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PPOR refinance with investment outlook

Discussion in 'Property Finance' started by Spoony, 28th Sep, 2016.

  1. Spoony

    Spoony Active Member

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    I'm about to refinance my PPOR, but as per my other thread am looking at possibly dipping my toes into the investment property world.

    I've been in discussions with a broker and he feels the best way forward is to refinance the PPOR with the best/most suitable product currently, and if/when the time comes to leverage the equity for an IP create a split off that loan to fund the deposits and costs of the IP. The IP would then have a separate loan again with a bank that offers the most suitable product at the time for my situation.

    Does this sound logical?

    I'm still of a mindset to set up the PPOR as interest only to build cash in an offset which could also be useful later.
    Firstly it would be handy in the case I end up renting the PPOR (planning on relocating in 6 years), though 1/2 of it's value is paid off so not the best approach tax wise so logically renovating it, selling it to fund new PPOR and perhaps deposit on another IP would probably be a better approach. Secondary thinking is, by keeping funds in an offset, these could assist later in purchasing the first IP. However given the loan would be split when the time arises and equity harvested anyways, is there any point at all to this? IO on a PPOR I hear is a bit more challenging these days but also may limit product offerings and associated costs of these too.

    Would I be correct in thinking the only advantage of having IO on the current PPOR was if renting it was a solid future plan, or is 'just incase' a good way to play this.
     
  2. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

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    It does.

    Leveraging equity in the PPOR means the entire debt against the IP will be deductible (deposit/costs and main loan).

    When carrying out the initial refi - release equity then (rather than later) to save yourself submitting a second application later on.

    Cheers

    Jamie
     
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  3. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    Jamie's right - get the equity loan set up as part of the refi, as it will save you another application later.

    IO against PPOR is good if you're disciplined enough to save the extra cash - if you'll spend it, P&I can be a better option.

    The benefit of IO is that it maintains flexibility if the PPOR does become an IP.
     
  4. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    Everything you've mentioned makes sense.

    Even if the PPOR never becomes and IP, it's very easy to change the structure to P&I and pay it off later on. It's not quite so easy to do the reverse as you've noted there's already some tax deductions that might be missed in the future.
     
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  5. Spoony

    Spoony Active Member

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    Thanks :)

    So by that you mean equity would be sitting in an offset until it is used for an IP. Would this restrict lender options? ie perhaps not all would be happy to do this in the current climate without a distinct purpose for the funds, ie 'I'm using it for deposit' on this IP. Or does the bank not care because borrowing capacity is there and it's secured against the PPOR.

    Thanks Jess, yes I understand there is a need for discipline, especially once a offset gets larger. I'm usually pretty good, I've been paying some extra into the loan for a little while now (not smart in hindsight if going to IO on refinance), but don't redraw this for any spending either.
     
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  6. Steven Ryan

    Steven Ryan Mortgage Broker Business Plus Member

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    @Spoony, you should be ok to top up your PPOR loan to 80% depending on the lender (some don't like giving much "cash out" but others seem to have no limit).

    Might impact your servicing a bit but what hurts more is having to borrow more $ at the same time (lenders generally assess "new" loans at a much higher rate than existing so better for the deposit/purchase costs to be "existing" not "new").

    Better to have the funds available now. What if something changes and you can no longer get your hands on it?
     
  7. Spoony

    Spoony Active Member

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    Thanks Steven

    Are you saying that because it will all be done in a single refinance process that the rate it will be done at will be different/better than later if the loan is split at a later date? The lender effectively seeing and assessing this 'split' as new loan. This combined with look at a second loan for an IP in a similar time period causing issues? Even if different lenders?

    I do understand the point of making funds available while it's possible though.
     
  8. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    I think what Steve is referring to is that some lender assess existing loans in one way, but the new loans they assess them at a higher rate.

    This means that if you apply for several loans over time, the older loans aren't seen to cost as much, and your affordability will be high. If you apply for them all at the same time, they'll be assumed to cost the assessment rate which will impact your borrowing ability.

    If your serviceability works, it's best to get it all done and have the cash in your account. If your serviceability is marginal, then sometimes staggering equity releases of different properties over time can stretch how much you can borrow a little further.
     
  9. Spoony

    Spoony Active Member

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    Cheers for clarifying that Peter, that does make sense.
     
  10. Spoony

    Spoony Active Member

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    Following up on this thread, the refinance is in progress, valuer was out yesterday looking at the PPOR.

    I was curious to get others thoughts on these two options though.

    The loan will be split, with the equity going into an interest only split separate from the remaining PPOR loan. Until I use this money it will be parked against the PPOR loan. The PPOR split loan will be P&I.

    Cost wise it's most effective both in fees and rates to stick with the more basic loan type. Which is the plan we were going to run with. The PPOR split will have free redraw facility, so the idea is all or as much funds/income can be put on the PPOR split to pay that down as quick as possible.

    Alternatively a different loan type can be used to have an offset against the PPOR loan (or an $8/month fee with the above mentioned loan type, which is cheapest vs the loan option/package that includes redraw).

    If the plan is to pay down the PPOR with the future outlook of improving it with some reno's, for future sale (possibly in 6 years), is there any advantage in running an offset? This sale would largely pay for a new PPOR, or depending on the situation part of the funds could also be a deposit for another IP (It's sometimes hard to clearly see that far ahead).

    The advantage of running a redraw setup is that I put all/most money straight into the loan and only pull funds that are really needed. While I'm quite good and frugal with spending most of the time, this process has a physiological effect of making one even more conscious and accountable. Cash if needed for renos will be available via redraw.

    The only advantage I can see running an offset instead and just paying minimum P&I on the PPOR, in-turn accumulating the offset is these funds could be used for anything if one required it, with full deductablity if used for investment. I'm not sure this is the case if funds are redrawn for this split of loan though?

    The 'purpose' of the redrawn funds would be for investment, so one should figure they should be deductible, as my understanding is the 'purpose' of the funds that determine deductablity? If the sum was substantial one could shift the spit amount, put the redraw/additional against the spit used for investment deposit/house so it was more clear what these fund were used for.
     
  11. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    You might want to get some tax advice before structuring like that.
     
  12. Spoony

    Spoony Active Member

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    I figure you're talking about in parking the money against the PPOR portion 'split' of the loan until it's used for investment could be seen questionable? I did wonder about this, though had figured the 'purpose of the loan' (ie the split) has been for investment from the outset, the money is just 'waiting' to be applied.

    However applying the above considerations, parking the newly acquired equity cash in an offset against either loan (doesn't really matter which) is a cleaner way of doing this I assume?
     
  13. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    There are a number of tax issues to consider.
     
  14. Spoony

    Spoony Active Member

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    Thanks, will look into it further.
     
  15. Spoony

    Spoony Active Member

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