Loan structure help

Discussion in 'Investment Strategy' started by Sunnycoast, 21st Dec, 2018.

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  1. Sunnycoast

    Sunnycoast Well-Known Member

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    If you were in this situation, how would you do it? I’m looking for some input from some of you experienced people that are on here. I read plenty on here and it has already helped a lot.

    Anyhow, I’m looking to purchase my first IP soon. This may ultimately become my PPOR as I don’t own my own house yet. I have 110k and I’m looking to purchase an IP valued around the 520-550k point. As you can see, if I did purchase for 520k then I would need 104k to cover the 20% deposit and 20k for stamps etc. which means that I am short 14k.

    My employer will be paying nearly all my rent for a minimum of the next 3 years but more likely 5 years, so servicing the loan will not be a problem. So would it be best to borrow the extra 14k from a family member to avoid LMI and get better rate from the bank? Should I get an interest only loan? 50% fixed 50%variable?

    I know I have a lot of questions and am thinking of seeing an accountant. I have seen that many people say that 88% lvr is probably the way to go. Is there anything else that you guys can advise me on as I go into this? For example, best way to keep track of expenses for deductions etc.

    Thanks in advance and keep up the good advice.
     
  2. Terry_w

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

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    Avoid lmi if you can. Esp Es it will be a main residence soon.
     
  3. Sunnycoast

    Sunnycoast Well-Known Member

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    Thanks for the reply Terry. Even if it is not going to be a main residence for another 5 years? Would I be able to claim much of the lmi over the 5 years. Sorry about the questions it is just that I’d prefer not to ask to borrow the extra cash off someone.
     
  4. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

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    If you've only got the cash for a 10% deposits plus costs, then you've pretty much got your answer.

    If you've got additional funds so that you can afford a larger deposit and costs, then the best answer is a bit more subjective. You need to consider what your future goals are, then consider what your resources and capabilities are in line with those goals.

    For example, you may have the serviceability to borrow for the first $500k purchase, but what happens later? If you want to buy another, then you need to consider how quickly you'll be able to come up with another deposit and costs. Also you need to understand if you've got the serviceability to purchase again.

    If you're not going to purchase again, or if you've got the ability to save quickly, then there's possibly not much reason to waste money paying LMI if you don't have to.
     
  5. Sunnycoast

    Sunnycoast Well-Known Member

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    Thanks Peter. I think I will aim to pay down the 20% plus costs to avoid LMI but that wouldn’t leave me with a buffer. Do you have any suggestions on the amount I need for a buffer? Also do you have any suggestion on fixed or variable loan arrangement?
     
  6. Terry_w

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

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    LMI is only deductible over 5 years with the first and last year prorated, so any benefits of a deduction will be minimal while the overall expense will be 2 to 3% of the loan amount roughly
     
  7. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

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    There's no answer to those questions that suits everyone. The right answer depends on your goals and circumstances. The best way to get more specific answers is to get in touch with myself or one of the other brokers here.
     
  8. JASA

    JASA Well-Known Member

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    If you can borrow from family to avoid LMI, I would (as long as I could pay it back quickly). I would also make sure I was buying a good ratio of land value, (worst house in best street/ suburb) that you could add value to later when you want to move in, or fix up while it is rented to claim extra tax benefits from repairs. Maybe buy something more affordable first off to avoid the need for LMI.

    In addition I would recommend moving into the property (for a little while at least) from the date of purchase to establish it as a PPOR so that you can hopefully avoid paying CGT when and if you sell it. Make sure to have utility bills in your name at that address from the beginning for proof that it was your PPOR. It also helps if you stay enrolled to vote in your properties local council.

    If you move into the home in the beginning, you can rent it out for up to six years at a time while maintaining the CGT exemption.( unless you claim another property as PPOR,-- you can only claim one at a time.) ATO don't actually stipulate a period of time that you have to reside in the home to establish it as a PPOR. I think that depends on the whim of the ATO person who looks at your case, but the longer you can stay there in the beginning, the better your chances of obtaining an ATO PPOR ruling when you sell.

    If you rent it out from the outset, or if it is already tenanted when you buy it, you will pay CGT on any increase in value which occurs during the periods you are not in residence. I reside in every property I buy in the beginning so that I can choose which property it will benefit me most to avoid CGT on when I sell.

    Good luck and be careful not to over extend financially, interest rates won't stay low forever.
     
  9. Terry_w

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

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    Good strategy, but this is not really correct.

    If you move into a property that was rented out first the CGT is worked out on the whole gain, less cost base expenses and then apportioned.
    This captures capital gains while you are living there.
    e.g. rented out for 1 year and worth $100k at purchase and $200,000 in 2 year, you move in and hold it for 9 more years and sell it for $1mil. There would be a $900k capital gain less cost base expenses (including interest etc while you live there) lets say $200,000 = $700k gain, but 90% of the time held it was the main residence so only $70k of this capital gain is taxable, and then the 50% discount is applied so $35k is added to other income (max $17k tax on $900k gain).
     
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  10. Sunnycoast

    Sunnycoast Well-Known Member

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  11. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

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    Hiya

    My comments are very general as I don't know the specifics of your situation.

    If you have a family member that's happy to provide additional funds then I'd take that opportunity to avoid LMI.

    A 50/50 split isn't a bad idea give that fixed rates are reasonably low and the variable portion provides you with flexibility. Just remember that fixed rates can be expensive to break if you refinance/sell during the fixed period. Perhaps stick with a 2 or 3 year fixed period rather than a longer duration.

    I probably wouldn't opt for IO given you'll end up moving into this house in the future. IO IP rates are bloody expensive too! At least P&I will be a fair bit cheaper and if you're employers paying your rent it could be a good opportunity to pay down some of your debt.

    Cheers

    Jamie
     
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  12. Sunnycoast

    Sunnycoast Well-Known Member

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    Thanks for that feedback. I will go with a 50/50 split (P & I) and aim to pay it down hard over the next 3-5 years using the offset account. Then I want to use the property’s equity/offset cash to purchase my PPOR. Is that a sound strategy?

    Merry Christmas
     
  13. Terry_w

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

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    Depends what you mean by 'sound'!
    it will result in more tax being payable. Why not not pay it down hard but to save in the offset account?
     
  14. Sunnycoast

    Sunnycoast Well-Known Member

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    I was thinking I could put the cash into the offset to minimise interest and to also make it easily accessible for when I purchase my PPOR. My reason for thinking this is that it would keep deductible debt higher than non deductible debt as I would use the money in the offset to go toward the purchase of PPOR. Sorry I’m a newbie and now very knowledgeable, but am trying to learn. Please correct me if I am wrong. Thanks again.
     
  15. Terry_w

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

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    Yes this is right but different to what you mentioned above
     
  16. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

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    Nah sounds like you’ve got it sorted :) sounds like a pretty good approach to me.

    Just leave a large enough portion of the loan as variable so you don’t run the risk of fully offsetting it during the fixed period (which is unlikely unless you’re earning gazillions).

    Cheers

    Jamie