FHOB -PPOR renovation funding (Future tax benefits)

Hi PC forum..
First post here..

FHOB - PPOR - the contract has just gone unconditional, with settlement due in 3 weeks.
Structure of loan:
160k - Variable @ 2.66% with Offset account
214K - Fixed rate @2.09% for 2 years - with 10K p.a extra payments allowed
LVR at 80% exactly at this stage.
Banks evaluation matched property sale price.
Offset account would be maxed out to park our emergency fund

Future plans :
1) Plan to spend 35K in the next 1-2 months towards aircons, switchboard upgrade, security screens, gate automation, landscaping & flooring.

2)To convert this into an investment property in 3 years' time and either upgrade a suburb or there is a possibility of moving interstate. That is when withdraw money from the offset account to make interest as tax-deductible.

3) To buy an investment property before EOFY of around 350-400k, so want to preserve some cash for the same.

Question:
For the sake of renovations of approx 35K what would be the best way to fund it?

a) Use cash to fund this 35K and get it over with.
b) Use equity by putting in extra 35K into the main loan account to fund this renovation, as once this becomes IP this will be tax-deductible.

Appreciate your inputs here.

Cheers

 

Usually using equity refers to borrowing against increased value (even though technically equity is market value less loan). If you bought a 500k house with all cash, saying you now have 500k equity is misleading, even though thats technically true.

Repaying 35k and then redrawing doesnt change the loan amount, and would be the same as if you just kept the original loan amount and used 35k cash from somewhere else.

have you mapped out the future loans with a mortgage broker, that you can get loans for this property, the ip, and the future ppor so that you have 3 properties?

 

You would want to borrow it, but avoid reducing the loan and avoid LMI.

 

a) easiest and quickest way
b) if you put 35K into the loan account then redraw for renovations you're essentially just in the same position as just using the cash to fund it, end loan amount will be the same.

Were these requirements discussed with your broker before you borrowed to buy?

 

Is that responsible lending guidance ? There is no necessity to borrow and create a increased $35K debt to achieve a marginal increased interest deduction annually ($780) which may provide a enhanced "tax benefit" of $260+pa hardly seems compelling. Debt is after all something that will accrue interest so that the total to be repaid over 30 years could be $48K - For a depreciable asset that has a life of what ? 10 years.

Avoid long term loans for assets that depreciate.

 

It may be irresponsible to use cash and have no buffer. I am not giving credit advice on this, just making some comments from a tax perspective.

 

WOW.. this thread got some activity.. Thanks for all your replies guys..

Future IP's would be in our family trust name (yet to be set up) and have discussed it roughly with the broker. However, given our present circumstances, we might not get a loan for an IP as per our broker. This might change as soon as I get back into permanent employment within next few months. Got a redundancy payout & having been in a decent paying permanent role before that.

Would want to put down atleast 10-15% deposit on an investment property without leveraging our position too much, which as per his advice would make it serviceable (all going well!)

Don't want to pay LMI on our PPOR, however don't mind it in the future IP given tax advantages.
Option to borrow it from the line of credit which is available to us, however, that is @ approx 6.5 % which does not make it an attractive proposition.

Is there any other way? Given we would have 160K sitting in the offset account as our emergency fund.

Renovations sums seem to be adding up quickly! I expected more like 15-18K in the start which was to be funded from our savings, but with the growing $$ figure want to structure it as efficiently as I can.

Those figures dont make this exercise worthwhile it seems.
However, given our future plans I would want to achieve the most efficient structure so that our course is set right for the path ahead.
We are debt-averse in general (no personal debt) and live in a decent yet frugal way. But it seems to jump into the RE game one will have to take on debt to achieve financial freedom.
Ironic.. but seems true.

 

Get some specific credit and tax advice is what I suggest. For someone debt adverse you sure are planning on taking on a lot of debt!