Interest only with an offset against PPOR

Are interest only loans at a higher rate usually to their p & i cousins? Say if it was a ppor in both scenarios? Or is there no difference typically in rates afforded?

 

Depends on lender. Not all of them have higher rates for IO.

 

Hi guys - great thread, what would be an ideal way to structure a loan if you wanted to utilize funds which you have paid into your existing P+I Investment Loan to purchase another Investment Property later?

Would it matter if you place funds into the offset or pay-down the existing loan and redraw? It is P+I as there is no intention to sell the property.

E.g.

$300k Investment Loan - pay down to $250k, redraw on $50k to purchase next IP

vs

$300k Investment Loan - place $50k in offset account, redraw on $50k offset to purchase next IP

Thank you

 

You would split the loan into 2 before doing anything. While you are at it convert both portions to IO. Pay directly from the loan for the new expenses.

 

Regarding the rate increases for investor loans.. If your plan was to convert your PPOR to IP but keep the loan as I/O from start to finish, would you get the Owner Occupied rate or the Investor rate? Let's assume the lender is CBA.

 

Yes I would think so. But it depends on what you tell them initially.

 

Owner occ - their system would have set it up as owner occ at settlement so that's how it stays unless there's a change to the loan.

Cheers

Jamie

 

So the buy, live in & reno, then convert to IP strategy is unaffected by these APRA changes? Do I have to tell them if it becomes an investment if I don't need to change the loan?

 

Guys, what if I don't want to convert my PPOR to IP but still want to change the P&I to IO just to improve my serviceability so that I can buy my next IP. Is that a good decision? I'm having equity but hitting the serviceability wall at the moment :-/

 

If it helps with reaching your overall goals than it's ok - you'll need to check whether your current lender will allow. If they do - they may require a new application.

If you do convert to IO - don't fall into the trap of simply making the minimum interest repayments each month. Aim to add to the offset as well.

Cheers

Jamie

 

Great, Thanks for the quick advice Jamie. Much appreciated.

 

Hi Jamie,

Say if you did bugger up the initial structure of the loan and did P&i could you not just refinance and pull as much money out as possible and park in the offset before you buy your new PPoR? As far as the ATO is aware you could have had the offset from the start.

Obviously doing it from the start would be ideal though.

Cheers.

 

No as the interest would not be dedictible and you wouldhave created a mixed purpose loan.

 

My pleasure

 

Hi all,

I really need your advice about loan structure since I am still confused after reading through several threads on PC. My situation is:

1. PPOR with $380k P&I loan (80% LVR) and $80k in offset. Since I have renovated the house, it is now valued at 600k
2. IP1 with $390k P&I loan (80% LVR) and no offset. The new valuation is $530k.

Now I want to purchase my IP2 and will need to use the equity from the PPOR (and IP1 if needed).

At first when I read about reducing bad debt (non-deductible) to maximize tax deduction I plan to pay off my PPOR using 60k in the offset (20k is kept as emergency fund) then refinance it. The new loan would be $480k IO and split to 2 portions ($320k for PPOR and $160k for investment). I will then use the $160k to pay for 20% deposit and 5-6% fees for IP2. Of course, I will need a 80% loan for it to complete the purchase. By doing so, I can claim the interest on $160k as tax deductible for IP2. I will also refinance IP1 to IO loan.

However, after reading this thread I now see the cons of my current plan as it will reduce my tax deduction on the PPOR once it is converted to IP in the future. So the 1st question is whether my current plan is still the best way to go ahead or it needs to be changed?

The 2nd question I have is about IP1. My broker advices me to refinance it to higher LVR (88% of $530k) so basically I can access around 60-70k which can be used as a deposit for a IP3 in the future (I will not be able to do it at the moment or in the near future since I will hit my servicing limit after the purchase of IP2). Her argument is that it may be much harder to get a loan with LVR higher than 80% in the future for IP1 so if we can do it now why not.

Thank you all.

 

You should seek specific tax and loan advice.

You would probably want to borrow the 25% deposit and costs from a separate split on either the home or IP1 or both. If you pay down the loan for the main residence now you will have less deductible debt later.

If you don't have enough equity to do this then you have a decision to make:
a) use some cash for the new purchase, or
b) pay down the main residence loan now and reborrow for the investment.

2.
If you borrow now and incur LMI yet do not have a property purchase that relates to this will the LMI be deductible? Seek tax agent. I would say it wouldn't be.

If your serviceability is limited what is the point in incurring LMI cost?

see
Tax Tip 33: Deductibility of LMI Tax Tip 33: Deductibility of LMI
Tax Tip 34: Deductibility of LMI on loan increases Tax Tip 34: Deductibility of LMI on loan increases
Tax Tip 35: Is LMI Deductible in These Situations? Tax Tip 35: Is LMI Deductible in These Situations?

 

At the moment I do not need the extra cash from IP1 to buy IP2. If I keep IP1 at 80% LVR, I still have around 20k as emergency fund (will be kept in an offset account). Net cash flow (family income plus tax saving minus all repayment and expenses) based on my calculation will be around +$2,500 to +$3,000 monthly with the current interest rate. It will reduce if rate increases but should be ok even with 5% interest rate.

 

The current equity on my PPOR is not enough to fund the purchase of IP2 (25% deposit and costs). If I use cash to top up let say 60k (option a), then I will lose the tax saving of approx 2.4k per year (assuming 4% interest rate) compared to option b where I use the 60k to pay down the PPOR and then reborrow for IP2. But the consequence of option b is I will lose the tax deduction of interest on that 60k portion when I convert my PPOR into an IP. So basically, both options are similar. The difference will be when I can get the tax deduction on the 60k (option a is now and option b is in the future). Is my understanding correct?

 

There is a 3rd option.
What till you buy a main residence and then later get the IP