Buy 2nd PPOR or 1st IP?

Discussion in 'Loans & Mortgage Brokers' started by Krisyd, 24th Jun, 2019.

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  1. Krisyd

    Krisyd Member

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    Hi,

    I am new here, reading the other threads here and Terry's tax tips.
    Just wanted a bit of advice from the experienced and helpful people here.
    I understand that I have to seek professional advice but I appreciate the advice given in the forum. It serves as a good starting point before speaking with brokers and accountants.

    Thanks in Advance.


    We (Me & wife) bought PPOR 3 years ago. Lender(P&I loan) is State Custodians. We went with them because of the Interest rate and Online reviews ( Loan serviceability was never an issue) . They are good till now.

    However, I was not aware of the risk of a non-ADI lender with respect to offset deposit.

    We have now 140 K in Offset and around 20-30 K in redraw (considering not much change in valuation).

    The current PPOR (2 bedroom unit) is literally at stone throwing distance to Station, Mall, GPs, Childcare etc. We are planning to stay here for another 5 years at least, then buy another PPOR (a house) and convert the current PPOR to IP.

    As of now, I am considering whether it will be beneficial to buy an IP (approx. 450K) as of now or not.


    I see two options :


    Option 1:

    Just wait to buy 2nd PPOR. Pay as much as possible from offset for 2nd PPOR.
    No extra repayment to current loan of 1st PPOR.

    Option 2 :

    Buy an IP now in an area to get some capital growth over 5-6 years. Sell before buying 2nd PPOR.

    For the 20% deposit of IP (90K), transfer the required amount from offset to redraw to use the equity. Refinance the Loan. Split into two parts.
    One part is 90K which will remain in redraw until the IP is bought.
    Other part is remaining loan amount . Offset set up against this one.
    Take 80% of the IP as IO Loan.

    Does the setup look correct?


    In both cases , considering the risk on offset amount, I definitely need to Refinance the PPOR loan to an ADI . Currently I am at 3.47% plus an annual fee of $300. Is it matchable? If I approach a broker, what should be my expectations? And is it possible to cover the exit fee somehow? I am aware of Refinance loans with cashback (NOT cash from broker). Is that an option?
     
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    It would be more tax effective not to use your cash for the deposit on the IP, could you just borrow extra without paying down the loan?

    Might be better to buy the new main residence first, then debt recycle into investments.
     
  3. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Not advice per se but a comment around focus.

    I see that the focus on rates fees and charges still persists in your mindset.

    Objectively you don't get what you don't pay for and you don't know what you don't know.

    Someone like Macquarie will do a pi 3.44 with a 70 lvr and the capacity to debt recycle.

    However none of those things means a lot if the context is still focussed on primarily saving on rate since that's not the end game for most.

    Most want to pay the debt off ,. Not save on rates and fees and charges....

    It's not the same thing.

    Often paying a higher rate and using an effective strategy will yield better results

    Loans aint loans

    Ta
    Rolf
     
  4. Krisyd

    Krisyd Member

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    Hi Terry,

    The valuation went up in Mid 2017 (based on the sell price of similar units in the same building) and at that price I could easily use the equity.

    But I am sure the valuation is down now. :(
     
  5. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    So I guess another thing to look at is a valuation outcome. Get say 3 diff lender valuations and see how that stacks up before going down the rates and lender selection issue.

    In all this I'm assuming the purchase was at 80 per cent ?

    Ta
    Rolf
     
  6. Krisyd

    Krisyd Member

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    Hi Rolf,

    I agree that I am still thinking in short term. That's what I would like to change.

    Could you please elaborate a bit?
     
  7. Krisyd

    Krisyd Member

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    No, purchase was at 85 percent. That's one of the reason why my equity is not much.

    Compared to with the price I have paid, My Loan amount is roughly at 77%.
     
  8. Krisyd

    Krisyd Member

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    My little strength is concentrated in offset.
     
  9. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Much d
    A lot depends on the borrowers goals, resources, risk profile, expectancy, teachability and capacity to make decisions.

    A really good example is your current need to refinance out from where you are.

    That need may have not been obvious TO YOUat the time u took the state custodian mortgage, in reality its not meant to be, its not something you do everyday.

    But..................

    It would have been obvious to a credit adviser that wasn't tied to a particular lender outcome because they would have asked a range of questions that would have put rate lower on the decision tree than your risk profile to your cash holdings.

    State custodians may have had a duty of care to ask if the ADI guarantee thing was an issue to you but as a product provider....,...business principles sometimes come ahead of full disclosure.

    We always cover the ADI thing off when we talk with clients about non banks where there is PPOR debt involved, and many dont proceed with a NON adi, once they understand what it means to them specifically - for many its also not an issue., but without the appropriate disclosure the borrower can be left blind.

    The above applies especially here since it sounds like you paid lenders mortgage insurance. ?

    Other things that can have large preferences over rate can be capacity to debt recycle, or split loans or so equity cash out pulls etc etc

    The list goes on....

    Rates fees.and charges matter, but aren't the drivers of most informed decisions for most borrowers unless they have very simple current and future needs, and only a little excess financial capacity.


    Ta

    Rolf
     
  10. craigc

    craigc Well-Known Member

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    As well as the lending options Terry & Rolf have pointed out above,
    if you consider option 2, if you purchase well, then after the 5-6 year period you mention;
    Reassess if hold IP1 or PPOR1 or none or both, as the options for best future needs at that time.
    If you can borrow &/or hold at the time you will hopefully have some growth & have multiple options available to you at that time when you consider your position at that time.
    The more you hold ‘generally’ the more options you will have.
    Good luck
     
  11. Krisyd

    Krisyd Member

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    Agree
     
  12. Krisyd

    Krisyd Member

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    This is including offset?
    Macq has two parts right? one ADI and other is not?
     
  13. Krisyd

    Krisyd Member

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    They never bothered to ask.
    Actually it is surprising that very little about this can be found online (except few threads here and there, many of them by you)

    Yes I did


    Off course I am interested in Debt recycle from what little I have learned about it, but how can I assess whether it is for me?
     
  14. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    If you have nondeductible debt and intend to invest further before paying off this debt then debt recycling is for you. Failing to debt recycle bit investing is like voluntarily paying more tax
     
  15. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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