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Correct strategy? High or low LVR dilemma.

Discussion in 'General Property Chat' started by hudbry, 30th Aug, 2016.

  1. hudbry

    hudbry Active Member

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    Hi everyone,

    I'm in a quandary and wanted your thoughts please.

    My wife and I currently have 3 IPs. We are also currently going through the process of buying our 4th. There is a 5th one in our early stages as well but I'm waiting on finance for it, and it's this one I'm in need of advice for.
    In order to help me I guess I need to give you a bit more info.

    My end game:
    I'd like to have all 5 properties paid off asap leaving me with an income of $115k per year.

    We currently have 2 capital investments and one cash return. The two we are in the process of purchasing are both cash return investments.

    We have savings of $135k in offset accounts.

    My dilemma:
    I'm waiting on finance to be approved for IP number 5. I've requested LVR of 90%, which I've done for the other IPs preferring to keep my savings in the offset account to keep repayments low.
    Due to the nature of the build, I'd be very lucky to get that deal. It's more likely they are going to come back and say no mortgage insurance, LVR 70%.
    This will take a fair chunk of our savings out of the offset, leaving us close to $50k, restricting any further purchase for the future.
    I'm simply not used to putting down such a large deposit. Honestly, it scares me.
    The property is a great little cash cow of 13% return so it would certainly help us get to our end goal of paying off the other IPs quicker.
    I know by putting 30% deposit down means no LMI, and less to pay off etc etc, but investment advice I've had in the past has been to use capital in other IPs for deposit, not your savings. I've done this already, taking some capital out of IP 1 to finance IP 2. There is more capital there, but I'd rather leave it there, and my IP 3 capital investment is still young, so can't draw on that. As a result, if I want to keep moving forward, I'm having to look to use my savings. Part of me sees it as taking a couple of steps back to be able to move forward faster.

    I'm not sure if I'm looking at this correctly, strategically speaking, so would love your thoughts and suggestions please.

    Many thanks in advance.
     
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Why is your goal to pay them off? Are you actually doing that now by paying PI?

    If you want to pay them off then avoiding LMI may be a good thing.

    Why not just borrow the deposits instead of using cash?
     
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  3. hudbry

    hudbry Active Member

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    Sorry, didn't make that clear.
    By paying them off I mean offset the lot of them so I'm not paying the bank anything. I'm paying interest only on all of them.

    When you say borrow the deposits, you mean from my other IPs?
     
  4. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Borrow with separate loans secured against your other IPs.

    Consider spousal loan strategies too maybe.

    Good that you are offsetting!
     
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  5. Colin Rice

    Colin Rice Mortgage Broker Australia Wide Business Member

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    Wow, tell us more?

    Was going to suggest that as its a wise move. Instead of paying the bank you become the bank!
     
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  6. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    Do you have any PPOR debt? You could recycle the offset cash into your PPOR if so, split the loan and redraw for the IP. At least that way you've reduced your home loan and have 100% borrowing on the new IP.
     
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  7. hudbry

    hudbry Active Member

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    Hmmmm, interesting idea, and not one I've thought of before. We don't have a PPOR as such, we rent........... although our first IP, which we rent out now, we lived in originally and declare as our PPOR for Capital Gains Tax purposes. Does this count?
    Can you explain further the process please. I'd put my savings into paying off that house, but then draw again off the value of the house? Is that not the same as using my offset money directly?
    Many thanks.
     
  8. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    It won't work if you don't have non-deductible debt unfortunately - the IP that used to be your PPOR is already deductible so it's a bit pointless.

    If you have more equity in one of your IP's use that rather than cash. You're much better off keeping your cash available especially if you don't have a PPOR.
     
  9. hudbry

    hudbry Active Member

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    How do I go about doing that? Is that not cross collateralising things? Are the rates not very high? Is this not the same as drawing on the capital of an IP? Can you offset this new loan?

    Can you tell me a little more about spousal loans please. How do they work?
     
  10. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    For the loan structuring see
    Terryw’s Ideal Loan Structure Terryw’s Ideal Loan Structure

    Just borrow against another property and use that as deposit.
    No cross collateralisation involved.
    Rates normal
    Not sure what 'drawing on the capital of an IP' is
    Yes can offset.

    For spousal loans:
    Tax Tip 47: Spousal Loans as a Tax Strategy Tax Tip 47: Spousal Loans as a Tax Strategy

    Simply put A lends to B.
    But you will need good legal and tax advice
     
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  11. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Why 70 lvr. Sounds like BankWest or anz on a duplex pair ?

    What is it that you are actually building ?


    An 80 lvr may be possible which would be a middle of the road outcome and preserve a lot of your cash.

    What are your longer term ppor needs ?

    Ta

    Rolf
     
  12. hudbry

    hudbry Active Member

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    It's 5 units on one block using RAMS. Tried with CBA but they wanted me to do a business commercial loan.
    80% might be doable.

    Happy to rent in the moment, but would like to buy our own house one day. Need to find the area we want to live in first.
     
  13. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    In that case it is important not to use any of your cash to invest.
     
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  14. hudbry

    hudbry Active Member

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    Yes, I agree with that and wouldn't if I could, but wonder if it's worth me taking a hit on the savings at the moment for the benefit of the rental gain?
    It seems like an opportunity I'm hesitant to miss.
    I can always borrow from my IP 1 at a later date, and also IP 3 when that moves more.
    Thoughts?
     
  15. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    You would be throwing money away.

    Imagine you used $100,000 of your cash as deposit for an investment property.

    Later you borrow $100,000 to buy your own home at 4%.

    That is $4000 per year less tax deductions for the next 30 years or so.
     
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  16. hudbry

    hudbry Active Member

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    Hmmmm.......sorry I'm a little slow when it comes to things like this so appreciate your time and patience.
    If I borrow $100,000 against one of my IPs now instead of using my cash, am I still not effectively borrowing at 4% as IP1's mortgage rate? Not quite sure what the difference is between borrowing against an IP now, or borrowing against an IP later on..........
    Like I say I not great with these figures.

    Many thanks.
     
  17. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    The difference is that your borrowing now for an IP, where in the future you'd be borrowing for a PPOR. Much better to save your cash for the PPOR.
     
  18. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Borrowing now will not result in any extra interest if you keep your cash in an offset account.

    But the difference will come later when you have non deductible debt and you will have more cash available to save interest on this which means greater tax deductions.
     
  19. hudbry

    hudbry Active Member

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    OK,
    thank you for that. I understand that more now.
    Because time is a little short, I'm not going to be able to organise that in time, so can I use my cash now and in a month's time borrow the money against an IP then?
     
  20. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    No.
    Tax Tip 5: Reimbursing yourself - Impossible Tax Tip 5: Reimbursing yourself - Impossible

    Well you can, but it won't make the interest deductible.

    Think outside the square...