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Pay less LMI and borrow less or borrow more and maximise deduction?

Discussion in 'Property Finance' started by Dumbo, 17th Aug, 2015.

  1. Dumbo

    Dumbo Member

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    After brokers opinions on best way forward. Looking to buy an investment property for around 650k. Currently have property worth around 300k, owe around 120k (I have 100k in an offset against this property). My question is should I borrow less and pull money out of the offset for a larger deposit to make it a 80-88% lend to save on loan mortgage insurance, or should I borrow the maximum amount possible?

    I'm thinking it would be better to borrow the full amount to maximise the deductions as the currently none of the other loan is deductible? If I pull the deposit money out of the offset for the new purchase will the interest on that be deductible?
     
  2. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    Realistically the most you'll be able to borrow is 90% (usually means 88% + LMI). Borrowing more than this for investment purposes is getting quite rare these days.

    Probably best to not worry too much about the extra deductions you get by borrowing more. Your loans can be structured to the point where the full purchase price and costs are tax deductible, so the only extra deductions you'd get would be on the LMI itself. It would probably take over a decade for the deductions on the LMI to offset the cost of the LMI.

    Consider this from the perspective of opportunity cost. How far do your current resources go when you're borrowing 80% of the IP value compared to how far those same resources can go by borrowing 90%? If 80% gets the job done, then there's no point in the extra cost. If you can't get it done at 80%, then you need to consider how much extra paying more LMI will get you and is that worth the cost?
     
  3. Azazel

    Azazel Well-Known Member

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    With the current lending changes, your decision might be made for you depending on who you go with.
    A few lenders will only take a 20% deposit.
     
  4. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    You need tax advice as well as to consider the general aspects.

    What is your borrowing capacity - can you borrow more for after this, and do you want to? Will 90% investment loans be available in the future? What if I need to use the cash I have for other things... etc

    No the interest on money used from an offset account attached to a non deductible loan would not be deductible.
    Tax Tip 9: Don’t use Cash in Offset account to Invest https://propertychat.com.au/communi...nt-use-cash-in-offset-account-to-invest.2355/
     
  5. Dumbo

    Dumbo Member

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    Thanks guys.
    Terry I would just like to clarify. My situation sounds a lot like scenario 2 in your link? I perhaps didn't use the correct terminology when I said "none of the other loan is deductible", it is an investment property, it's just that it isn't running at a loss so hasn't been negatively geared.
     
  6. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    It looks like you can access about $120k from your current property to put toward your next deposit. How you move forward from here depends very much on your future plans and how far your deposit needs to stretch - how many more properties are you thinking of buying in the future?

    It would be beneficial to do some planning to get the best bang for your back in terms of deposits but also making everything as tax-effective as possible.
     
  7. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    This means you can borrow against the equity of the other property to provide you with a 10% or 20% deposits (plus costs). Either way, you're borrowing the entire purchase price of the new property and it's all tax deductible. Hence assuming the interest rates are the same the amount of tax deductions in either scenario is the same. [they're not actually the same, but the difference is negligible in the long run].

    The only difference is the amount of tax deductions you get for paying the LMI by leveraging the new property to 90%. For a $400k lend, this might be about $6,000 in LMI. At 5% interest, this costs $300 / year.

    If you're on the maximum tax rate at 45%, this would mean you get back an extra $135 in your tax. It would take 44 years to make back the LMI premium in the extra tax deductions it generates. The difference in interest rates on the loan between an 80% to 90% lend might cut this down to about 15 years, possibly 10.

    Hence my suggestion that extra tax deductions aren't really a consideration in this scenario. It's really a question of opportunity cost, where the LMI you lets you maintain the extra money for potentially another deposit to purchase another investment (if that's what you want).
     
  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    It is usually always better to borrow where no LMI is incurred. But in your case using the cash or borrowing will result in the same immediate tax consequences (assuming all rates and owners the same).

    But longer term there are different consequences. For example if you have no main residence then it would be good not to use the cash as this will build up cash for the future private expense of a main residence. Then the consequences will be different.
     
  9. D.T.

    D.T. Adelaide Property Manager Business Member

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    Doesn't mean its not deductible, dumbo
     
  10. TheSackedWiggle

    TheSackedWiggle Well-Known Member

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    I am curious if a new loan on 80 lvr be structured to the point where the full purchase price and costs are tax deductible?
     
  11. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    If you've got other property with equity in them, it's very simple. You borrow the 20% deposit and purchase costs against the equity in the property you already hold, then borrow the remaining 80% against the the new property. All the money is for the purpose of buying the new IP, so it's all tax deductible.

    If you don't have any other property or assets you can borrow against, then you've probably got to use cash for the deposit and costs, you're not borrowing that money and there wouldn't be any deductions associated with it.
     
  12. SaberX

    SaberX Well-Known Member

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    Abit confused how the LMI takes 44 years to recoup tax. BOrrowing costs are deductible over 5 years or the life of the loan? And even then subject to your tax rate so you'd only get back 30% of total borrowing costs assuming the borrowing costs deductions you claim over say the 5 years are offset against income you would've been taxed at a 30% marginal tax rate?

    Not sure why the offset account money isn't deductible, Terry? If you pull the money out of an offset ($100k) and then use it on this IP the whole amount would be cash in hand with the nature of use in an IP (therefore fully deductible would it not?).


    I'm also mulling to go 80% deposit with no LMI (save a few thousands) or go say 85-88%, pay say $4-5k LMI but then save say $20-35k on a loan over 400k by going the higher LMI. The downside is all these changes recently may arguably mean that having more LMI and therefore saving cash for your next deposit is even more important... or could negatively argue that if lending is so hard to leverage up over the next year or two, one may be better off just sitting out of the game till things improve.

    What do brokers feel is the best strategy out there currently? Maximising LMI/deposit saved, or just minimising LMI altogether given lending is already tough (and sit on the sidelines)?

    Does any broker have rough %'s they could provide as a guide to calculating LMI at various LVR %'s, say 80,81,82,83,84 % etc? I got some 'example' rates from bankwest/ME bank discussions... seems the sweet spot is about 86-87% band before the LMI increase is a higher % relative to the deposit saved by going higher LVR?
     
  13. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    You might be thinking of a different scenario to me. Offset money is cash and therefore no interest. But if the offset is attached to an investment loan then taking the money out of the offset will indirectly cause interest to increase on the investment loan and this will be deductible against that investment (not the new investment for which the offset money was used for)
     
  14. SaberX

    SaberX Well-Known Member

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    Yes, think it was a misunderstanding. Agreed that any increase in the loan of a non-deductible (say Owner Occupied) loan due to taking cash out of the offset wouldn't be deductible....if doing so to an investment property then yes, it would be deductible...
     
  15. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Yes agreed.But there are different consequences between using offset money and borrowing.

    If IP1 was securing the offset and the withdrawn money was used for IP2 and if IP1 was sold the interest would no longer be deductible. If IP 2 was sold it would be deductible still.
     
  16. SaberX

    SaberX Well-Known Member

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    Had to read that twice but i get where you're coming from. Effectively if you took 20% of the deposit from your offset in IP 1, its treated like cash in your bank when placing a deposit of 20% on IP 2. So essentially no tax deduction on there. But in IP 1's loan technically your loan is now 20% higher, so indirectly your paying interest on 20% more loan in IP1 and therefore deemed deductible as it was raised to buy IP 2.

    Seems to work well on leveraging money as long as you don't sell then? And negative gearing laws don't change/the anti-gearing activists & APRA don't get there way!