How to structure our loan?

Discussion in 'Financial Planning' started by Wonderland, 19th Dec, 2019.

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  1. Wonderland

    Wonderland Well-Known Member

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    Hi everyone,

    We are looking at renting out our PPOR and renting another house in a different suburb. We are doing this due to the kid’s schooling. Our plan is to rent for the next 1-2years and then look at buying another property and turning our current PPOR into an investment property.

    I am currently not working but hoping to look for part time work next year. This is all new to us so we don’t have much experience with investment properties and structuring our loans etc. What is the best strategy that we should implement for this situation? Do we keep paying our mortgage with principle and interest, or pay just interest only? What are the pros and con of either options? Is there a better way to do things?

    Any advice or recommendations would be greatly appreciated!
     
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    You should seek tax advice about capitalising interest if not working.

    You have already acquired the asset so limited opportunity, just pay minimum repayments, consider interest only, borrowing to pay certain expenses related to the property and using an offset account.
     
  3. Wonderland

    Wonderland Well-Known Member

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    Thank you for the reply! Sorry but you’re going to have to dumb down your reply a little more. I’m a complete newbie.

    What does ‘capitalising interest’ mean? What do you mean by borrowing to pay certain expenses?

    I should clarify that we would like to buy a PPOR within the next 1-2years and convert our current PPOR into our IP. My partner works but I am currently not because of the kids
     
  4. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Hiya Wonderland

    This is a usual client scenario that comes to us in our Broking and Planning Businesses over the last 20 years

    Because this is the first time you are looking into structuring it can understandably be bewildering.

    The challenge is EVERYONE has an opinion.

    Some of these opinions are at least part qualified by education, work licence or education, but most are fluff or at best, urban myth or old wives tales, its human nature for us, we dont want to lose face.

    Very risky to talk general advice with no hard data.

    Typically, we would suggest flicking your loan to IO, park all income and savings in an offset, and then when you buy your new PPOR, look at an active debt recycle strategy to repay the new HOME loan quickly, while just paying IO on the old PPOR ( now IP) loan.

    Please seek specific credit advice from a broker, Debt recycle advice from a planner and tax advice from an accountant

    ta
    rolf
     
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  5. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Have a look at my tax tips, especially the early ones. They are all numbered and you can find them here
    Terry's Tax Tips
     
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  6. Wonderland

    Wonderland Well-Known Member

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    Thank you so much! I would assume it would be a common scenario for a lot of people. It is so daunting because I want to set things up the right way so in a few years time, when we are ready to buy, we are in a good position to do so. Thanks again for the advice, I’ll have to look up what a debt recycle strategy is. I heard that seeing a financial planner could be very costly, especially for people like us who’s only just starting out with no real portfolio.
     
  7. Wonderland

    Wonderland Well-Known Member

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    Thank you for the link! I’ll definitely be checking this out. I need to read and learn as much as I can so we can make an informed decision moving forward. Ideally we would like to make a 5 year plan to set all pieces in the correct position
     
  8. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    A planner is only needed if you want financial advice - such as what to invest in, advice on which shares etc. They can also do modelling and many have expensive software to help with this.

    Debt recycling is essentially tax advice as it involves converting the non-deductible into deductible. This is something a tax agent or a lawyer can advise on. Some financial advisors are also registered tax agents so can give tax advice too.

    The broker can advise on loan splitting, loan products, which lender, etc

    The lawyer can advise on ownership structure, security for loans, who should be the borrower - such as which spouse, who should be the lender, in related party loans, terms of related party loan agreements etc.
     
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  9. Jess Peletier

    Jess Peletier Mortgage Broker & Finance Strategy, Aus Wide! Business Member

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    Hello :) If you're not working you may be limited by your borrowing capacity in regard to changing structure.

    It's be worth getting specific advice so you can set things up to give you the best bang for buck, taking into consideration the ability to reduce non-deductible debt asap in the future, when you eventually buy a new home.
     
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