Loan advice

Discussion in 'Loans & Mortgage Brokers' started by chb, 1st Apr, 2017.

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  1. chb

    chb Member

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    Hi All,

    I'm fairly new in terms of actually owning an IP and was hoping for some tips around loans.

    I've got a
    • PPOR which is about $500K loan and I've got about $200K in the offset
    • IP which has a $364K IO loan and worth 460K(80%) and returns 540/wk
    • $100k income
    • Both under my name and not the wifes
    To get the IP loan to start with I had to put some more money into my PPOR, rather than the offset, otherwise the bank wouldn't have given me the loan amount. I thought this was strange given that the 540 a week rental income is actually alot higher than the repayments of about $1100 a month.

    I'm now considering getting another IP and I know I'll come across the issue of getting a loan but was wondering if I am doing something wrong? Seems like a few people have multiple IPs and are able to get loans but I'm already maxed out according to the bank even though in my opinion I'm paying off the loans easily?
     
  2. Anthony Brew

    Anthony Brew Well-Known Member

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    The rental income they only calculate at 80%, so if you are getting 28,080 in rent, they only calculate the income for you as 22,464.

    Also the loan of 364K, even though you are paying IO, I believe they calculate it as PI and also at 7.25%, so in their calculations, your outgoings are going to be way higher than it is in reality.
    Eg if your real IO repayments are 1,515 but PI repayments at 7.25% would come out as 2,630 then they make their calculations on the latter even though it off by about 13k/year.

    So that combined means your serviceability from their calculations is 20k below what you actually currently paying.

    And even worse, they seem to ignore the money in the offset when doing calculations.



    I have one IP and planning my next 2 and I am looking forward at the exact same problem for my third one down the track.
    I was thinking that the only way to improve serviceability is to put it in to pay off the mortgage which seems ridiculous.
    I am currently contacting a broker to ask more about this. I hope there is another solution that someone can offer.
     
  3. Richard Taylor

    Richard Taylor Well-Known Member

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    Hi Chb

    Going to depend on a couple of factors but in essence you want to create an equity loan against your PPOR to put down as a 20% deposit on the investment property.

    Assume the new investment property purchase is 400K then 80% of the purchase price would be 320K and this would be secured against the IP itself.

    Then it is a matter of coming up with the 80K deposit and your acquisition costs etc (Say a total of 100K).

    Rather than use cash funds you want use borrowed funds so the interest becomes Tax deductible.

    You could set up a equity loan over an above your existing PPOR loan however if serviceability is tight you are better off to pay down your PPOR loan by say 100K from your offset account funds and then set up a separate interest only sub loan for 100K.

    You draw these funds to cover down the deposit and the interest becomes deductible.

    Just a matter of making your cash funds and equity go a bit further.
     
  4. Terry_w

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

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    Maxing out after a few loans is the new reality.
     
  5. Anthony Brew

    Anthony Brew Well-Known Member

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    If he pays 100k from offset into PPOR and then borrows that 100k as a sub loan on his PPOR, how can that be tax deductible?
     
  6. Terry_w

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

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    Depends on the use of the $100k. If investment then the interestt would be deductible.
     
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  7. Anthony Brew

    Anthony Brew Well-Known Member

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    Oh I was not aware of that at all!

    So you have an IP worth 500k paid off.
    Then you get a loan of 100k on this to put as a desposit into purchasing another IP.
    Then this loan is tax deductible from your overal property income from your IP's?
     
  8. JasonC

    JasonC Well-Known Member

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    The interest on this loan is tax deductible (as it is an expense incurred for acquiring an income producing investment). If the expenses (incl depreciation - a on paper expense) are more than the income from the IP then this loss can be offset against any of your other income (not just IP income). This is negative gearing.

    With loans then it is the purpose that the funds are used for that is important, not the security.

    Regards,

    Jason
     
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  9. chb

    chb Member

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    Thanks MCA and everyone else. Makes total sense and makes me wish I tried doing the same for the first IP!

    Didn't realise that they added on such high assumptions to serviceability
     
  10. Anthony Brew

    Anthony Brew Well-Known Member

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    Awesome.

    Until now I initially assumed that if you move money from the offset to pay off some of the IP for serviceability, then borrow it out to use to make another purchase that the borrowed money would not be tax deductible any more.

    Thanks for the explanation!
     
  11. Terry_w

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

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    Yes. s 8-1 ITAA97
     
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