Join Australia's most dynamic and respected property investment community

Is it a bad idea to pay down PPOR loan in order to buy IP?

Discussion in 'Property Finance' started by inspiredbyprop, 19th Apr, 2016.

  1. inspiredbyprop

    inspiredbyprop Well-Known Member

    Joined:
    19th Jun, 2015
    Posts:
    159
    Location:
    Sydney
    OK PCers, I currently only own 1 PPOR and I've seen a lot of advice indicating it's better to put money into the offset account and not pay down the principle in case we would want to convert the property into IP. So I've been doing just that since day dot hence there is no change in the initial loan amount.

    After lurking in this forum for some time now since the PPOR purchase, I'm ready (mindset) to embark on the IP journey. However, my MB advised that my max borrowing is only ~290k (of course, it was about 30% higher before APRA's new policy) and with that amount, I think it will be difficult buy a decent property in Sydney (my aim is ~400k for an IP).

    To achive 400k, the MB advised me to use the money in the offset to pay down the PPOR loan to reduce debt and increase the borrowing. When I thought about this, I think I might do that as I don't think I will convert it into IP due to these reasons:
    1. Low LVR at about 60%
    2. I don't know that to do with the money in offset account. It's not a bad idea to turn it into IP/tax deductible loan
    3. Sell and buy in a new area, hopefully I could increase the LVR to 80%. Also there won't be CG tax.

    What do you think?
    PS: I will also engage with other MB to get a second opinion. Just that your responses might help me to construct questions/thoughts.
     
    Last edited: 19th Apr, 2016
  2. ZachAnsel

    ZachAnsel Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    110
    Location:
    Sydney
    There is no one size fits all unfortunately, its more understand the concept/reason why they advise you to do so. Accepting suggestion without knowing the condition and try to adapt into your world can be fatal


    If you plan to convert to IP one day, then IO is the way because flexibility. You can pay down later if you change your mind.

    And if you converted to IP, maximise tax benefit.

    CGT is not relevant wether PI vs IO, as calculated based on purchase price and length ownership and structure of purchase
     
  3. tobe

    tobe Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    900
    Location:
    Melbourne
    If that is the limit of your capacity, then it sounds like good advice. Make a new loan split for the amount in the offset account, and use this for the deposit for the investment property. take a new loan ($290,000) against the investment property for the remainder.
    Some of the non bank lenders have better calculators for investors, so you might be able to squeeze a little more than $290k for the new borrowings.
     
    TaylorChang likes this.
  4. Scott No Mates

    Scott No Mates Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    5,593
    Location:
    Sydney or NSW or Australia
    Not quite a yes/no answer but i'll add my 2 cents.
    • If you pay down the ppor it will reduce your non-deductible debt but may not be able to redraw all of it for your deposit
    • If you use the money in offset, you increaseyour non-deductible borrowings ie outstanding ppor loan
    • Selling will incur costs without adding value (agent fees, legals, and stamps)
     
  5. Steven Ryan

    Steven Ryan Mortgage Broker Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    2,458
    Location:
    Sydney & Gold Coast
    This can make sense in some cases, sounds like it might in yours.

    Other options to explore for improving your borrowing capacity:

    • Convert your PPOR to an IP and rent somewhere
    • Buy an IP with higher rent return
    • Get a pay rise
    • Reduce expenses/credit card limits
     
  6. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    9,045
    Location:
    Sydney
    Yes sounds like a good idea. Pay down the PPOR just by the amount needed so that you can borrow 105% to buy the new IP.
     
    Perthguy likes this.
  7. inspiredbyprop

    inspiredbyprop Well-Known Member

    Joined:
    19th Jun, 2015
    Posts:
    159
    Location:
    Sydney
    Thank you all.

    On another note, I had been investing in shares market recently using the LOC extracted from the increase in PPOR value (as some of you might notice from my recent posts on the ASX thread).
    One of the reasons is the return in shares are higher than the rent+capital growth in Sydney properties (Although capital growth is somewhat difficult to predict but it's based on the recent time).

    Hopefully I could join the IP journey soon this year...

    Yes Scotty, I understand that and I would prefer to maximise the tax deductible.

    Thank you Steven. I have actually considered all of the options you mentioned, but it will not work for my current situation, except the last one which I can easily do by closing the existing CC account and reopening soon after the new loan is approved.
     
  8. c_west

    c_west Active Member

    Joined:
    22nd Jun, 2015
    Posts:
    42
    Location:
    Adelaide
    Not trying to change your strategy or anything and without further info I am unsure what you are trying to achieve, but maybe instead of spending 400k in sydney look at spending 290k elsewhere?

    Paying down PPOR isn't that bad at the end of the day, I recently had to move some cash from my offset into the mortgage to avoid $4k LMI on a loan split, easy decision.
     
  9. inspiredbyprop

    inspiredbyprop Well-Known Member

    Joined:
    19th Jun, 2015
    Posts:
    159
    Location:
    Sydney
    Thanks cwest. I'm exploring my options based on the 209k spending. Although I'm not very comfortable in investing interstate especially for the first IP, I would most likely to use a BA.

    With 10k BA fees, it actually reduces the return quite significantly. But I will definitely look into it until my income increases or pay down the PPOR loan to increase purchase capacity.
     
  10. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,785
    Location:
    Perth WA
    In your situation paying down the PPOR will be better than using offset cash for the IP regardless of servicing.

    As others have suggested, create a loan split for the amount required for deposit and costs, pay it down via offset funds then redraw for IP purchase. That way you can get a 100% lend for the IP.
     
    Perthguy likes this.
  11. Corey Batt

    Corey Batt Finance Strategist Business Plus Member

    Joined:
    14th Jun, 2015
    Posts:
    1,173
    Location:
    Adelaide, SA
    Paying it down will get you closer to your goals and there isn't a more efficient use - so definitely the most suitable pathway.

    A lot of time you will see absolutes being thrown around - when in reality finance is very messy.

    Some absolutes which aren't always a universal right answer:

    • ALWAYS have debt interest only
    • ALWAYS have an offset account
    • NEVER pay down debt
    There are rules of thumbs and there are absolute truths, in reality there are many of the former, and few of the latter.
     
    Gingin and inspiredbyprop like this.
  12. Scott No Mates

    Scott No Mates Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    5,593
    Location:
    Sydney or NSW or Australia
     
  13. Perthguy

    Perthguy Well-Known Member

    Joined:
    23rd Jun, 2015
    Posts:
    4,799
    Location:
    Perth
    I have done this for a 105% lend. It worked well. When the value of the IP increased, we refinanced and paid out the original loan.
     
  14. albanga

    albanga Well-Known Member

    Joined:
    19th Jun, 2015
    Posts:
    1,118
    Location:
    Melbourne
    You could also consider looking in your own backyard. Is your PPOR large enough to subdivide? If so do you want your backyard? If not then its just another option, you could subdivide it and sell off the land or better yet develop something small based upon your servicing.
    You could then hold that as an IP or sell it and pay down PPOR debt further.

    Obviously a fair bit more work than just paying down the loan and redrawing for a deposit but just something creative to consider.
     
    Whitecat likes this.
  15. inspiredbyprop

    inspiredbyprop Well-Known Member

    Joined:
    19th Jun, 2015
    Posts:
    159
    Location:
    Sydney
    Unfortunately, the current PPOR is an apartment unit. But definitely, this is something I would consider in search for the next properties.