Sydney - long term plan with PPOR

First of all, big thanks to the community for great discussion across many many property related topics. An invaluable research resource.

I would kindly ask for opinions regarding my current situation, I would seek to get several points of view to confirm/reject my hypothesis.

Our situation:

• PPOR (FHB) 2 bed 2 bath 1 car Apartment in Sydney ~15 km from CBD, bought in the end of 2017 for 680K.
• ~20 mins from the closest station walking, but in a nice apartment complex with shops, supermarkets and in a reasonably quiet suburb (good place for young families I would say)
• 500K owing with a projected full pay-out in ~9 years
• Current valuation in my subjective opinion would come out ~635K (though market is changing again apparently)
• Strata ~800 a quarter
• Property in my name, income ~180K annual, wife is at home with a little kid
• Potential rent is 520pw

Our goal:

• In ~3..5 years, a larger property, 3-bedder apartment or a small-ish house or a townhouse in the same vicinity to the CBD (15 km)
• Have a passive income generating asset with low maintenance (income from shares or apartment's rent paying the apartment's loan)

Our thoughts:

• We unfortunately didn't time the market well due to FOMO. Once the prices in the areas we were looking at started to reasonably decrease, we jumped the gun (got ~5% discount from the listing price at the time).
• If we are to sell today (we won't), we'd lose money, though the rest of the market has cooled off, so this kind-of doesn't matter, e.g. other properties would cost less as well (wishful thinking, since ~ mid 2019 we would be in a much better position to purchase due to current loan not dragging down our savings with the market). Still, our thinking that time in the market > timing the market.

Our considerations:

• Wait several years, sell PPOR at market price at that time, use balance to purchase a larger property, potentially a house or a townhouse (up to ~1.3 mil current equivalent),
  • expect greater appreciation due to land component
• Wait several years, sell PPOR at market price at that time, use balance to purchase a larger apartment (up to ~0.9 mil current equivalent), invest part of income in shares/ETFs (Vanguard, etc..),
  • expect higher diversification due to international market exposure and potentially higher returns (shares would be purchased in the lowest family earner name)
• Wait several years, convert PPOR to IP and keep it, take out any funds in offset and buy a larger apartment
  • expect the property to self-fund and eventually pay itself out
  • this may come in combination with re-selling to a spouse who are in the lowest tax bracket?
• Other options we didn't consider?

Appreciate your opinions.

 

Just confiming that your loan has an offset? That is, do you get statements for two accounts, one for the loan account and another offset / savings account with a completely different account number?

The plan is conservative and fairly generic. Other options would be increasing gearing to buy other investments but that depends on your risk profile. You have to decide whether you need more growth.

Whats the several years timeframe actually? Primary school and high school should be considered. So should more children if thats the plan.

You need goals for 5, 10, 20, 50, 100 years.

 

For now you can hedge your bets as you plan to stay for a few years.

Make minimum loan repayments, but build up as much as possible in an offset account. While you live there, this will have the same effect as paying extra into the loan. The advantages are that if you decide to retain the present property as an IP, the loan is maximised. The money in the offset can be withdrawn and used as a deposit on another PPOR.

My advice is to always look forward, not back.
When you are ready to move, carefully consider the future capital gain prospects of your present property when deciding whether to sell or retain.

 

I don't think we have separate accounts for the offset, no. We initially had a single zero-yearly-fee loan with an unlimited redraw option, then split the loan onto fixed and variable. The variable option then became offset-eligible (since we pay the yearly "wealth package" with CBA), however I believe what the bank didn't change the accounts and just put the fixed portion onto a separate account, with a variable still "redraw-only". I might need to follow up on that, but since the redraw is unlimited in our case, I might be missing the significance of a separate offset account number?

 

I believe both of these statements are a very good advice.

 

A redraw and an offset are completely different - you need an offset account if you have any possibility of turning your property into an IP.

Search forum threads.

 

In simple terms, a redraw on a loan is a new borrowing. If you use that to buy a new PPOR, for example, the interest is not deductible because the purpose of the new loan was to buy PPOR.

This makes a big difference if you move in the future and keep the current property as IP.

 

It sounds from the above like you have not got the right finance structure to help enable your third option - but you do have time to change that now.

You may not end up converting it to an IP but you'll at least put yourself in the optimal position to be able to decide which option to go with in a few years down the track.

 

Called the bank and changed to offset, took 5 mins, thank you!

Speaking of the financial structure for PPOR-IP conversion, can you elaborate?

 

Check your internet banking to make sure there is a separate offset account with its own account number.

Where are the payments coming out of?

 

At a principal level you want to minimize your non-deductible debt before moving onto reducing deductible investment debt.

If your long term plan is to convert this to an IP and buying a new PPOR then I'd be looking to make sure you're structuring it in a way that facilitates that outcome longer term.

At a foundation level offset account makes sense for this purpose now, but there are also other levels like interest only repayments. All depends on the specifics in your plan as to what is going to help you achieve your goal.

Not advice, just ideas

 

It’s now a separate “Everyday Offset” account and two separate loan accounts (variable and fixed). All the offset funds are in the offset account. Weekly loan repayments (variable and fixed loan portions) are taken from the offset account via direct debit.

 

Where did the offset account balance come from? Youve had this loan for 2 years, right?

 

I had an existing “Everyday” account with CBA which they converted to an “Everyday Offset”. I then moved the funds from redraw on the variable loan to the offset account(no fee).

 

nope

 

The fee is the least of your issues here.

Experts, what would be the suggestion here? At least do a same day repayment of the redrawn amount back into the variable loan?

 

I have been redrawing small amounts before as it was necessary, and it is likely/possible I will be refinancing in the nearest future (before any PPOR -> IP conversion will take place) with another bank with a goal to reduce the interest rate. However I do agree that I am not across redraw/offset intricacies being discussed...

 

Then your loan is already contaminated.
Suggest talking to a knowledgeable accountant to understand the extent here.