Your opinions/suggestions on my decision

Have a 3b house (1970) on a 615sqm land in NW Sydney, pretty happy with the location, primary school, short walk to M2 bus stops, mall within 1km. Thinking to knock down and rebuild there, build a 40-45sq two storey 5b house here. Loan amount pending currently $500k and have similar amount sitting in offset account. Working with mortgage broker seems if we take another $700k loan for new build then we will be roughly paying $5-5.5k monthly repayments which are well under our comfort and this is without touching our $500k offset.

In near future let's say in 5yrs time we have to look for some IP as well, that's something we want to do next after we have our new rebuild house. So given such plan, funds needed for further IP what do you recommend in terms of loan structuring currently? Should we leave all this offset untouched? Or use some partial amount like $100-200k from it and reduce the loan amount now?

Thanks for your help

 

Any one here?

 

At a minimum keep about $100k of your cash available when you build your own home. You might find that there's things you want to change during the build. Getting additional finance for this halfway through is a nightmare, better to simply have cash available for potential changes.

Overall I'd recommend borrowing more, rather than less. Keep surplus money in an offset account. There's lots of scenarios where this might be beneficial that include tax, finance and investment planning.

Bottom line is it's better to have cash available now, rather than having to go back to the bank and asking for another loan in the future. You can always reduce the limit in the future, but asking for more money required a loan application.

This needs to be weighed against what your repayment commitment will be. Make sure the loan repayments are within your comfort zone. You're the one who has to live with it.

 

Yes I would borrow 100% for the new build
Later debt recycle this and invest at owner occupied rates.

 

I would leave the cash in the offset until you're ready to buy the IP then look at your loan options at that point in time, a lot can change in 5 years. You wouldn't want to put it on the loan now only to find out you can't access it in the future if you needed it.

 

Not usually at Midnight, all the successful people here at that sort of hour are working on their tan aboard their Mediterranean luxury cruiser
(or like me sleeping ready to go slave another day)!

WHY knock down rebuild ?
What is the current zoning, being near a shopping mall it might be zoned for high density, or could be in the next few years.

You have two different issue's here, your PPOR & an IP, talking to a broker about your plan to knockdown rebuild is a start, the IP is a non issue until you decide to buy !

Personally, I'd be looking to buy several IP's in the shorter term (based on my equity and serviceability), then look to either upgrade/change or rebuild my PPOR later

@sash Has some good advice on cash cows
Getting your money working for you sooner will make things easier later

*yes everyone's circumstances are different, maybe you have a 7 person family and need a bigger house, or is it just the WANT of shiny new
Bigger isn't better, and could hamper your ability to invest later

 

If it definitely won't become an IP (I don't know that, but let's just assume that for a moment), what would the benefits of borrowing more be? I would have thought it would make sense to have the minimum loan needed and then taking a second mortgage for IP purposes on the PPOR, if an IP was purchased down the road. That way you get a tax deductible loan at OO rates.

Am I missing something? Or is it just in case my assumption is wrong and it becomes an IP down the road?

 

You could seriously declutter and contend with a smaller extension (25-30sqm)..or as is? Save $300-400K in process.

 

The cost of funding is different between investment and OO debt. You can shuffle the OO loan over to investment debt and shave off about 0.4% on the rate. on $500,000 that would be $2,000 in interest saved per year without loss of tax deductions (except for the lower amount of interest).

 

Yes, exactly, that's what I meant. But why would you take a total $1.2m non-deductible loan with a $500k offset, rather than having a $700k loan and no offset and then getting a second loan to pay for a future IP? It was my understanding that an existing non-deductible loan can't become deductible (say the current $500k loan with the $500k in the offset) if you change its purpose. I thought you'd have to close that loan and then open another one, for it to become deductible, is that not right?

 

Nope.

 

Firstly, better to borrow money when you don't need it and it's easy. When you do need money, it often becomes harder.

In the scenario outlined, if you need an equity release for investment purposes it would be at investment rates.

However you could borrow more initially at owner occupier rates, split the loan, debt recycle the new split and thus have the same outcome as an equity release but at owner occupier rates. As a bonus there's no further credit assessment to do this.

 

Got it, I didn't realise you could repurpose a non-deductible loan into a deductible loan.
I'm still missing something though, you said that the equity release would be at investment rates. I didn't think that was true? I thought that the security (a PPOR), not the investment purpose (IP) determined whether it was an OO or investment rate. Is that not right? I certainly have a deductible loan against my PPOR that's at OO rates.

 

I have a private binding ruling on the tax side.

The banks now give investment rates on anything that will be borrowed and used for something other than the main residence. Security doesn't matter for the rate anymore (except with 2 lenders perhaps)
That is why borrowing for a main residence renovation can work well

 

Got it, that's what I was missing, thanks!
Did this change in the last three years or so? That's when I got my loan.
Do you mind disclosing who the two lenders are that are still offering OO rates on an investment loan secured against a PPOR? Does your crystal ball indicate they'll change too?

 

Lenders policies vary on this, but most lenders will decide that the loan is for investment purposes, therefore they charge it an investment rates (the cynic in me says it's because they can). It's been around since lenders started categorising loans in 2015. There are a few exceptions though.

I imagine there's a lot of equity released where the official purpose is 'renovation'.