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First Home Buyer - PPOR - IO?

Discussion in 'Property Finance' started by Hars, 5th Sep, 2016.

  1. Hars

    Hars New Member

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    Perth
    Just signed an offer on a property last Friday for a home we're intending to live in.

    I randomly found this website and I've spent the entire weekend devouring all of the insanely useful information. I'm curious how I should set my loan up best for the future. It's made me question my initial plan which was to pay a big deposit on a P&I mortgage and pay it down ASAP.

    Me: Self employed @ $120k
    Wife: PAYG @ $65k

    We have $550k in savings we can put towards a deposit. No debts, we are pretty financially disciplined and good savers.

    Property: $700k - just signed offer, we're settling in 4 weeks. We came in with a cash offer (Mum's idea!) and fast settlement to use as a bargaining chip which ended up working in our favour, we got the house at a discount. Mum was going to kick in the difference if for some random reason we don't get finance.

    We have pre-approved finance with ANZ, we went direct to the bank as Dad (now Mum) have decent business dealings and they recommended the Break free package and on a P&I loan the mortgage guy said he was confident he could get us under 4% on variable. I'm not sure if we'll get that rate on IO.

    If there is any chance we're moving out of this place in the next decade and turning it into an IP, I need to set the loan to interest only, borrow as much as possible and park as much cash as possible in the offset account? That way when we move out we remove the offset and that debt becomes tax deductible?

    If we do stay in the property, should I set it to IO anyway and make additional payments? I saw a video saying you're better of doing that due to the forward loading nature of a P&I loan.

    I do want to start investing in property eventually - hopefully purchasing my first in the next 6 months. Where should the deposit for the first come from?

    I appreciate any advice!
     
  2. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

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    Spot on.

    I wrote a blog entry on this a while back. Copy/pasted below. Just assume you're John :)

    -------------------------------

    We see it every day. Clients who pay down a large portion of the loan on their Principle Place of Residency (PPOR) and are now looking to upgrade to a larger house while keeping their current property as an Investment Property (IP).

    So what's wrong with this picture? In short, when their current property turns into an IP, the loan against this property is generally quite small (as they've paid down a considerable amount of the principle) - which means they can only claim a small amount of interest. The good news is that there's a way around this - but it's important that it's set up correctly from the start!

    Let's look at an example.

    The not so ideal situation
    John purchased his first home in 2005. It was a nice little 1 bedroom apartment in the centre of town. He took out a loan of $300k for it.

    The loan was set-up as principle and interest and John was determined to pay off his loan as quickly as possible.

    It's now 2011 and John has managed to get his loan down to $100k.

    John has now decided he would like to buy a larger house but keep his little one bedroom apartment as an investment.

    Because John has paid his loan down to $100k - when this property becomes an IP, he can only claim interest on a $100k loan (which is about $7k per annum on 7% interest rates) which isn't ideal since the property is now worth about $500k and is going to get $500 per week rent.

    To make matter worse, John wanted to use the equity in his first property to purchase his next one. The issue is that the equity he is accessing from his 1 bedroom apartment won't be deductible because it's being used to purchase a PPOR.

    So in this scenario, John has reduced his tax deductible (IP) debt whilst increasing his non-deductible (PPOR) debt. Not ideal!

    So how do we get around this?

    The ideal situation
    If John had set up the loan as Interest Only (IO) with an offset from the beginning; he could have eliminated this issue.

    Instead of paying down the principle, John could pop all of his spare money (including the would be principle repayments) into the offset account which provides a similar outcome to paying down the principle. Instead of having paid down his loan to $100k, John would have $200k sitting in his offset account and only paying interest on the remaining $100k.

    When it comes time to convert this property into an IP, John can simply take the funds out of his offset account, which will boost the loan back up to $300k, and use those funds towards his next PPOR. This way, John has basically increased his deductible debt (IP loan) back to its original level of $300k whilst reducing his non-deductible debt (PPOR loan) by $200k.

    Now John is able to claim interest on a $300k loan (which is closer to $21k per annum on 7% interest rates).

    Cheers

    Jamie
     
  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Yes.
    Borrow 80%, go IO and park in offset.

    Better still borrow 105%, go IO and park in offset.

    You can then pay down the loan if and when you choose.

    The two reasons not to do this are
    a) if you are a spender, and/or
    b) serviceability reasons
     
  4. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Not from the offset account :), coz thats your money

    assume you will buy a 500 k IP and you want a 12 % despoit + 5 % costs

    Take your IO 560 k PPOR loan.

    splt it into 475 PPOR loan and 85 new loan.

    Take 85 k from the cash in offset, and pay down the 85 loan.

    redraw from the new 85 loan for deposit and costs

    Presto - 85 k of tax deductible debt .

    Choose your new current lender with this in mind - they arent all equal

    ta
    rolf
     
  5. Whitecat

    Whitecat Well-Known Member

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    How about LMI cost?
     
  6. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    no lmi
     
  7. marty998

    marty998 Well-Known Member

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    If it's his 1st property with no other equity how is he supposed to borrow 105% with no LMI?
     
  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Borrow 80% from a bank and 25% from a related party is one method.
     
  9. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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  10. Hars

    Hars New Member

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    Perth
    Thank you guys - appreciate the quick responses!

    I'm really lucky I found this forum before acting!

    Terry - reading through your 105% tax tip now!
     
    Terry_w and House like this.
  11. House

    House Well-Known Member Premium Member

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    Possible to borrow from someone else's LOC/equity loan or they'd have to withdraw first and then loan it out?
     
  12. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Hi Massuman man

    Yes X could lend Y even where X is borrowing from a LOC.