Newbie finance question - future upgrade PPoR but used redraw

Hi all,

A question for the finance gurus out there.

I have a PPOR purchase price 390k
Value now would be about 520k
Loan outstanding is 217k (original loan was 230k) and is P&I
Balance in redraw 125k
Partners savings 100k
Combined salaries 210k

I realise now I should have got interest only, an offset and also should have used less equity in the initial purchase.

Anyway, want to do 2 things in near future.

A) Buy an IP (let's say 600k + 40k costs) in Brisbane soon

B) in 3-4 years Buy new PPOR in Sydney when market has cooled a little and rent out existing PPoR


Here are my proposed actions for (A)

1) Convert current PPoR loan to IO, just for best practice's sake

2) Borrow against equity in current PPoR
(say 200k ie 80% of 520 less 217)

3) use 200k borrowed funds as deposit and costs against New IP. I realise this will be higher than 20%

4) Borrow remaining 400k in separate loan against IP

Now up until here I am fine.

The question is that I know I want to do (B) in 3-4 years

However since I have paid additional into the re-draw, have I negated the ability to claim interest on the $125k part of the original loan that is in the re-draw when that property switches to IP?

Is there any way to 'refresh' the debt on the current PPOR so that if I do change it to IP in the future there will be more deductible debt on the current PPoR?

Or is, as I suspect may be the case, the future tax deduction limited to the current balance on the current home loan i.e. 92k.

Any thoughts on an effective strategy here and way forward?

If the end game is that it is no longer feasible tax-wise to rent out the current PPoR when purchasing a new one is the best thing to do to refinance by:

(a) Pay down the home loan to say $122k (leave $30k buffer over current remaining balance).

(b) $300k separate loan for deposits on IP (or maybe two IP) to make roughly the $420k equity accessed in the PPoR to get back to 80% LVR. This would be deductible

(c) Third loan for remaining valuation on IP(s). This would be deductible debt.

(d) When it comes around to upgrading PPoR, sell the current PPoR (rather than rent out current PPoR with low deductible debt) and use proceeds towards new PPoR with a loan (and offset this time!)

Any thoughts most appreciated!

 

I think you are asking if you can increase the loan and have it deductible once the PPOR becomes an IP = can I borrow to buy a PPOR and claim the interest = no.

Only solution is as Rolf suggests. Sell (could be to a spouse) and/pr debt recycling strategy - but will take time to get benefits building up.

 

Thanks Rolf and Terry!

So to confirm the deductible interest on the current POoR if it were made an IP would be 92k?

If that's the car and it makes selling a be the option (but I'm not ready to upgrade POoR as want Sydney to cool off) does the alternate strategy make the most sense of reducing PPoR debt until ready to sell and upgrade to new PPoR?

Thanks for your help!

 

No sure where you got the $92k from?

The deductible loan would be the loan associated with the purchase of the property. This may be the minimum balance of the loan since you purchased it (could be much less if you have redrawn).

I would think switching to IO with offset would be the way to go rather than pay it off as your plans may change.

If the house is currently owned by one of you the other may be able to purchase the whole lot or a 50% share (no stamp duty), borrowing to do so.

 

Sorry I meant deductible loan. I calculated this by taking the current balance on the loan 217k and subtracting the amount available in the redraw 125k to get 92k. Maybe that's not right?

 

In that case the balance would be $92k with $125k in redraw and a limit of $217k.

That would mean a max $92k could ever be deductible.

 

Work out your exit and re-entry costs (So very rough figures here):
Let us say you sell for 500k then i would estimate 15k (agent and advertising). Then you re-enter at 600k so roughly 35k on stamps and other costs. Total Costs are 50k.

Lets assume you enter at 80% LVR so your loan is now 480k.
And again lets assume IR of 4.5% and assume your on the mid tier tax bracket then from my poor accounting skills it would equate to roughly $8,000 per annum in interest deductions.
VERSUS roughly $1,500 if you keep the current PPOR as an IP and do not debt recycle.

There are probably a lot of other considerations and potential benefits as well? Depreciation if buying newer.etc? So from a taxation view point it seems it could stack up.

But then you just need to align it to your chosen strategy, if you plan on developing then it would make no sense selling if your site can be used as a dev site. If your a CG investor then how does your current suburb compare to somewhere else? If you are in a low growth suburb then it could be a no brainer to sell up, get the benefits of the deductions and buy into a higher growth area.

 

So it will take roughly 7-8 years to break-even if considering the exit and re-entry strategy?

 

That is just from a very rough taxation viewpoint but please seek proper advice. A new purchase may even have other deprecistion benefits you could factor in to reduce the ROI in that regards.

You should not base your decision on this though. As I said if you can get better growth then that should be your main aim with the taxation benefits the cherry on top. For example if your property is in Sydney which many claim is at market peak then you can sell high and then re-enter a growing market such as Brisbane.

 

Explain Debt Recycling? Please.

 

Getting bad debt and turning it into good debt. e.g. paying down a home loan and reborrowing to invest in income producing shares. Interest is now deductible and this helps to pay down the non deductible home loan sooner so you can borrow to buy more income producing shares.