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Building PPOR - what would you do?

Discussion in 'Property Finance' started by Lisa Harmik, 18th Jan, 2016.

  1. Lisa Harmik

    Lisa Harmik Member

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    Hey Property chatters!

    Long time reader, first time member. Great forum and a wealth of information! My partner and I are about to build our PPOR in Sydney and have a bit of a problem (good problem I suppose :))

    We have $320k cash sitting in an offset account against an IP. This cash is fully offsetting the loan amount of $310K hence paying no interest.

    We also have a line of credit of $300K that has not been used. It is a clean split and no contaminations, etc.

    Question is, which money do we use? Here's the problem:

    Option 1 - we can this cash to build. Offset will reduce and loan interest is deductable. However this is our buffer so we don't want it to reduce to $0. We have approx. $1.7M in loans so need a good sized buffer.

    Option 2 - We can use our LOC and not use our cash. Problem is LOC interest is not deductable as we are building a PPOR. The cash from option 1 will remain in the offset meaning no interest payable with our IP loan. This option seems silly to us.

    That is our 1st world problem :p Any ideas or hints would be absolutely appreciated :)

    Lisa H
     
  2. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    I would use the offset funds for sure.

    If you needed to use the buffer for any reason, the chances are that if you utilised the LOC the interest would be deductible (for eg if you started using it for all your IP expenses.) And if not, you'll only have non deductible in a 'what if' situation, rather than a definite non-deductible debt if you use it for the PPOR.
     
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  3. Lisa Harmik

    Lisa Harmik Member

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    @Jess Peletier I like that thought. We aren't big spenders and not one to splurge out on holidays or cars so if we did have a large expense coming up chances are it would be IP related.
     
  4. Marg4000

    Marg4000 Well-Known Member

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    A third option may be to borrow for the PPOR and then put the offset cash against this.
    Marg
     
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  5. Perthguy

    Perthguy Well-Known Member

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    That could be a good option if there is a chance the PPOR will become an IP in the future.
     
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  6. Lisa Harmik

    Lisa Harmik Member

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    @Marg4000 @Perthguy thanks for the response appreciate it. I thought about doing this but was hoping not to borrow as once the build is finish i would love to purchase another ip.

    The chances of this ppor becoming an ip in the future is 0.5%.
     
  7. Scott No Mates

    Scott No Mates Well-Known Member

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    I'm backing @Marg4000 on this one. Regardless of whether you think that you will live in this property forever you may change your mind.

    If you take out a loan then shift all of the $300k to this offset account there will be no interest to pay, funds will still be available as you wish.

    The interest on the debt where you have funds sitting will be claimable.
     
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  8. York

    York Finance Broker Business Member

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    Agree with Marg. Loan the money for PPOR, switch offset to PPOR loan miminising interest. This will provide personal buffer if you need the cash in future. Switching the offset away from IP will activate interest on IP loan making it deductible. If required use LOC for IP expenses for deductibility also.
     
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  9. Lisa Harmik

    Lisa Harmik Member

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    Is it possible to have an offset account attached to a LOC? If so could I just use my LOC to build and place the $320k in the offset linked to the loan? Saves me opening another loan.
     
  10. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    Whether you borrow the whole lot for the PPOR and can retain the LOC undrawn will depend on your servicing - if you hope to also buy another IP, get your broker to make sure you can do both.
    You can't get an offset against a LOC, but you can get an offset against the loan you get to fund the balance of the purchase. This would work well and is most likely the best option if you're not going to buy an IP. If you are, it's better to borrow 105% (including costs) for the IP.

    If you can borrow 105% for both via the LOC, make sure you split it to reflect the amounts of both deposits so you don't end up with a tax issue.
     
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  11. FCA

    FCA New Member

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    Hi Lisa,

    its a very good dilemma you have there :)

    There are a few things you need to be mindful of, each will depend on your financial situation in its entirety. One of the main reasons to have no debt on your home and retain the debt on an investment property is the offset the interest expense has against your (and/or your partners) income. If you don't have an income and pay no tax it is a moot point.
    Moving debt from personal to investment assets is also against the law and there are Capital Gains Tax issues you need to consider depending on when you intend to sell your property. Ownership structures etc.
    I would suggest your first port of call would be to speak with your accountant or financial adviser, after reviewing your entire financial situation, he/she will be in the best position to guide you as to a suitable strategy.
    Then by all means contact a mortgage broker for advice on the best loan structure, rates, fees etc.
    Many people think 'today', neglect tomorrow, and then regret... 'if we all had a crystal ball...reality is, we often do".

    Hope this helps
    Joe
     
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  12. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    I would probably suggest you borrow if you can. Move the offset money over to the PPOR loan and borrow 80% if you can. The interest should still be the same. moving the offset money will mean more interest on the IP loan which would be deductible and it would save you the same interest on the PPOR loan as if you used cash but you will have the benefit of a higher deductible loan if you ever rented out this property.

    If you do run into servicing problems later you could pay the loan down and then reborrow it.

    I would suggest you consider a few splits up front as per this thread Tax Tip 13: Simple Loan Structuring Strategy
     
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  13. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    I think this is not phrased well. Moving debt - changing security for a loan - doesn't change deductibility of interest because it is the purpose and use of the funds that determines deductibility not security. However it is not against the law - just impossible.
     
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  14. Lisa Harmik

    Lisa Harmik Member

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    Thanks everyone for your replies, they're really appreciated! I'm leaning towards opening a new loan with offset to build the PPOR. I think this makes sense.

    Lets say for example uncle APRA pops his ugly head and bank says no more. My plan is then to use a mixture of cash and the LOC to fund the build. The only problem i see in this is that any money left in the LOC will not be able to be used to fund future IP's as i will have contaminated it with my PPOR. Perhaps to solve this problem is to split the LOC again and and keep a portion clean for future IP's?
     
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  15. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    That sounds fine, just split off a deposit sized split from your LOC ready for your IP. And don't forget to keep aside some cash/loc for your buffer!
     
  16. Lisa Harmik

    Lisa Harmik Member

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    @Jess Peletier Thank you. Just a shame the poriton for the PPOR wont be deductable but this should only be $100K.
     
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  17. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Split the LOC before doing anything. Maybe multiple splits.
     
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