PPOR Loan Structure, where it will become a future IP

Hi,

Our first PPOR will be a Sydney apartment that we plan to change into an IP after the first year or so.

The total loan is $450k so we are considering setting up a split loan as follows:

• $200K at 3.75% P&I 100% offset
• $250k at 3.55% P&I (no offset)

We've selected the offset amount at $200k as it is very unlikely that we will exceed this amount of savings whilst we are living in the apartment.

Then when it turns into an IP, all our offset cash will move into our property (bigger home to live in).

Just wanted to check to see if this Split loan approach seems to make sense? As the bank has been a little pushy trying to select this split, so it is making me second guess myself like I must be missing something...

 

Yes sounds ok. Depending on your savings level you might want to make one split IO.
You might also try to borrow 105% if you can.

 

Hi @CHE

If you have plans for future owner occupier property, then definitely worth considering IO.

What is making you feel that the Bank's been pushy?

Also, are you paying LMI? If not, there may be flexibility to move things around later down the track.

 

Hey propertytwins it looks like your twitter account has been hacked - the same message keeps reappearing every few hours in the side bar here for business members.

 

The bank was just really wanting the split amounts firmed up asap, even though we haven't got the valuation back (it is an OTP purchase, with Occ Cert & Strata Docs yet to be registered - but soon).

So just double checking that I wasn't missing any important consideration in setting up a split, because I can definitely see the benefit in saving interest.

We were initially thinking IO and did a lot of calcs to compare this, but the IO differential (on both OO & Inv loans) was the spoiler.

IO worked out to be an extra $38.5k in interest payments over 30 years to receive an additional $18.7k in tax returns (compared to P&I). And this was also after:

• Adding to the IO offset account the net repayment savings during the first 5 years (i.e. equiv P&I payment less IO period payments)
• Adding the net tax return (surplus compared to P&I) into the IO offset account each year
• Then, after the 5 year IO period has lapsed, drawing small amounts from the IO offset to cover the higher repayments (IO remaining 25 years versus P&I)

So we decided that paying off a small portion of the principal via P&I whilst we are OO (and missing out on additional savings of an approx equivalent amount) would be okay for us

 

We'll avoid LMI as we are going for 80% LVR.

I guess I've probably misinterpreted the bank as being pushy, but we do have some urgency in getting our loan docs signed off prior to going overseas very shortly for ~3 weeks. So we are just covering off the risk of receiving our settlement notice (we'll have 21 days) soon after we fly out.
Not the best timing...

 

Sorry, I only meant the split portion was a 100% offset account. But we would still start with around $150k in the offset at the start and can save ~$50k per year so would max out the $200k offset in about one year (so looks like $200k could be set too low, if we stay for more than a year)

With P&I after 1 year we would pay down $15k (with $7k of this contributed to the funds in the offset) and lose this destructibility.

At the 1 year point for IO, we would have saved an extra $13k due to the lower repayments. We were initially solely focused on IO because of this benefit, as it would both increase savings towards reducing future non-deductible and also maximise tax destructibility on our first place.

But ended up coming around to the P&I offer, as there wasn't that much difference in regards to cash flow (during the first 5 years), plus we would reduce the total interest paid on P&I by a fairly large amount. I do accept I'm probably missing a few key considerations, so would appreciate any feedback that expands upon your above comments

 

When we move out, we'll be using the funds in the offset towards a new property. So this offset balance will go down to $0

 

About 11k (of the 15k equity calculated above) would be paid into the 200k Split with offset