Changing PPOR to IP and the types of Loans

Discussion in 'Investment Strategy' started by d01, 15th Oct, 2020.

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  1. d01

    d01 Member

    Joined:
    1st Oct, 2020
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    Location:
    Sydney
    Hi,

    has anyone worked out what is the better strategy regarding type of loans and how a lender and ATO will look at things?

    I have a PPOR with an I+P Loan which has relatively low interest rate and I am planning to change it to an IP.

    1) Keep the same Loan with Low interest rate BUT keep reducing the the deductible debt (that's the bad thing)? Would the lender mind? Would do lender find out? What would happen then? Would I still get a nice "interest paid" summary I could use for tax purposes?

    2) refinance as IO Loan with higher rate (no decrease the deductible debt).

    I haven't done the math yet but I have a feeling that it's possible to have better cash flow with strategy 1 even.

    Would the answer be also dependent on the overall strategy whether I would want to keep the property and make it positively geared (income) OR just wait for some increase in value?

    I am wondering what is the "right" thing to do...

    thanks

    tomas
     
    d01, 15th Oct, 2020
    #1
  2. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

    Joined:
    14th Jun, 2015
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    Location:
    Gold Coast (Australia Wide)
    Hi Tomas

    The "right" thing to do is to ask questions and do research as you are doing.

    Strategy one is quite common, and is often a default thing based on convenience


    Likely in breach of your loan agreement

    As you say, reduces deductible debt which may or may not be beneficial to you since we know nil about your current numbers such as new Non ded debt, your marginal tax rates, future goals and risk profiles.

    Im not a tax guy, but the ATO wont care what the loan is called, they will go by the "purpose of funds test".

    I assume that your loan hasnt had redraw used and is not a LOC style product on a PI rate, where your salary has been credited directly to the loan so as to save interest. These things and concepts were all the rage a few years back, but peops found that because every salary credit reduced the loan limit, and every "living off redraw" was a new borrowing, they had a contaminated loan, AND in many cases had ZIP interest to deduct.......................​


    Strategy 2 needs some work to implement and a full loan app is required by most lenders to got to IO, even the incumbent lender. This is why doing nothing and leaving it as is is the preferred strategy by many - as a default, rather than a strategy per se.


    Compliant with your loan agreement​

    A likely rate spread of 20 to 50 pts depending on loan type and lender mix. 20 years ago that spread was 100 pts, then competition brought it to Zero with most lenders, then in 2015 APRA concerns over IO volumes allowed lenders to use the spread mechanism to encourage PI v IO. There are lenders with low or no spread between IO and PI since the IO virus has been largely contained.

    A reset to a 30 year total loan term which may help with Servicing for later purchases, and allow more cash to go to non debt even if PI

    Lowers deductible loan debt repayment, the balance of the PI being able to be repaid off your non deductible debt, and in combination with an Active Debt Recycle Strategy, kill off your non ded debt much more quickly, often by a few years, and in less than half the time in most modelled scenarios.
    ​

    Suggest you seek some specific credit and tax advice, because its very probable you wont have all the tools and info to make a considered decision otherwise.

    ta

    rolf
     
    Rolf Latham, 16th Oct, 2020
    #2
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  3. d01

    d01 Member

    Joined:
    1st Oct, 2020
    Posts:
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    Location:
    Sydney
    Hey Rolf,

    thanks for you reply.

    Ideally we would move out from this PPOR after a year. Not sure if it makes any difference but those are the current circumstances.

    From the original Loan I have paid 15k. Again I know what I would have done if there were no restrictions. I would always go for an IO loan. That's what I did with my first PPOR but I couldn't do it with the next one and the difference in the interest rate is pretty big now + the requirements to be able to get another loan were it had to be a P+I Loan.

    Now I have almost 100% in the offset against the PPOR loan so no money is being paid straight to the loan. The right thing to do, if it was possible, but maybe after the latest changes it will be possible, would be to change the loan to an IO loan. Most of the lenders these days don't have any attractive IO loans either...maybe that will change too.

    My initial idea, before the properties doubled in Sydney, was to buy few units and then make them all positively geared and make a living of that. Stuff has changed and my big plans had to change.

    We will try to go for the next upgrade and again I am not doing it right as the most expensive property should be always the IP and not PPOR but that's life. So if I will be able to get another loan which is a big question, what will they look as being a riskier setup

    - 2 IO Loans
    - 1 IO and 1 I+P Loan

    First unit had already it's appreciation and again because I am "new" I am not sure what was the right thing to do

    - make the PPOR IP and get another PPOR
    - sell PPOR and get another one PPOR and IP.

    The more I think about it I feel like I should have taken the CG with no tax. Get this current place and get a new IP with a bigger Loan as the first IP is positively geared now.

    ... I got carried away... anyway

    So there is pretty much NO bad debt (all in offset) so everything kind of goes against the loan only. If the type of loan for the current PPOR would have NO ramifications for the next loan I would 100% go for IO right now I think.

    It would be interesting to see how different loans with their interest rates affect my borrowing power. I think that should be my priority first, to get a new loan for the new place.

    thanks

    tomas
     
    d01, 16th Oct, 2020
    #3