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Is there a better strategy

Discussion in 'General Property Chat' started by Samj, 16th Aug, 2016.

  1. Samj

    Samj Well-Known Member

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    I am new to this real estate domain and so this may be a silly question. I am just wondering if there is a standard way that investers are following for the following case. I am not looking for a doggy way to do it.

    We have built our house 2 years and 6 months ago. Our loan to value ratio is around 70% at the moment.

    Now we have to move to a different area because of jobs and kids school changes. So, I am thinking to buy another property to live in and rent out the existing property.

    If I take a new home loan (eg: $500K) putting my existing home as an equity, I'll have to pay the interest for the whole amount and it will not be tax deductible. My rental property will have a positive cash flow.

    I am just wondering if it is possible to set it in the other way around? Biggest loan for the rental property and smaller loan for the new owner occupy property?

    Just wondering if there is any way to setup it in that way. I don't want to move to the new property immediately. I can buy it now as an investment property and move in later if needed.
     
  2. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

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    Not really.

    That's why IO with offset can be an awesome structure. It would have preserved the principal balance of your first home.

    When releasing equity for your next purchase - ensure that you set up a new loan (don't just extend the existing).

    Cheers

    Jamie
     
  3. Samj

    Samj Well-Known Member

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    Thanks Jamie, Could you please explain this one? Let's say my home value is $500K and existing loan amount is $375K. Did you mean create a different interest only account for the same amount? Sorry I am not quite familiar in this domain...
     
  4. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

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    No probs

    If property is worth $500k - the bank will let you borrow up to 80% which is $400k

    Loan 1: $375k (current loan)
    Loan 2: $25k (equity release)

    You don't want to just extend the $375k to $400k

    Note: Some banks will let you release equity up to 90% of the properties value but LMI is payable.

    Cheers

    Jamie
     
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  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    You should look at debt recycling strategies as well and consider spousal sales - or sale to a related entity.
     
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  6. Big Will

    Big Will Well-Known Member

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    Further to what Jamie wrote about offsets and how it works.

    Year 1 - House 400k
    Loan 1 = 300k with offset of 50k (interest is calculated off 250k)

    Year x - House worth 500k
    Loan 1 = 300k still and 50k still in offset (interest calc off 250k)
    Available equity is ~80k + 50k cash or 130k (depends if you want to use your cash)
    Equity Loan (2) - 80k with 80k offset = no interest being paid until you draw down funds.


    House 2 looking at purchasing is 400k (80k deposit required for 80LVR, taken from equity loan)
    Loan 3 - 320k

    So by this time you have 3 loans.

    Loan 1 - 300k
    Loan 2 - 80k
    Loan 3 - 320k

    If you stay in your current home (being 500k house).

    Loan 1 - 300k is nondeductible
    Loan 2 - 80k is deductible
    Loan 3 - 320k is deductible

    However if you move into House 2 it is the reverse as money used towards the PPOR is nondeductible.

    It is best to speak to a tax expert as this is my understanding and I am not qualified to give you advice :)
     
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  7. Samj

    Samj Well-Known Member

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    Thank you very much for the explanation!
     
  8. Samj

    Samj Well-Known Member

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    We have decided to rent out our property and move for rent. At the moment I am considering to refinance with another bank. If I refinance with the new bank for 80% before I rent this house. Will the total amount be tax deductible?

    Actually, moving our cost some money and I have some bits and pieces to be done before move out. By refinancing I am expect to get around $20K.
     
  9. Greyghost

    Greyghost Well-Known Member

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    there are multiple components to this question but the short answer is the the existing loan (assuming that 100% of it relates to the house and there is no private toys etc in there) will be deductible from the time the property is available for rent.
    If you refinance you would seek to keep the original loan balance in tact and set up a second split for the additional $20k you speak of.

    you didn't state what the 20k will be used for, if it is going to be used for future investments be careful on how you draw, deposit these funds.
    Check out @Terry_w posts on this..
     
  10. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    The amount you currently owe will be tax deductible as this was used to purchase what is now an investment property.

    The deductibility of any additional money will depend on what you use it for. If used for an income producing investment it's deductible, otherwise it probably isn't.
     
  11. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    This is not necessarily correct. If money has ever been taken from redraw then the loan will be a mixed purpose loan and not all of it would relate to the purchase of the property

    see:
    Tax Tip 87: Moving out of the Main Residence and Interest Tax Tip 87: Moving out of the Main Residence and Interest

    Also

    Tax Tip 77: Redrawing Extra Repayments to Increase Deductions? Tax Tip 77: Redrawing Extra Repayments to Increase Deductions?

    Tax Tip 67: Using Redraw Facilities on loans and Tax Issues Tax Tip 67: Using Redraw Facilities on loans and Tax Issues
     
  12. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    @Terry_w that's why I used the words, "The amount you currently owe."
     
  13. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Well that is just incorrect.

    What if someone borrowed $100,000 to buy a house and paid it down to say $50k and then redrew $40k to buy a car. They would currently owe $90k.

    But it would be a mixed purpose loan and the deductible amount would be $50k or less - once rented.
     
  14. dabbler

    dabbler Well-Known Member

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    No, not against that property, there is no way to increase the deductible loan amount on that property, it stays at or under the original amount depending on if you have been paying the loan down or sticking to IO payments.

    So, it can stay the same (if IO payments) become lower, but never higher.
     
  15. Samj

    Samj Well-Known Member

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    If I am going to rent out my owner occupier property and rent another property for me. At the moment I am paying the principal + interest and I am going to change it to IO loan. When I am setting up that new IO loan, should I specify the loan as an investment loan? I am asking because I've realized that investment loans have a higher rate.

    Thanks again everyone for your help!
     
  16. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    No need from a tax point of view.
     
  17. dabbler

    dabbler Well-Known Member

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    If you are going to re finance, they will ask, and it will be an investment loan, so yes, higher rates.

    may not be worth doing it that way, may be ok with PI and actually paying the loan back and leaving the loan the same. All depends on what exactly the goals are, it should not always be an automatic....never pay back the loan.
     
  18. Azazel

    Azazel Well-Known Member

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  19. Samj

    Samj Well-Known Member

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  20. Azazel

    Azazel Well-Known Member

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