First time home buyer - PPOR to IP strategy, thoughts?

Hi all,

My partner and I are first time home buyers, currently contemplating a purchase. I am very keen to effectively structure the purchase from the outset. Rather than asking broad questions - I have determined an approach which is applicable to our current situation (and likely similar to many others on here). All input is appreciated - noting I am new to the structuring aspect so some of my assumptions may be naïve.

Our intentions are as follows:

1. Purchase a property for $650k as joint tenants (which as a first time buyer will attract minimal stamp duty of ~$11k).
   1. Proposing to fund the purchase with an interest only loan with an offset facility.
   2. LVR of 80%-90% depending on borrowing capacity and subject to further research.
2. Place remaining funds (if any) in offset account.
3. Live in this property as our PPOR for approx. 1 year to satisfy stamp duty exemption requirements.
4. Convert to an investment property and rent out - rental income should be approx. equivalent to interest payment at current rates (prior to expenses so will be negatively geared).
5. Rent where we actually want to live - during this period we would be saving for a purchase of the next PPOR (potentially 2 years).
6. Withdraw offset and combine with savings to purchase next PPOR under (potentially) the same strategy depending on market conditions.

Benefits

• Stamp duty savings
• Full deductibility of interest as IP
• Offset reduces non-deductible interest during PPOR period
• Access to cap appreciation and subsequent ability to (hopefully) access equity
• Will facilitate quicker expansion of property portfolio

Drawbacks

• Securing IO owner occupier loan may be difficult for first home buyer
• IO rate will be higher than P&I
• Paying non-deductible interest during PPOR period
• Not paying down principal so adverse market movements can impact equity position
• Frequently moving house (not a huge concern for us)

Specific questions

• Do you think obtaining an IO owner occupied loan with an offset account a realistic expectation?
• What do you think is the most optimal / realistic LVR to be acquiring this first property at?
• Any other major benefits / drawbacks I haven't considered here?
• Are they any implications on using the same offset account for both the PPOR period and when converting to IP (I don't believe there are seeing as it will be an IO loan and no borrowed money will be going into the offset account)?

Other factors

• Located in VIC.
• Current savings of ~$120k.
• Joint pre-tax income of ~$200k p.a.
• Chartered Accountant so LMI waiver may be available.
• Given current visa status Joint tenants appears to be the only option.

Thank you!

 

This will be very hard

No tax issues with that. I can't see any other issues either.

This is not the case.

105%. Any chance of borrowing the deposit or using a parental guarantee or anything in this
Tax Tip 61: How to borrow 105% on your first purchase Tax Tip 61: How to borrow 105% on your first purchase


Are you a tax accountant? You should consider the tax implications of living in the property before renting it out - good and bad.

 

Terry - thanks very much for your inputs and reference to relevant tips.

Yes - parental guarantee is fortunately an option.

I will consult some mortgage brokers re. likelihood of securing an IO PPOR loan with offset. Failing this, I see the following options:

1. IO loan with no offset for PPOR period - refinanced to IO loan with offset on conversion to IP (noting this may still be difficult to obtain). Given the PPOR period will be relatively short - the financial outcome won't be too different to the situation in the original post. An alternative option is not to refinance and retain the same IO loan with no offset going forward.

Drawing on your tips for a 105% LVR this could be structured as follows:

• 105% LVR with parental guarantee;
• 105% LVR with parental loan (25% of prop val);
• 105% LVR with term deposit security that avoids LMI - problem with this is that the lender must be a deposit taking institution so limited lender pool?;
• Blend of the above to equate to a 105% LVR that avoids LMI. Noting that we are unlikely to have the cash for a 25% term deposit as security.

Questions:

• How long would typical term deposits for this kind of structure be?
• I'm not certain that family would have the appetite for a personal loan to the extent of 25% of prop value. In an ideal world, this would presumably be a loan for 25% of the property value to hit the 105%. i.e., on a $500k prop, borrow $125k from family, loan from bank at 80% LVR $400k - total debt $525k. No need for a parental guarantee in this case. Is this logic correct?
• In reality, a blend of parental loan + term deposit, or pure parental guarantee looks like the most obvious option?

2. P&I loan with offset for PPOR period - refinanced to IO loan with offset on conversion to IP (this would likely be easier to obtain but would diminish the deductibility base over the time it is a PPOR). Same structuring and questions as above.

Any inputs on this are much appreciated.

To your point re. joint tenants - I am currently in a de-facto relationship with a temporary partner visa (not yet a PR), I was under the impression that to be exempt from FIRB processes the purchase had to be made as joint tenants (with my Aus citizen partner). I will do some more research on this.

Unfortunately not a tax accountant as many of my friends like to believe. I will be sure to do my research re. tax implications of living before renting.

Cheers.

 

This is not the case.

 

Colin - thanks for the responses.

I'm keen to explore a couple of the points further:

Ability to obtain an IO loan for offset for PPOR purposes

Noting that both yourself and Terry believe this will be difficult - what does the difficulty specifically relate to?

i.e., will the difficulty be obtaining an IO loan for PPOR purposes with an offset; or

will the difficulty simply be obtaining an IO loan for PPOR purposes (irrespective of whether there is an offset)?

Implications of converting from PPOR to IP but not refinancing

Hypothetically, if we were able to obtain an IO loan for the PPOR, I'm keen to understand the implications if we do not refinance upon conversion to an IP and just retain the existing IO loan.

Is there any implications from a tax deductibility perspective that you can think of (i.e., loan was originally used to purchase PPOR but is now for IP purposes)?

LVR

Also keen to understand why you are suggesting an 88% LTV - whereas Terry is suggesting 105%. Is this purely from an negating LMI perspective or just what you believe will be acceptable from a lending appetite perspective?

Appreciate this is all contingent on our borrowing capacity / appetite of lenders but keen to have a conceptual best case structure to inform discussions.

Thanks again.

 

The offset has no impact really. Why do you want IO on an owner occupied loan is what the lender will ask.

Moving out won't change the use of the funds. If the whole loan was used to buy or improve the property the interest should be deductible once you start looking for tenants, and are moved out.

 

Since APRA/ASIC regime the lenders have been advised to place owner-occupiers in a P&I loan, so its a regulator/legislation-driven decision, offset is irrelevent.

You would ideally need to update the lender and they will put you on a higher rate as investment loans are circa .5% higher. If you don't tell them they won't know.

I was referring to, the base loan for the purchase, and yes the 15% would be secured against your first property in a separate loan split to be used for deposit plus costs.

 

Thank you both for clarifying - very informative.

Colin - would you mind expanding on your point re. LTV please as I'm afraid I'm not following? Specifically - what you mean by "88%+ cap LMI" and what this would look like in a hypothetical scenario with a parental guarantor. Does your example also arrive at a 105% (overall) LTV as with Terry's rationale?

Failing to obtain an IO PPOR loan, I see the alternative (and probably more common) pathway as:

• Obtaining a P&I loan with offset (maximising LTV on this by utilising parental guarantor) and parking remaining funds in offset until it ceases to be PPOR.
• Refinancing P&I loan to IO after 1 year and designating as an IP and removing funds from offset to maximise interest deductibility.

Thanks again.

 

88% LVR plus add the LMI (lenders mortgage insurance) premium which is usually just under 90% of total LVR. This will allow you to hold back 10% deposit to use for your next purchase.

Yes, the total LVR is circa 105% with the remainder being secured against guarantor property.

 

Thanks Colin - I'm afraid I'm a little unsure how this would work in practice.

On a hypothetical property purchase of $100k:

88% LVR = $88,000
LMI = ~$2,000 capitalised into borrowings to equate to 90% LVR, total borrowings of $90,000 against the property.
Guarantor = remaining 15% of borrowings is secured by guarantor i.e., $15k.

Equates to $105k of borrowings = 105% overall LVR.

Am I understanding this correctly?

We are hoping that due to my professional designation and existence of guarantor that LMI may be waived - which presumably would mean the guarantor is guaranteeing proportionally more of the loan under the same circumstance as above (i.e., 17% of purchase price to arrive at 105% overall LVR)

Thank you!

 

@CharlieD Yes, pretty much nailed it.

Except no LMI payable if you use guarantor and/or get LMI professional waiver.

 

Great, thanks heaps.