with the loan transfer? Obviously we want to maximise the claimable tax from the rental by offsetting against the bigger loan.

    Thanks for your help.

    Profile photo of Jamie MooreJamie Moore
    Participant
    @jamie-m
    Join Date: 2010
    Post Count: 5,069

    Hi bns

    Welcome aboard.

    I don’t quite understand the question – admittedly it’s quite late so my brain might not be functioning :-(

    Are you wanting to access equity in the IP to purchase a new PPOR?

    That’s fine – but that equity won’t be deductible because the purpose is to purchase a PPOR.

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
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    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of PLCPLC
    Participant
    @plc
    Join Date: 2012
    Post Count: 400

    Hi bns, like Jamie I’m not quite understanding the question you have posed, however he is correct in saying that if you are looking to pull equity out of the existing property for the new PPOR purchase then it wont be deductible as the purpose of the loan will determine deductibility, not the security it is based against.

    The loan structure from the very start will be the most important factor here for you. A decent broker will be able to help you out and get you on your way.

    Cheers

    Tom

    PLC | Phoenix Loan Consulting
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    Melbourne based Mortgage Broker | Making Finance Simple

    Profile photo of Colin RiceColin Rice
    Participant
    @fms
    Join Date: 2011
    Post Count: 338

    No, you cant transfer the 400k to the new PPOR as it is secured against the original property.

    You can access generally up to 90% of the original properties value to be used as a deposit towards a another property purchase.

    • This reply was modified 5 years, 2 months ago by Profile photo of Colin Rice Colin Rice.

    Colin Rice | CDR Finance
    http://cdrfinance.com.au/
    Email Me | Phone Me

    Perth Based Mortgage Broker - Investment Property Finance Specialist | E: [email protected]

    Profile photo of superAndrewsuperAndrew
    Participant
    @superandrew
    Join Date: 2014
    Post Count: 188

    How does one transfer that existing 400k loan for the unit into the PPOR equity loan?

    I think you are mixing things up here. You can only use the equity in your IP for your PPOR. However I would advise against that.

    Obviously we want to maximise the claimable tax from the rental by offsetting against the bigger loan.

    Given that you want to purchase a 500k unit first as a PPOR and then later convert it to an IP and purchase a 1m house as your PPOR, I would do the following:

    1. Take out an IO loan + offset account for the unit. Borrow 100% and place your savings etc in the offset account. As long as the unit is not an IP the interest won’t be deductible.
    2. When it’s time to purchase the house. Use the savings in the offset account for the deposit and take out a new loan for the house.
    3. Your goal is now to reduce the interest on your PPOR loan. Place all your savings, etc in the offset account of your PPOR. The loan on your unit/IP will be tax deductible now but your PPOR loan won’t be.

    This strategy will allow you to maximise your interest deduction by maximising your IP loan and keeping your PPOR loan as low as possible.

    Instead of having IP loan 80% and PPOR 80%, it is better to have IP 100% and PPOR 70%.

    You would need to run the numbers to make sure this strategy is suited for your income level, savings, current loans, etc

    Cheers

    Andrew

    superAndrew | Property Analyser and Finder Tool
    https://property-analyser.com.au

    Profile photo of bnsbns
    Participant
    @bnsp
    Join Date: 2014
    Post Count: 5

    Sorry guys for the confusion and thanks for the feedback. I believe SuperAndrew nailed it on the head.

    Basically I’m asking the age old question PPOR 1st/ IP 2nd or IP 1st/ PPOR 2nd.

    So my wife is nagging me to buy a house/unit because she loves to renovate/DIY etc (well she gets me to do most of it). We are currently renting and I have shares that are outperforming pretty much everything at the moment so I’m reluctant to sell any just to buy an overvalued property (we want to purchase inner 5km Brisbane). I’m keen to wait it out – rent, relax and wait for the housing market to cool down a little when rates rise next year.

    Soo anyways IF she wins the argument and we end up buying, I’d prefer to use as little deposit (sell as few shares as I can) and possibly buy a unit as our PPOR for 2 years or so. Then after 2 years, we will upgrade to a house (PPOR) and turn the unit into our IP.

    Are we better off renting for another 2 years then buying our house (PPOR) and drawing equity from that to fund the IP? (Setting up IO loans on both, offset on the PPOR , all incoming and outgoing funds into the offset and using credit card to pay for expenses) Ideally this is the way to go to maximise our tax deductions yeah!?

    But If we were to purchase the unit first, how could I end up with the above scenario and restructure the loans to ensure we have maximum tax deductible debt?

    Hope this makes more sense this time – I’m slowly starting to get my head around it all :)

    Profile photo of BennyBenny
    Moderator
    @benny
    Join Date: 2002
    Post Count: 1,366

    Hi bns,

    Basically I’m asking the age old question PPOR 1st/ IP 2nd or IP 1st/ PPOR 2nd.

    It certainly sounds like you are starting to understand things better, bns. Your questions are well-thought-out, and you mention several things that show you have been doing some research – well done !! I suspect you might have already seen this, but just in case, do take a look :-
    https://www.propertyinvesting.com/topic/4410491-the-big-picture-for-new-readers-especially/#post-4697967

    It will provide evidence to show which way is best financially. Of course, there can be several other non-financial reasons to take the other path. e.g. spouse, family, security, etc. And at certain times in the property cycle, it may be CHEAPER to take the other path (i.e. buy your home first). But then, if renting is costing significantly more than paying a mortgage, it could be that property is about to boom, and rental yields will drop as house values rise. At a time like that, it is good to be “in the market” with property, whether as a PPOR or as an IP. And a PPOR can provide CGT exemption.

    Are we better off renting for another 2 years then buying our house (PPOR) and drawing equity from that to fund the IP? (Setting up IO loans on both, offset on the PPOR , all incoming and outgoing funds into the offset and using credit card to pay for expenses) Ideally this is the way to go to maximise our tax deductions yeah!?

    Any answer to “Are we better off renting for another 2 years” requires a crystal ball, or detailed knowledge of your local market. Some believe that inner Brisbane is set to soar, so waiting two years might ensure you pay a lot more than it would cost today. But then others still believe all Australian house prices are due to collapse by up to 50% (but that is not me!!).

    But If we were to purchase the unit first, how could I end up with the above scenario and restructure the loans to ensure we have maximum tax deductible debt?

    SuperAndrew has already covered that well, and you affirm that it is the way to go. Offset account on your IP first allows you to totally withdraw the Offset funds for ANY purpose (e.g. a deposit on a PPOR) and the original IP loan (IO) remains as the full amount. With no funds left in Offset, the Interest payments on the IP mortgage revert to the full amount, and are all Tax Deductible.

    Set up a similar Offset account on your new PPOR (also IO) and pile your savings into that. The Offset will emulate “paying down the loan” and, as this is non-deductible debt, it is the right one to “pay off”. But by paying it off in Offset, flexibility remains, allowing you to change your mind in years to come, by perhaps making the PPOR into another IP.

    Or, if keeping it as your PPOR, you “could” choose to pay off the mortgage once the Offset funds exceed the mortgage. Or, as Equity grows, you could borrow via a separate loan for deposit/costs on another IP (deductible for that loan, as the purpose was to invest, not buy a PPOR)….. and the beat goes on…..

    Hope that helps,

    Benny

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