IP Purchase: Deposit options and tax implications

Discussion in 'Accounting & Tax' started by rizzle, 29th Jan, 2017.

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  1. rizzle

    rizzle Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    423
    Location:
    Melbourne
    I currently have:
    • 2/1/1/ PPOR valued recently at $525K
    • Mortgage of $401K, 4.23% I/O BWA w/ 100% Offset
    • Tenanted second bedroom (50% of eligible expenses are tax deductible)
    Which option will be most tax effective if I want to purchase an IP in the next twelve months:

    Option 1:
    • Re-finance PPOR to low cost online lender (save a minimum of $2k each year versus crappy BWA rate)
    • Save up a deposit for IP with salary income (using existing offset of course)
    • Summary: Not locked in to a lender due to LMI anymore + increased PPOR mortgage (after using offset cash for IP deposit) will still have 50% deductibility on interest
    Option 2:
    • Top up re-finance with BWA (take it up to 90% lend of recent valuation). Would have an additional LMI expense, as the original loan was only 88% lend.
    • Use funds from top-up as down-payment for IP
    • Summary: maximizes leverage for the purpose of IP deposit, minimises dipping into offset, but incurs more LMI
    Option 3:
    • Same as option 2, but only top up to threshold before more LMI becomes payable (currently checking if this is possible), then use cash savings in offset to fund any shortfall
    • Summary: Minimises more LMI expense, but LVR goes above 80% (locked in to BWA) and I've heard that BWA are not the best lender for top-ups (and the rate is not awesome)

    Option 4: something else I haven't considered?

    I have read @Terry_w 's tax tip, I think option 1 or 3 is likely to be the winner.