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Discussion in 'Investing Strategies' started by Hunting_dollars, 28th Oct, 2007.

  1. Hunting_dollars

    Hunting_dollars Member

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    Hello everyone, i am new here and can see that there are many knowledgable folk here that can ofer advice on investing srategies.

    I would like some advice on my current postion as I am getting married soon and would like to set myself up nicely.

    Own 1 x IP bought at 240k (3yrs ago) have P&I loan currently at 175k 7.82% interest which I can draw down on if need be. i make minimum repayments of $1392 per month ($380 me , $1012 Tenant) I claim all my expenses e.g. Interest, water rates council rates and depreceation, leaving me an after tax return of around 5k a year (the property is negative geared) Based on a conservative sell price of 370k for the property, my current equity is 195k.

    I have also purchased a home for me and the wife to live in at 395k. I borrowed 265k from NAB in another loan at 7.82%. The other 135k came from a family member and is not required to be repayed ever, so can be considered instant equity in this property. Me and my partner make as much repayments as we can on this loan, in line with reducing our non-deductable debt as quickly as possible. I earn 65k P.a. and she makes 33k per year. We make $2172 in repayments per month in advance on this loan. The loan currently sits at about 259k. We also have a i saver account that does NOT offset our home loan. We put around $1500 per month in this account and it returns around 6.5% interest p.a. There is currently 4k in this savings account but it will go to zero by the time of the wedding because of expenses we must pay.

    I currently believe that our situation is o.k. without really having a hard look to see If we could squeeze a little more out of this portfolio, maybe take on a little more risk and go into shares or something like that. I have heard a lot about offset accounts and believe that I should have one possibly?

    I would like to get into shares at some stage and margin lending sounds good any ideas?

    Any ideas or thoughts would be greatlky appreciated thanks.
     
  2. crc_error

    crc_error The Rule of 72

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    I would draw down the equity and invest into some quality managed funds.. use the dividends to assist with loan repayments... spread the managed funds into australian and international assets like property, resources, infrustrure, shares.
     
  3. Hunting_dollars

    Hunting_dollars Member

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    thanks crc

    thanks crc, which equity would i draw down on? IP or PPOR? Should I still concentrate on reducing my PPOR debt as quickly as possible as I have seen some methods promoting the witdrawal of PPOR equity into LOC's? If this was done wouldn't the interest repayments be non-deductable?
     
  4. JustB

    JustB Well-Known Member

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    Hunting_dollars,

    You can draw down equity from IP &/or PPOR if desired via LOC's and both will be fully tax deductable debt, if used for investment purposes. Tax deductability is determined by the purpose of the borrowings, not by the type of security used.

    What is your aim and timeframe for further investing? If you need to raise funds for your upcoming wedding, in the short-term, perhaps shares/managed funds are not appropriate, as you may actually lose capital in the short term. Probably best to build up your isaver, or keep paying down the PPOR.

    If you can afford the additional interest repayments on the LOC's, and still save whatever you need for the wedding, and have an investment timeframe of 3-5 years or longer, shares/managed funds are definitely a viable option to diversify your portfolio.

    Also, if your interest rates aren't fixed, you may have the option to switch the IP loan to interest only, to maximise your cashflow.

    JustB
     
  5. Hunting_dollars

    Hunting_dollars Member

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    Thanks Justb, I am going to park the money in the isaver untill the wedding money pit passes, then I would look to have a long term investing strategy. I would like to try and implement the LOE strategies that Steve Navra talks about, i wonder if anyone could provide a spreadsheet tool or something that i could test this strategy with my financial details? GREAT FORUM!
     
  6. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Might be something here: http://www.invested.com.au/83/
     
  7. Hunting_dollars

    Hunting_dollars Member

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    am I doing something wrong here? when I download the spreadsheets i just get a blank workbook with some scribbles about a gif? dunno whats happening? if somebody has the latest LOE spreadsheet and share spreadsheet from the previous links could they email to me please?
     
  8. dkmc

    dkmc Well-Known Member

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    If you want to tighten the screws
    change your IP loan to interest only

    You will get a little bit extra cashflow to save

    Secondly - make ur current everyday bank account an offset
    assuming its with the same bank

    Put funds in the offset rather than a 6.5% savings account - which is taxed

    You offset non deductable debt- giving you a high effective rate of return
     
  9. Hunting_dollars

    Hunting_dollars Member

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    Thanks DKMC, so I draw down the equity in the PPOR and cap the PPOR loan at 259k. Keeping it P&I (if its affordable) use the drawn down funds to invest in a margin lending portfolio. Draw down the equity on the IP and use those funds to perhaps fund another IP? Also, revert IP 1 back to IO loan and cap at 175k. Am I on the right track here? Also scrap the isaver and talk to NAB about a 100% offset against my PPOR to reduce non-deductable debt. Now all I got to worry about is whether I can afford all the repayments on the new loans.
     
  10. Hunting_dollars

    Hunting_dollars Member

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    just another thing, what is the definition of capitalising interest? and when should it be used? (I dunno what it is)
     
  11. tailcat

    tailcat Well-Known Member

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    How long are you planning to live in the PPOR?

    If the answer is forever and a day then keep reducing the P&I.

    If there is a chance you may move, then consider switching to an IO mortgage with 100% offset. This then gives you the most options in the future.

    The main gain you get from this is that if you want to convert your PPOR into an investment property, (Never, never sell policy), then you can `transfer' all the funds in the 100% offset to your next PPOR. The IO loan then becomes 100% good debt (provided it has not become contaminated).


    Tailcat
     
  12. Hunting_dollars

    Hunting_dollars Member

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    thanks tailcat, so by contaminated I assume you mean by still paying P&I even after it is converted to an IP? I do not plan to be at this PPOR forever (likely 10-12yrs) but I figured I would sell it to fund my next PPOR (hopefully bigger and bettter) are you saying I could still do this by only making IO repayments on my PPOR and using the offset account to accumulate as a deposit for next PPOR?
     
  13. Rod_WA

    Rod_WA Well-Known Member

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    Not quite, by 'contaminated' he means that the ATO will look at the original loan and see that it was for private purposes, so you won't be able to easily extract the equity by topping up the loan and converting it to an investment, if you have been paying down the principal.

    By keeping it IO, and using the 100% offset, the loan is kept maximum and only transactions are against interest, so when you convert it to an IP, all the debt becomes deductible.

    IO also gives you the greatest flexibility with your cashflow. The general public like to pay off their home loan - there is a strong desire to become debt free. A smart investor will maximise the tax effectiveness and keep the cash options open.

    Also, I reckon the 100% offset is a must in your situation. A high interest savings account will attract 31.5% tax for you, reducing the effective return to about 4.5%, whereas an offset will return about 7.8% (or whatever your home loan rate is), tax free.

    As you pump cash into the offset, you will quickly get to $10k, $20k. The interest differential (7.8-4.5 = 3.3%) on $10k is $330 to the taxman, at $30k it is over $1000 a year lost.

    Capitalising interest is an aggressive strategy to absolutely power your cashflow and extend your investment capacity, where you don't pay interest on your investment loans, rather you let the interest grow onto the loan (the loan tops up as the equity grows and then you take an indefinite 'repayment holiday' as the banks call it). I'd get used to your changing life circumstances before trying this out (my thoughts only, decision is all yours).
     
  14. samaka

    samaka Well-Known Member

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    Is this how it works?

    So say I want to buy a property and I need a loan of $100k (easy figure). I would get two things:

    - An interest only loan of $100k.
    - An offset account.

    If I put $20k into the offset account - I still have $100k I need to pay back eventually, but I'm only getting charge interest on 80k? I can take that 20k out later (for what ever reason) and I go back to paying interest on 100k?

    I assume at any stage I could tell the bank to take that 20k in the offset account of the principal of the loan?
     
  15. thinkbig

    thinkbig Member

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    Samaka,

    Thats correct. Its a subtle difference, but here it is:

    If you ever turn a PPOR into an IP, the prinicple is you want to get as much of your money out and into your new PPOR loan (again perhaps with an I/O-offset setup).

    By redrawing funds from your PPOR loan, the resulting debt is considered to be non tax deductible. Ie you debt was to buy a house to live in).

    If you are just using money thats sitting in a bank account (that just happend to be saving you interest but offseting a loan) then its all good!

    As you've already worked out. a 100k I/O loand with 80k ina 100% offset, and a 100K P&I loan with 20k payed down is the same in terms of your monthly liability (if you assume the same interest rate). The I/O offset is SO much more flexible.

    Yes, The only problem you'll run into is serviceablilty/LVR. As the funds aren't 'committed' to the loan, you're evaluated on the total of all the loans. This is where you may have to lock in some of that cash

    Hope that helps
     
  16. Rod_WA

    Rod_WA Well-Known Member

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    Yeah, but you'll note that the offset reduces the interest payable, which is very desirable whilst the property is your PPOR (of course it it's desirable anyway, but when you move to a new PPOR you'd like the old PPOR/new IP loan to be full again). Obviously you'd expect capital growth in the first property in the meantime, so you would be able to borrow against the extra equity as investment funds through a separate LOC etc.

    Of course, if you want to reduce the principal, sure, go for it, what you'll end up with is exactly what you would have got if you a P&I loan - a reduced principal by the same amount, and the same amount of interest payed (thanks to 100% offset).
    But the beauty of the IO loan is that the cash is readily available in the offset to do what you want: for personal use if you want a holiday or a new car, without 'contaminating' the property loan with personal use funds.

    One other useful facet of an IO loan is that the principal does reduce in real terms due to inflation, so you can easily argue that the principal is reducing over time, eg $100k in 20 years time is only around $50k in today's dollars assuming 3.5% inflation. Of course this happens to all loans, IO and P&I, but you get the point.

    Having said that, my PPOR loan is P&I over 30 years, since this is what my wife demanded! All my other loans (investment IP, and two LOCs for shares) are IO. This keeps her happy.
     
  17. Hunting_dollars

    Hunting_dollars Member

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    So in my case, can I now convert my PPOR loan to an IO loan for the balance remaining i.e. original loan 265k less 6k paid off to equal 259k?
    Then, since the balance of principle has not been reduced at all, I can assume that if I turn the property into an IP the ATO will let me deduct this interest? (that is providing I don't make any more P&I repayments)

    Will this "un-contamination" work?

    Also, what would be my best course of action to clean my existing IP loan? I have been paying P&I off of that loan since I purchased the property. But, since I have never lived in it, can i still claim the entire interest bill as a deduction, because it is for investment purposes?

    Also, would I contaminae this existing IP loan if I redrew some money to, say buy a car?
     
  18. thinkbig

    thinkbig Member

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    I beleive that would be OK. The other thing to remember, is that you can use something like a newly formed LOC to get access to equity in your PPOR.

    Theoretically you could convert to I/O the create a new LOC taking it up to a comfortable limit. As this new LOC is essentially a new loan, then this frees up funds for investement cleanly. Don't mix the two though.

    For arguments sake. Say you have property in now worth 400k.

    You could convert the P&I to I/O at 256k. You could then create a 60k LOC. This would leave you with just over 20% equity in the loan. The 60K LOC could now be used to fund deposits for other IPs, direct shares, managed funds etc (even in conjunction with a margin loan). The debt on this new loan would all be tax deductible if you use the funds for investment.

    The IP is less of a concern. Any money you draw against it (any shape or form) that is going to be used for investment will create deductible debt. Whether you keep it P&I, convert to I/O or use a LOC in conjunction with either. I'd be inclined to leave it as it is untin you need access to the funds

    [/quote]

    This would be the one exception. If you were inclined to do this then you should convert to I/O right now. Remember once you've payed down that P/I loan, you really can only redraw to fund investment and leave deductible debt behind. If your surplus (ie the money you saved converting from P&I to I/O was sitting in an offset account then this doesnt happen.

    Rather than refinancing everything, perhaps try to separate your personal assets from your investments. Ie convert you PPOR to an I/O, funnel all your surplus cash into this one. Tax effectiveness only becomes an issue when you've completely offset this one. This would be where you'd fund a car from.


    Note: I am not qualified to give this sort of advice, and am not in the finance industry, just giving my view. You really need to seek professional advice before you make a decision. Any good mortgage broker should be able to advise you in this regard but it is a good idea to get the concept beforehand.
     
  19. Hunting_dollars

    Hunting_dollars Member

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    thinkbig wrote:

    Rather than refinancing everything, perhaps try to separate your personal assets from your investments. Ie convert you PPOR to an I/O, funnel all your surplus cash into this one. Tax effectiveness only becomes an issue when you've completely offset this one. This would be where you'd fund a car from.



    Any chance you can elaborate on this? do you mean funnell all surplus cash into an offset? When does tax effectiveness become an issue?
     
  20. tailcat

    tailcat Well-Known Member

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    Yes this will work. You should get an IO loan for 259k. The 6k of principal payments cannot be `recovered' this way. However, later on, when the PPOR has gone up in value, you could set up a LOC (a completely separate (3rd) account) and use this for further investments. This would then give you access to the 6k. Note banks usually have a minimum size for loan accounts. With Westpac it is 20k. Hence the need to wait.

    Convert it to an IO account asap. The `principal' payments are affecting your current cash flow. This money is better off in the offset account!

    You can also set up a LOC against your IP for investments and/or running costs (rates, Body Corp etc.).


    So in summary: You can have up to 5 accounts on the two properties.

    PPOR:
    IO account 259k (never touch only pay the interest every month)
    100% offset account : (Do what you like but just make sure the balance increase. This is the money that you are going to use to buy your new PPOR with.)
    LOC Use this to get at any equity in the PPOR. This can only be used for investment purposes.


    IP:
    IO account: Pay as interest only. Divert as much cash flow to more worthwhile projects.
    LOC Get access to any equity for investment purposes.


    Yes you would!!!!!!!! Even if you buy a Mars bar, your accountant would love you for all the extra fees they could charge you. DON'T DO IT.
     
    Last edited by a moderator: 30th Oct, 2007