Generic advise about getting back into the market required.

Hi All,

I would like to seek some generic advise about my current situation.

Back story:

My wife and I migrated to Australia and finished uni back in 2010. We started working and saved very hard for our first home. In 2013, we managed to saved enough to buy a piece of land in Doolandella, QLD and built a house on it. I was very interested in ensuring our long term goal of living financially free. We attended a couple of "keep your credit card at home" seminars and flashy apartment launches. To cut the story short, due to my lack of knowledge, we bought one of the cheapest apartment in Nundah, QLD with NRAS (settlement Nov 2014).

NRAS was quite unpleasant to deal with (all the various cost and apportioning for neg gear during tax returns). However, when the Brisbane apartment squeeze started, by a stroke of luck, we were not affected. This is largely due to the nature of rental discounts in NRAS and the tax offsets. As for the loans on my house and the investment apartment, I foolishly believe whatever the mortgage broker said and cross-collateralize both properties. This allowed me to loan up to a 105% of my investment apartment against the equity in my house (my house did not increase in value, I paid down the loan). The loan on my home is tied to an offset account, whilst my investment is with a IO 5 year fixed loan.

Current situation:
Late last year, I managed to fully offset my entire home loan (i.e. I pay no interest on home). I started buying ETFs with any excess cash to divert my risk/gains. I also started putting money (about 50k) in HISAs; prepared for any action. My wife has since quit her job to spend more time with our kids (making me the sole income earner). I am thinking of going back into the property market, but would like to do things differently this time.

I would like to break the cross collateralize between my home and the investment. I plan to do this by:
1. paying down my home loan to zero
2. applying for a LOC using the equity (about 280k)
3. either break or wait to investment fixed term loan to complete the 5 years (I think there is still ~1.5 years left)
4. refinance the investment loan with another bank and pay for whatever above 80% of the value using the LOC - tax deductible

Once the above is done, I would like to start buying more investment properties and request for loans at LVR 80% and pay the rest using LOC. This will lower the risk of me losing my home.

My questions:
1. Is the above a silly plan and is there a better way of doing this?
2. Will my current bank see through what I am trying to do and not approve the LOC?
3. Will banks give LOC this size based on my financial position (sole income)?
4. I am looking at up coming suburbs with grow potential,e.g. Runcorn, Acacia Ridge. Any thoughts?

I know that I have made a number of mistakes and worked really hard to get to this point. I still think that being financially free in the next 10 years time is possible, but need some guidance. Thank you and apologies for the long message.

 

Hi @John1983

Well done on your achievements to date.

If not breaking the loan prevent you from moving forward, then its worthwhile checking what the break costs are, so you can do a cost benefit analysis on whether its worthwhile doing this.

Sometimes paying the price may mean you could fast track your progress.

In terms of paying down the loan - best not put money into the loan and closing it, as depending on the lender it may be challenging to get the cash out back. This is even more important in the current environment. Any future loans will be based on your income, and family commitments, including how many family members.

Please seek specific advice to your circumstances.

 

First thing would be to talk to the bank holding your loans. Tell them what you want to achieve and ask how they can help you. Don’t phone, these things are usually done better face to face if possible. Just get advice, don’t do anything. If not happy, visit a different branch and talk to a different person.

If no luck, consult an independent mortgage broker and see what possibilities they can offer.

Don’t do anything until you have fully explored your options. Some actions can’t be undone. Sometimes the best option is to just sit tight.

I would much prefer Runcorn or Runcorn Heights over Acacia Ridge. You are probably priced out of the Eight Mile Plains end, but the area south of Beenleigh Road may be worth looking at. Its an older area with smaller and cheaper houses on good size blocks, and closer to the city than the much more expensive next suburb of Calamvale. Runcorn has good rail and bus links to the CBD.
Marg

 

This is possible but not necessarily the way to go.
If your IP has equity there is no need for a separate loan.
If there is no equity then I wouldn't get a LOC but a term loan, IO or probably PI in your situation.
Depending on the rates and break fee it may even be suitable to wait it out and remain crossed.

 

Thank you for your advice. I surely in seek help in getting the loans right this time. It is more of who to ask.

 

Thank you Marg. I certainly will talk to someone in my current bank. Will slowly analyse my options and talk to more people. I have time boxed myself the next 6-12 months to get all of the loan structure sorted (or at least what I think I can do) and establish the areas I want to buy.

 

Besides the cross collateral which is a common mistake that can sometimes be a necessary evil I think you've done well. NRAS does add a lot of bureacratic extra layer but as you found out it does have a silver lining where it's less affected by downturns and the govt payment each year I'm sure helped with paying down your PPOR faster.

I would go read the posts from the brokers on here and see one who you think suits you. Each of them are different.

You might find that the break costs for 1.5yrs on the investment loan is less than a better deal with a different loan product so you might be able to bring that forward now. Whilst it's all sorted out keeping in mind the goal to get another IP you can learn a lot from here about what sort of investment might work for your porfolio, strategy and risk appetitie.

 

Thank you Terry. ATM, the IP is worth about 80k lesser than the purchase price due to Brisbane apartment squeeze. I know this because the sold price of other apartments in the block this year have been dismay. The only comfort is NRAS helping me to be marginally cashflow positive. I will read up on term loans as well.

 

Thank you Westminster and fair points. The main reason for me to want to get rid of cross collateral is my family and the house we live in. We will possibly not live here forever, however, I would like a peace of mind if anything were to happen, my family only needs to pay down 1 loan attached to the home. I will certainly spend the next 6-12months seeking options.

 

In that case you could just use redraw on the existing loan and use this to pay the investment property loan down to 80% of value. But tell the bank to organise a valuation first.

And make sure you pay the existing loan to $0 or $100 or so first (but make sure it doesn't close the loan).

 

Thank you Terry. Will this work for me for a tax POV? I know that if I pay down my loan (PPOR) to $1 and use the equity to take up another loan (e.g. LOC), any interest or account fee ongoing and establishment can be tax deducted if used to purchase an investment. Does paying down a loan then redrawing for the purpose of purchasing an investment allow the same tax deductions?

 

You should seek tax advice from a lawyer or tax agent.

If you borrow to invest the interest would generally be deductible.

 

Sure thing. I will talk to my tax accountant.

Another idea is for me to pay down my investment loan with excess cash I got once the fix is up or when I break the fix. I can refinance with another bank without a LOC/Term in place. Finally, using the equity in my house to apply for LOC or Term loan for future investments.

This will allow me to deal with one loan at a time. The downside of course is that I effectively need to chalk up around 100k if valuation comes in low.

Part of the reason I would like to pay down this investment is because of the apportioning. This reduces my negative gear position by ~25%.

 

Keep in mind the cash out restrictions. Using redraw will be much easier than applying for a new LOC. Split first though.

What do you mean by 'apportioning'?

 

I will keep that in mind.

As for apportioning, basically it's to do with the reduction of tax deductions due to NANE component of NRAS:

"While a taxpayer who invests in an NRAS property receives assessable rental income they also receive government incentives, including state government NANE income. In order to receive government incentives, including state government NANE income, investors must rent out their property at 20% less than the market rent.

If expenditure related to the NRAS rental properties had been incurred solely for the purpose of gaining assessable income, it would be wholly deductible. However, as investors in an NRAS property incur expenses in order to both earn assessable income and NANE income, any expenses an investor incurs in order to invest in NRAS must be apportioned."

National rental affordability scheme - refundable tax offset and other taxation issues

 

I think you are confused.

When you borrow against a property any interest will be deductible against the income from the asset the borrowed funds are use for and not the security.

The fact that the security property is a NRAS property is irrelevant for money reborrowed and used elsewhere.

Tax Tip 11: Further Borrowing against property deductible against the income it generates Tax Tip 11: Further Borrowing against property deductible against the

ps I have written about apportioning the expenses on NRAS here:
Tax Tip 70: NRAS Property and Deductibility of Interest and other expenses Tax Tax 70: NRAS Property and Deductibility of Interest and other expenses

 

Thank you for the clarification and apologies for being unclear. The security property that I can borrow against is not the NRAS property (property is worth lesser than when I purchased) but my home (has equity and an offset account). I will check with my accountant in regards to redrawing from my home loan. But if that works, I wouldn't mind paying down my home loan to redraw for future investment.

As for Tip 70, it is exactly what my accountant said when she apportioned my deduction due to NANE.

Do let me know if I a missing anything. *Novice Alert!*