Advice on PPOR upgrade while in a wrong mortgage structure

Hi all,

My husband and I are planning to buy property within catchment of a good school for our 2 kids and convert our current PPOR into an IP(to rent out). I've done my due diligence in reading up investment strategies posted here and, to my horror, it seems we did a lot of things wrong with our current mortgage - only redraws (no offset account), no structure, etc. Can anyone please advise on what our options are/what we must do?

Wanting to buy property for PPOR valued at $820k

Current PPOR planning to convert to IP:
Valued at $730k
Loan: Owing $261k (with $70k redrawable)
Monthly Repayment: $1,315
Potential weekly rent: $500 per week or more

Monthly Income: $9,800 net (not including potential rental income when able to convert)
Monthly Expense: $3,600 (not including current repayment)
Current PPOR Repayment: $1,315
Spare : $4,800

We are quite confident that we’ll be able to service the monthly principal and interest but are concerned if the banks will let us borrow in the first place. We only have $70k savings redrawable which we are planning to use as deposit - we are afraid this is not be enough. In the future, we are planning to talk to one of the mortgage brokers here but are keen to listen to what others have to say first.

Thank you very much in advance.

 

Hi Sintama, welcome to the forums

It might not be as bad as you think. Did you use the redraw facility a lot on your loan? Depending on the scenario you may be able to split your loan as is, and redraw the funds for your home deposit - it's not ideal, but not life threatening, either.

If you used your redraw for lots of personal bits and pieces, it gets a bit more complex and you'd benefit from speaking to an accountant to determine how much of the remaining debt will continue to be deductible once it's an IP.

 

Thank you Jess! Unfortunately, we used the redraw a LOT for personal bits and pieces so its really contaminated.

 

It might work out best to sell the property. Do the sums on a few different scenarios and see what happens

 

Wouldn't get to concerned, can't change what's been done. Have a look @Terry_w tax tips - solutions are limited.

You might find it's best to sell up, reduce the debt on your new PPOR and look for another IP.
Might end up being better overall...
Is your existing property likely to go up in value?
Is it going to give you a good return/yield?
Would your money be better used elsewhere?

 

When you say "a lot" are we talking hundreds of issues, years of misuse or are we talking ten monthsand within each month twenty amounts drawn for private use. The ATO ruling may simplify this so that each MONTH of misuse is a separate calc and its far easier than it could be. . That could mean tax advice and a blended loan calculation would be a cheaper option. eg Lets say that was $1500 its going to be cheaper than a sale ! Could even be simple - I had a guy who used redraw and it was evident through time he had certainly repaid the loan in full (he credited a redundancy which left a balance of $1 and then redrew it a few days later ) and all the redraws exceeded any original loan without doubt.

Then you could refinance and address the true extent of the issue. And yes the final solution may be to sell but its a bit like choosing euthenasia before talking to a Doctor.

You have a evident tax problem so determining the extent of it with tax advice makes sense.

 

There seems to be around $500k equity over and above the loan - the deductible portion of the loan may be anywhere from nothing up to near $260k

Even if the loan isn't mixed 4% interest rate on $500,000 would mean $20,000 per year.
This is the amount you could potentially save in non-deductible interest per year by selling.

Depending on the tax rate this could work out to be up $9k per year in your pocket by selling.

Lets assume sale and purchase of a new home must result in $45k in costs - that would mean a 5 year term on recovering your costs with the savings.

Many other things to consider tho.

 

Thanks for all your responses!

We are keen on keeping existing property as an IP(before all your replies) - thought it was as simple as IP rental income can pay for its mortgage with a bit more in excess which I can put towards the new PPOR - didn't realise that there are tax implications when converting PPOR to IP. Apologies for my ignorance - will definitely re-read @Terry_w tax tips. I am aware that there is a problem but don't know to what extent in terms of $$$ loss.

@Brady
Is your existing property likely to go up in value? Yes, but probably not as much as it had seen the past 4 years
Is it going to give you a good return/yield? Yes with either sell or rent.
Would your money be better used elsewhere? I can think of a lot of things like travel but a new property seems to be the best choice at the moment.

@Paul_PFI
"A lot" means up to 3 redraws per month - for years. I counted up to 38 redraws so far since I refinanced in 2014. Is that too much for an accountant to 'repair'/do calculations on ? Our set-up was that we funnelled salary/savings into our mortgage and redraw when we needed some cash.

Thanks again everyone! Really appreciate.

 

I think that can be recalculated so that some informed choices can be made. The issue with funnelling salary etc into the loan is that it pull it down each time like a ratchet... It only goes down. Never up.

eg Loan $400K. Salary $8K a month.

Month One 100% deductible - $8k salary and + $8K spending = 392K ded + $8k non-d
Month two $392k deductible - $8k salary + $8k spending = $384k ded + $16k non-ded
Twenty months on assuming all are same.....
$240K deductible. $160K non-deductible,

So assuming its IO to simplify matters the deductible portion is $240K and the non-deductible is $160K...Losing 40% of the interest deductibility.

In 4 years its more like only $80K is deductible and 80% of deductions are lost

Makes a offset look like great value as if you had used a offset the whole $400K would still be deductible but with the benefit of reduced interest in past years as well.

 

I would be doing this - speak to your banker/broker and work out a restructure is a moot point.

 

Was always a discussion I had with clients, but now you will be seeing a lot more of this... new platform has a whole heap of questions ensuring this is discussed with the clients - as it should be.

 

Not licensed to give tax advice. Can't win.

 

its in the best of interests of a client to reduce debt!

 

People come to me all the time with this - but I say did they discuss tax? no, well the banker/broker can't give tax advice so you should have sought this elsewhere.