Split between home equity and IP loan

Discussion in 'Investment Strategy' started by Meerkat#007, 17th Jan, 2021.

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  1. Meerkat#007

    Meerkat#007 Member

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    Hi all,

    My first post. :)

    I've read in lots of places that a reasonable approach to buying an IP is to draw a 20% deposit plus costs from home equity and secure the 80% balance against the IP.

    We have a good amount of equity available, and it seems to make more sense in our case to borrow a much larger amount against the PPOR (70% LVR on the PPOR) and only the balance cost against the IP. The reason is that the interest rate is lower on the PPOR (it's based on security type not purpose) and both rates are lower for < 70% LVR.

    In our case it would be 70% LVR on the PPOR and about 50% LVR on the IP. The amount of interest paid over the loan term would be minimised by doing this.

    I haven't read this strategy anywhere but I'm also fairly new to all the concepts. Am I missing something? Is there a specific reason for the normal 20% / 80% scenario?

    Thanks,

    Jim
     
    Meerkat#007, 17th Jan, 2021
    #1
  2. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Hiya Meer

    Welcome to the zoo :)

    The 80/25 is most common because

    1. Most peops dont have that much equity in their ppor
    2. Many peops have an emotional tick about so much lending on their PPOR
    3. Most lenders do not price loans based on security, but on purpose
    4. As at today there are some fab investment IO rates around for eg Bankfirst with 2.24 IO fixed for 3 for investment use
    5. When upgrading the PPOR it wont be simple to preserve deductabilty

    ta
    rolf
     
    Rolf Latham, 17th Jan, 2021
    #2
  3. Meerkat#007

    Meerkat#007 Member

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    Thanks Rolf.

    I’m trying to get my head around your last point. Is it because you could unwittingly end up with a mixed purpose loan?

    In our case we’re planning to downsize / downgrade our PPOR in a few years (kids now adults, too much mowing) so I expect we'd need to pay off some of the PPOR loan to keep the LVR at 70% against the new residence.
     
    Meerkat#007, 17th Jan, 2021
    #3
  4. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Im not a tax guy, but if you sell the PPOR property and close out the loans, deductability ceases.

    Portability and/or security substitution MAY allow the loans to remain open, but some lenders dont allow it, or circumstances like ownership or loan names may not fit.

    Folks with this strategy suggest that they can just refi the debt to the IP, thus repatriating the investment debt, but the risk of not being able to do that for the usual reasons isnt insignificant.

    ta
    rolf
     
    Rolf Latham, 17th Jan, 2021
    #4
  5. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    I am licensed to give tax advice and advise clients to borrow against the main residence at oo rates as much as possible for their investment debt. I have even gotten a private ruling for a client on a strategy.

    It's common and straight forward
     
    Terry_w, 17th Jan, 2021
    #5
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  6. Meerkat#007

    Meerkat#007 Member

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    Hi Terry. You've thrown me with that comment. :) Is it using an equity release product?
     
    Meerkat#007, 17th Jan, 2021
    #6
  7. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    No, standard loans.
     
    Terry_w, 17th Jan, 2021
    #7
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