First PPOR turn IP clairty

Hi everyone,

Thank you for all the wisdom and advice.

I have received a large of money that I have been sitting on for some time and am ready to do something about it. Also, my parents have helped me build my first home. I am 24, with a stable job and in the early stages of my career, and would like to set myself up to be in a position to retire by 45. I have a SO but his name is not on any paperwork and does not have any involvement. I have read about the tax benefit's of a spouse but that will be for a later date.

Current situation

• Renting and will be moving into mentioned PPOR
• My parents have paid for my land and construction costs, and I am now in the process of getting a home loan to pay this back.
• Will be turning it into an IP (1) in less than 6 years.
• My costs are $300k (A) (full costs were $350k but I paid $50k myself). The property has been valued at $480k (B).
• At the time I had only asked to borrow $350k (C) P&I loan - will increase this and ask for IO, if possible.
  
• I will also be purchasing my parent's property (in two transactions) in the near future as IP (2).
• Somewhere in this mix, if the market is favourable, I will be claiming the 6-year rule.
  
• My savings is greater than my loan amount.
• Simultaneously build a portfolio of ETFs

I have read Terryw's tax tips and have a few questions

I understand borrowing my max capacity now will increase the tax deductions when it becomes an IP. Also to do that, I should avoid paying down any amount of the loan while it is a PPOR. With the surplus loan funds (D=C-A), I understand I can park borrowed money in a clean offset account.

1. How can I use this surplus without contaminating the loan - to either buy ETFs or as a deposit to buy half of my parent's house? Should I be asking to split the loan from the beginning? I keep reading "it is what the loan is used for that determines the deductibility". If I can clearly show that I used D for investment purposes, would that be enough, or is it better to split? I'm confused on the terminology of splitting - when searching I keep getting fixed/variable splitting, is that the same thing? Do I even want to touch this surplus? What impact will it have when it becomes an IP loan?
2. Once I do drawdown on the surplus to buy an income-producing asset (probably within the first year if to buy ETFs), while it is still a PPOR, can I then put my owning savings (emergency fund + 3 months of expenses) into the offset and invest the rest of my savings into ETFs (DCAing)?
3. While setting up the property side of things, I will be renting and looking for my PPOR, where do I sit my savings (as I DCAing into ETFs as above)? Having it in an offset on an IP doesn't make sense because then I reduce the interest I can claim.
4. Or should I borrow to buy ETFs and leave my savings for the PPOR, again where would I sit my savings? Do I increase & split a loan from one of my IP to buy ETFs?
5. Once I do purchase a PPOR, is it best to pay as much of it with cash and then borrow the rest and then debt recycle that non-deductible loan to pay it down?
6. Can I do all of this in my first year as an owner? I've read rumours that because I am receiving the FHOG, that all of this goes out the window for the first year.

Apologies if I've asked too much. Please let me know if I should be directing this somewhere else.

Thank you, again.

 

For Q5, Or would I be better to borrow 80% and then put my savings of the equivalent amount in the offset and debt recycle?
I wasn't sure how to edit my post

 

1. what surplus are you referring to here?

2??

3. You have to keep you cash somewhere and an offset account is better than under the bed, even if it is reducing interest payable

4. You can always pay out a loan, but can't turn something already owned as deductible. But shares are easily sold.

5. I would probably borrow as much as possible when buying hte main residence, without incurring LMI, as this will be a lower rate then investment debt. Then debt recycle and loans shuffle.

6 why not

 

Thank you, Terry_w.

1&2. If my expenses to pay back my parents are $300k and I am borrowing $350k, there's a $50k surplus. Wouldn't this be the scenario where I have borrowed money put into offset? If so, then can you help explain Q2. Otherwise, it may be that I don't have a clear understanding of how the movement/use of borrowed money works.

4. I don't understand what you mean by pay out a loan. I thought you never pay out an investment loan. Let's say it is now Year 2, can I use my PPOR-to-be-IP (the equity in it or as security) to purchase IP(2) and/or ETF?.

5. That makes sense. When borrowing for PPOR, will they look at the two IPs and my ETF portfolio?

By Year 3 I will have two IPs loans, a portfolio of ETF and cash, ready for PPOR. I would like to understand how I can achieve this, with continuous borrowing and minimise using cash.

 

1. You would seem to be refinancing your parents loan and borrowing another $50k so this loan from the bank should be split accordingly. See my tax tip 1 with issues surrounding parking in an offset. Prob best to keep the $50k in an offset then pay back into the $50k loan and reborrow when you go to use. pay directly from the loan then if you can.

2. The $50k offset would be full, so you would probably need a second offset

4. You would probably have just 2 choices to borrow to pay shares, a) margin loan or b) debt recycle an existing loan - which would mean reducing deductible debt. with the other choice being c) use cash. Which you would use will depend on the ownership structure and whether you would be having non-deductible debt in the future.