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Cash Savings Or Loan To Finance Renovations

Discussion in 'Property Finance' started by Benson, 13th May, 2016.

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Cash savings or Equity release to pay for IP Renovations?

  1. Cash Savings - Why?

    1 vote(s)
    16.7%
  2. Equity Release - Why?

    5 vote(s)
    83.3%
  1. Benson

    Benson Active Member

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    Hi everyone! This is my first post on the forum ;)

    We have an investment property and already have plans and permits to build in the backyard and looking to start building within the next couple of months. We also want to do some renovations to the existing front dwelling at the same time.

    We are unsure of the best way to fund the renovations to front house and tossing up whether to:
    1. Revalue the existing property, access some equity to pay for renovations then apply for construction loan to build at back OR
    2. Using our cash savings to pay for reno and going for the construction loan (without accessing any equity for renos)

    - Just not sure which of the above 2 options is better to pay for renos? I’m just a bit hesitant to use my savings as I’ve heard its better to use the banks money where possible? Therefore I’d like to keep my savings as deposit money for purchasing another investment property in the future.


    - Can I claim deductions on the renovations I propose? (i.e. Re-stumping, Drainage Repairs, New Kitchen, New Bathroom, Add 2nd Bathroom, Painting, Landscaping, New Floorboards, New BIR’s etc.)

    - What are the pros and cons of each option?


    We plan to keep both properties for long term and we do not have any personal non deductible debt or PPOR and are currently renting.
    Can anyone provide some guidance?


    Benson
     
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    If you use cash and either haven't paid off the main residence or don't yet have one then you are really throwing money away.
     
  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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  4. Benson

    Benson Active Member

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    Thanks for the reply Terry

    I understand that the PPOR is non deductible and therefore best to pay off ASAP but as we don't have one it doesnt apply.

    I also understand that by taking out equity I can claim deductions but can I still claim on all the renovations I'm proposing? I didn't think you could clam on renos unless they were "genuine repairs"

    And isn't it better to use cash savings as I don't need to pay interest on this VS taking out equity and having to pay interest on it (even if it is deductible) ?

    Cheers
     
  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    If you don't have a PPOR then all the more reason not to use cash. You will be tying it up and will have less to buy the PPOR when you eventually do.

    You may be able to claim some things, but depreciate the majority. Whether you borrow or use cash won't change this.

    You can store the cash in the offset account so that borrowing has the same effect on interest as using cash - for now.
     
    Blueskies likes this.
  6. Blueskies

    Blueskies Well-Known Member

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    Definately borrow. I would borrow even if it were for renovations to my PPOR and keep the cash in offset, today's PPOR could always be tomorrow's IP and don't want to give away any of those potential deduductions unnecessarily.
     
    Jess Peletier likes this.
  7. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

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    Do you plan on purchasing a PPOR at some point?

    Either way - cash is king. I'd look to borrow and place the cash in a linked offset.

    Cheers

    Jamie
     
  8. Benson

    Benson Active Member

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    Thanks for the responses!

    Ok yes that makes sense!
    Nice thread Terry, easy to understand ;)
    I can see how the overall interest bill will be the same, so better to use access the existing equity!

    Does the fact that I will also be applying for a construction loan straight after the revaluation change anything?

    For example:
    Revaluation @ $550k ($550k conservative, could be higher)
    Current Loan @ $392k
    New borrowings of 80% of $550k less current loan
    = $440k less $392k
    = $48k for reno

    Construction loan:
    Estimated total construction cost = $160k
    Proposed multi-dwelling value on 1 title = $700k ($700k conservative, could be higher)
    Lender lends 70% of $700k less existing loans (now @ $440k)
    $490k less $440k
    = $50k construction loan

    So total additional borrowings I would now have to complete reno + construction
    = $48k (from reval.) + $50 (from const. loan)
    = $98k (conservative)

    If we were to allow say $35k for renos, that would leave us with $63k to put towards the construction and any additional construction costs to come out of our savings?
    i.e. $97k required from savings account ($160k construction cost - $63k)

    So would it still be wise to use equity for renos as (depending on both valuations) I may need to tap into my savings to top up the construction costs.


    PPOR - in regards to your question Jamie, to be honest we're not entirely sure?
    We are happy at the moment renting and just having investment properties.
    In general, is it better to continue renting and not have PPOR so that we can keep claiming deductions for the IP's we hold?

    Cheers
    Benson
     
  9. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Always better to borrow instead of using cash. If you would be incurring LMI you would need to reconsider.

    You may need to also rethink if serviceability will be an issue, but borrowing generally won't cost you any more and you can pay down the loan if required to increase serviceability.
     
  10. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    I agree with the others :)

    I'd always borrow and keep cash in the offset BUT if you're inclined to burn through cash (or your partner is) sometimes using it is the safer option.

    Also, if you need to borrow again in the near future for your construction, you want to be sure you can service the additional debt. If the reno funds are going to prevent you from borrowing for the construction, you may need to reconsider. It's difficult to say without knowing your full situation - best to chat with your broker first to make sure your servicing is all good.
     
  11. Azazel

    Azazel Well-Known Member

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    As I'm sure others have probably said, this is probably the way to go.
    The equity is deductible.
     
  12. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Equity cannot be deduction, it is only the interest on loans that can be deductible.

    Equity = value less debt.
     
  13. Benson

    Benson Active Member

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    For what purpose does the loan need to be used in order to claim deductions on interest?

    Are banks generally happy to do valuations if you have just purchased the property within the last 2-3 months? Or are they likely to still value it at the purchase price?
    Do i simply provide some recent comparable sales to prove its now worth more?
     
  14. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    to acquire the asset that produces income or to pay for investment related expenses to the production of income
     
  15. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Depends on the bank. Many require at least 6 months to pass. some have no limit. e.g. I did a revalue about 2 days after settlement on one proeprty and the valuation come in $10k higher
     
  16. Benson

    Benson Active Member

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    Thanks everyone for the responses so far!

    I'm going see if I can get a reval. done as it's only been 3 months since purchase.
    If not I may have to wait another 3 months to revlaue and then start on the renos.