Using savings advice

Discussion in 'Investment Strategy' started by Drekko, 28th May, 2020.

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  1. Drekko

    Drekko Well-Known Member

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    Hey guys
    I am after some advice here. Obviously I am wanting to be careful and choose the best method in doing this

    My wife and I with 1 child are wanting to do some uprgrades to our PPR. One being a pool which is costly. Probably about 50-70k by the time we finish landscaping, pool installation and out door area

    We both have about 107k savings
    We have 3 investment properties currently rented
    1 PPR which is the place we are living in

    We could either:
    1. Talk to our broker to see if the bank will allow us to borrow money on one of our investment property's or use equity for our renovations. And use our genuiene savings to buy another investment property
    2. Use our genuiene savings to do our home renovoations which will probably eat most of it up
    OR can anyone think of any other strategy based on the info I have given?
    If you need more info I can give it

    Also is there anyone in Victoria I can speak to that could help with this strategy and give advice? any recommendations?
     
  2. Terry_w

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

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    Since borrowing for owner occ purposes will be the cheapest finance you can get why not borrow against the main residence, or even an investment property and then debt recycle/loan shuffle this across to the investment debt

    If you borrow $100,000 and the interest rate difference is 0.5%, that would be $500 in interest savings per year.
     
  3. Drekko

    Drekko Well-Known Member

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    well i have to work that out. Our investment loans are interest only vs principal and interest on our PPR loan

    have to work out the repayments and check which is cheaper.

    If I understand your reply correctly?
     
  4. Terry_w

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

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    what is the difference in rate?
     
  5. Drekko

    Drekko Well-Known Member

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    Hi Terry
    We have a few loans. Once being my partners old PPR loan that we probably should change to IO. I have to call the broker and get some details before I give you all the info. Once I do that ill post the info. Thanks for your help!
     
  6. Drekko

    Drekko Well-Known Member

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    Hi

    investment property 1 - 3.10% P&I variable ( formerly PPR)
    investment property 2 - 3.70% I/O 3 yr fixed
    Investment property 3 - ( is split into 2 loans )
    sub loan - 3.99% P&I
    sub loan - 4.55% P&I
    PPR loan - 2.73% P&I variable

    Spoke to my mortgage broker and the Investment property 3 loan is a fixed untill 6th of July 2020
    So we will look at getting a better rate of that one very very soon.
    Based on this. Which loan should we try and get extra funds to do some renovations?
     
  7. Niche

    Niche Well-Known Member

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    Surely PPR if that is the lowest rate, then over time turn the debt in to deductible debt so it is not only at the lowest rate but also tax deductible
     
  8. Drekko

    Drekko Well-Known Member

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    But how will I turn that debt into a tax deductible debt if I borrow off my PPR? The PPR is where I live
    My repayments for each loan:

    PPR loan (current residence) - 2.73% P&I variable - Repayment per month is $2,954.57
    investment property 1 - 3.10% P&I variable - Repayment per month is $1,037.48
    investment property 2 - 3.70% I/O 3 yr fixed - Repayment per month is $1,101.33
    Investment property 3 - ( is split into 2 loans ) -
    sub loan - 3.99% P&I
    sub loan - 4.55% P&I
    combined monthly repayment is $1444.04
     
  9. Terry_w

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

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    those loans are drawn fully presumable.
    What you want to do is borrow a further $100k or so at the owner occ rate.

    then recycle this loan - you could save up to 1.8% interest per year potentially
     
  10. Terry_w

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

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    its not the security for the loan that counts, it is the use.
     
  11. Niche

    Niche Well-Known Member

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    I'm sure @Terry_w will be able to correct me if i am wrong but I will have a go at explaining to help you understand as well as making sure I have it right in my head.

    Basically you would borrow the money at the PPR rate of say 100k then if you put extra repayments towards this then redraw those funds for investment purposes (either fees for the investment property or purchase shares) then the interest on that part is tax deductible. It is A LOT simpler if you use loan splits but can still kinda work without it. As i said I am by no means an expert but I believe that is a very simplified description. Terry any feedback would be greatly appreciated for my own understanding
     
  12. Terry_w

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

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    This is true

    But I was thinking the loan shuffle strategy - recycle the loan, pay down the $100k, then redraw and use it to pay down an investment loan.
     
  13. Drekko

    Drekko Well-Known Member

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    Hi
    I am truly grateful for your responses and advice. I am sorry but I am still learning and I dont quiete follow you. Especially the loan shuffling and recycling. Not sure what you mean by this

    I might need a physical example of how you would do it and I think I should grasp it then

    If I understand some of it. You mean to take 100k extra on loan PPR loan (current residence) - 2.73% P&I variable.

    Then move this into our investment loans :
    say:
    investment property 1 - 3.10% P&I variable -
    investment property 2 - 3.70% I/O 3 yr fixed -


    Then I am confused how to use this money for the landscaping stuff we want to use it for and also how it becomes tax deductible
     
  14. Terry_w

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

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    If your main residence rate is 2.73% could you not borrow another $50,000 at 2.73% and hold onto your cash.

    Then use this money to do the reno. Take the $50,000 cash you still have to pay this loan down to $1.
    Then redraw $50k

    Put the $50k into the variable loan with the highest rate 4.55%

    This way you are now saving interest on $50,000 x (4.55% - 2.73%) = $910 per year
     
  15. Drekko

    Drekko Well-Known Member

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    The interest rate on the main residence is lowest but we are paying Principal and Interest on that of $719,000 ( we only just purchased this house a few months ago)
    Paying about $2.9k a month

    ALso wouldnt it be better to use the extra cash we have saved to buy another investment property vs paying down the $50k loan to $1 ?
    Wouldnt another investment be higher wealth of income in the long term? vs using it to pay down the extra borrowed money?

    if your answer is yes I would just do that and pay the extra loan conventially

    Tell me if I dont know what your talking about and sound silly
     
  16. Terry_w

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

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  17. Drekko

    Drekko Well-Known Member

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    thanks Terry. I have to do some reading so I can better understand it. Ill read that
     
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  18. Drekko

    Drekko Well-Known Member

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    HI Terry
    Just want to clarify this

    By doing this wouldnt I still be out of pocket 50k from my main residence loan? thus paying even higher non tax deductible interest then I was originally?

    Might not be understanding correctly but say I have 50k savings of my own cash and I have 720k owing on the main residence loan at 2.73% and I want to do home reno which costs 50k

    1. I borrow an extra 50k from main residence loan which then puts me in 770k owing
    2. I do the reno and pay the tradie the 50k. Now I am paying the bank non deductible interest of 770k at 2.73%
    3. Use my 50k cash I have saved and put it on the main residence into redraw, lowering my amount owing the bank back to 720k
    4. Transfer the 50k from the main residence loan sitting in redraw to my highest interest loan which is an investment loan. This will then make the interest of the 50k I used tax deductible and also reduces the amount owing of the invest meant loan by 50k which is more efficient due to it being a higher interest rate
    So my main residence loan will still be 770k owing but at a lower interest rate
    the reno is done
    our savings is used - but -
    I am 50k owing less on my higher interest loan and the interest on that is also being tax deductible
    Is this right terry?
     
  19. Terry_w

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

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    Sounds about right, but don't forget to split and avoid borrowed funds taking a detour and mixing etc.
     
  20. Drekko

    Drekko Well-Known Member

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    Which loan do I split ? Main residence loan or the highest interest investment loan?

    Wouldn't splitting cost fees or even reestablisment of a new loan?

    By the way our 4.55% loan is fixed Untill July 6th so we will be changing that to a lower interest one (probably a P&I one as they are cheaper than interest only at the moment)