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Negative gearing and LVR

Discussion in 'Accounting & Tax' started by Steven Marples, 16th Apr, 2016.

  1. Steven Marples

    Steven Marples Member

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    I've just bought a house in Perth which will be a rental property for the first few years until i move in there myself.

    The house cost is 850k
    Stamp duty 35k
    Rent will be about 650 p/w
    I have 350k in savings
    I earn about 200k p/a

    My question is whether the best strategy is to put all my savings into the house and make the mortgage as low as possible, or if to target an LVR of 80% to avoid any mortgage insurance and maximize the negative gearing potential.

    I am seeing an accountant next week to discuss but thought i would do a bit of research and seek some opinions so i am armed with the right questions for the accountant.

    I'm a first time buyer with no property investment experience, so any advice would be really appreciated.
     
    Last edited: 16th Apr, 2016
  2. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    The most flex scenario for something like this is usually an 80 % lend with the balance of cash in offset

    That way the property will have higher tax deductability it you ever rent it out and move on to anew PPOR since you can use the cash in the offset.

    If you have access to a family guarantee,you could even borrow105 % and then have all your cash in offset.



    ta
    rolf
    .
     
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  3. Blacky

    Blacky Well-Known Member

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    Many combinations of strategies you could use. Depends on you goals and timing of when it will become your PPOR.
    One option, which would regularly be overlooked would be to borrow 105% of purchase (that is 5% for costs) while maintaining 80% LVR.
    How would this work?

    Purchase $850,000
    Costs (5%)say $50,000
    Total Loan - $900,000
    Security -
    New house $850,000 ($680k LVR 80%)
    Cash security deposit $220,000 ($220k LVR 100%).
    Total $1,070,000.

    You would need to run your own numbers to determine if it is better to use this method, borrow to say LVR 88% paying LMI or borrow to 80% and pay the remainder in cash.

    All depends on your own goals and strategies. But this method would maximise tax deductions. If this is more/less/neutral cost wise would need to be determined.

    Blacky
     
  4. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Borrow as much as possible without incurring LMI and park the remainder in the offset account. If you have a non working spouse work out the effect of lending her/him the money and they invest it in a high interest savings account.
     
  5. Blacky

    Blacky Well-Known Member

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    I ran a few quick numbers, probably not the best option in this scenario.

    Btw - you shouldnt listen to me anyway, Im not a trained or qualified proffesional - Im just some random dude on the interweb.

    Blacky
     
  6. Steven Marples

    Steven Marples Member

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    Why borrow 80% and have, say 10%, in offset? Why not just borrow 70%? Is the 80% more effective from the tax perspective? To me they both seem the same.

    Thanks for the responses
     
  7. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Say you decided not to live there?

    Or, say a week after settlement you decided to buy a $40,000 ivory back stratcher.
     
  8. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    There's no real advantage to borrowing 70% - 80% will allow you to retain as much cash as possible in your offset (for maximum flexibility) without incurring LMI. Using an offset is better than redrawing out of a loan (less messy tax-wise) and keeping as much cash as possible in offset will put you in the best position in the event something changes with your plans - for eg if you decide not to move in or similar.
     
  9. Steven Marples

    Steven Marples Member

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    Why is it less messy tax wise? The advice of my mortgage broker was to leave the portion of the loan i could pay off as variable (enabling me to pay more than min repayments when possible), and fix the rest, as it gives you more certainty on the part of the loan I won't pay off in the short term (next few years).

    Any opinion on that vs offset?

    FYI, I'm not a big investor in property (at this stage), just going to use this place as an investment property for a few years and want to take advantage of the tax break while I'm doing it.
     
  10. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    Just imagine down the track you accept a job in a different state, and decide to move to Qld. You love it, and decide to buy a home there.

    Problem is, you've paid all your cash into your investment property and now have to redraw those funds to buy your home. This means that you now have 100% debt on your PPOR which isn't deductible, and a low LVR on your IP. Ideally, this would be the other way around, and using the offset helps you achieve this.

    If nothing changes and you do move into the property as planned, you've lost nothing as using the offset is exactly the same from an interest/cost perspective as paying funds directly into the loan.

    I would also suggest having the property IO and putting any extra funds into to the offset rather than paying extra into the loan, for the same reasons. There's no downside to doing this, but it can save you thousands if your plans change.