Loan recommendations?

Ok, things are becoming a little clearer, but one more question: If I want to draw out money via a LOC does the LOC "limit" take into account the amount in the offset account?

 

MCM, Voigtstr (and Sk3tChY)

Let's take this slowly and discuss certain different options, which can be combined later.

This is going to be long so I may have to break it across several replies.......

Assumptions:

1) MCM : you are serious about investing down the track. If not then leave everything as is.

2) I'm assuming your current mortgage is `clean'. It is the remains of the loan you took out when you purchased the property and as not been contaminated by any `debt consolidations' or similar.

Scenario 1: Rent out current PPOR and buy new PPOR

(I will ignore the capital available for investing for the moment.)

In this case you are aiming to have as much of your own money as possible available to use for deposit and costs when you buy the new PPOR.

To do this you need to change your P&I mortgage to a IO with 100% offset account. The rational for this is that all the principal component of your repayments is being locked into the current building. Yes it is equity, but you can only use this for investing (which we will deal with later). You cannot use this money, in a tax effective way, to buy your next PPOR.


Let's take a concrete example to help explain. The PPOR is worth $300k and the current mortgage is for $200k.



If you continue with the P&I, in 5 years you could have worked this mortgage down to say $150k by pouring every spare dollar into the repayments. (You have built up $50k of equity in the house.)

How do you buy your next PPOR?

You have no spare cash for the deposit .
You need to re-borrow the $50k (give or take a bit) (in a new account) for the deposit!!! However, because it is to be used for non investment purposes, it is not tax deductible (i.e. bad debt).

Final situation, This house becomes an IP with a $150K tax-deductible loan and a $50K loan which is not tax-deductible.



If you turn your mortgage into IO with a 100% offset account (and make exacly the same repayments and the same interest rates) You will have pumped the same $50k of money into the system. However it now looks like this:

A1: IO acount with $200K owing
A2: 100% offset with $50K of real cash in it.

Now when you buy your new PPOR, you can take the $50k out of the offset account . The house now becomes an IP with $200k of good debt on it which is all tax-deductible.

(Sk3tChY : This is where a LOC is not the same as a 100% offset account. It may actually be worse than the P&I approach. If you behave absolutely perfectly then you will have a LOC with $150k owing and a limit of $200k. To get at this `available' $50k, you will have to move the $50k into a second account and it will NOT be tax deductible. If you slip up and use the LOC to buy a single mars bar, then the whole $150k will have become contaminated as well. Your accountant will not thank you (but he will charge you ).

Scenario 2: Scenario 1 + investment capital

MCM you say you have some capital too invest in MFs.

I shall assume a value of $20k. The reason for this largish amount is that some banks will only create a new account of a certain minimal size.

You have at least options:

1) You could invest this money directly in MFs. I have no problem with this but you could do better.

2) You could forget the MFs for a while and simply dump it into the 100% offset account. You get a reasonable `return' by saving on interest repayments, especially since this money has already been through the tax system. Also you capital is protected, given the current state of the share market this isn't to be sniffed at. Also, you can get at the money instantly when an investing oportunity swhows up on the horizon.

3) (My preference) You can make this money work twice . You put the $20k into the IO account (NOT the offset account). This reduces your current bad debt by $20k. Scenario 1 still applies but you are working with an IO loan of $180k of bad debt. However, you can now get your $20k back!!!!!! You ask the bank to create a third account. This account would probably be a LOC with a limit of $20k. You can now use this account for your investments.

A1: IO acount with $180K owing (bad debt).
A2: 100% offset with $50K of real cash in it.
A3: LOC with $20k owing (good debt).

What do you gain by taking option 3? You still have $20k available for investing in MFs etc. You still owe $200k on the PPOR. However, $20k of this now tax deductible. So not only is your investment capital working just as hard through the managed funds, but it is also allowing you to claim money back from the government .



Tailcat

 

Tailcat, firstly thanks for a very detailed post - it's cleared up many things in my head and was idiot-friendly to read (i love that!).

A3 definitely looks like a good setup, but I have 3 questions regarding it - I'll use example scenarios to illustrate.

(1)
Assuming I had the same 200k loan as IO with a separate offset account. If I had 200k capital that I wanted to invest, then what you are suggesting is paying the 200k into the IO loan (NOT offset) such that the loan balance is now 0 (but loan still "alive"). I then use a separate LOC to invest the 200k into MFs and the loan is now deductible. That part I understand (hooray!).

Say then i decide to upgrade my PPOR. If I had all the money for deposit in the offset it wouldn't be a problem, but since I've paid the 200k into the IO loan itself I would then need to sell MFs. But by doing so, does this mean the former PPOR (now an IP) is sitting on non-deductible debt?


(2) If above is true, then is the use of LOC the same regardless whether loan is IO or P&I? (ie: you've paid the loan off and new LOC loan is tax-deductuble for MFs)


(3) How do I implement A3 if I wanted to get the investment exposure to MFs via a HDT?

For example if I had a 200k loan (in personal name) on PPOR and 200k capital for MF investing via a HDT, would I do the same and pay the 200k into my loan then draw via LOC and gift/loan money to HDT?


I know (3) might be a tricky one, but responses to any (1), (2) or (3) would be appreciated

 

So to put that entire paragraph simple;

1. Switch the PPOR loan to IO with a 100% offset account.
2. Draw down every bit of equity you can from the property, into the offset account.
3. Put whatever savings you have for the new property in here.
4. When your ready to buy the next PPOR and make the old one IP, open up a new account and transfer all the money from your offset, into the new account.

I'm not 100% sure if this is what you're getting at, but this is what I would do. This way you maximise the good debt on the IP and minimise the bad debt on the new PPOR.

When I referred to the LOC, it was for the IP, not PPOR, so there would have been no chances of contiminating the loan, as your pointed out would be a possibility. The only reason I would choose an LOC over a normal Loan+Offset, is if it was gonna cost me less. (i.e. fees, interest rate etc.)

Tailcat this is why I suggested getting the LOC for the IP. You could quite easily get the LOC limit lifted by;

a) Drawing equity from either the IP or PPOR
b) Putting the 20k into your PPOR account, and use it as security, as well as equity from capital gains on either/both of the properties.

I would opt for b. This way you could probably draw $20k from your IP, $20k from your PPOR, as well as having the $20k of your own cash, giving you a total of $60k to invest.

 

Sk3tChY,

Read the post carefully and you will see that all 3 accounts, especially A3, are held against the original PPOR. I have not said anything about any arrangments for the second PPOR.

Tailcat

 

Yessum, I see...

I was just pointing out if MCM wanted to he could also pull out on any equity he had made on the IP, to give himself more capital to invest.

 

Tailcat - any thoughts on my questions above? (in case you missed)

 

tailcat, what did you think of my scenario... being on 6.74% fixed interest at the moment, I think it would cost me to move to a variable interest loan with offset and loc.

I'm also hoping that the money invested into navra over next year would get more in interest, (minus tax) than putting it into the loan and saving interest.
The loan would need to be changed to a variable loan to, otherwise I'd be limited by the loan contract to only putting up to 10,000 into it a year or else I would have to pay a break fee. Also the loan itself would become deductable as soon as its a rental wouldnt it?

 

Thanks, for the feed back on the clarity of the explanation.

Sorry for the delay in replying. This needed thinking about. There are several different scenarios here and I am still not sure I have seen them all.

Firstly, a lot will depend on exactly how long it is before you buy your new PPOR. This will be a personal call by yourself.


Taking it to extremes:

1) Suppose you want to buy your new PPOR very soon, say next week :

Obviously, you simply convert the current P&I loan to IO and leave well alone. You then look at what to do with your capital to reduce the bad debt on your new PPOR.

2) You wish to buy your PPOR in say 1 -2 years time. You are caught between 1) above and 3) below. Good luck!

3) Suppose you want to buy your new PPOR in the distant future, say 5 years time:

I think You are still better off paying out your current mortgage in its entirety. Close the actual mortgage and then open up a LOC for investments.
(I say LOC because you do not have to spend your money immediately, and you can store any income in it easily until you find a new investment. IO with redraw may serve just as well.)

Two points:

a) Be careful not to just walk in and plonk $200k into the mortgage account. Check the fine print of the mortgage, there may be a payout clause where the bank charges you a termination fee based on the size of the last repayment. You may have to do it in two (or more) payments, the first of $199,900 and then a month later a payment of $100.

b) I would approach the bank and discuss the practicalities of what you are doing and find away to minimise the administration costs. Closing an account only to open a new one at a cost of say $500 is just giving the bank money. Tell the bank you will open the new account with a competitor and see how many doors suddenly open. I think you need to make the clean break between the old and the new to keep the ato off your back.

You need to be sure you (and I) understand the true circumstances.

I think we have to assume that the investments you make with the $200k of capital are going to essentially take care of the interest payments on the new LOC. This then means that the P&I payments that you are currently making on the mortgage from your salary are now free and available. I think this is an important concept to grasp. This is the money that was going to be banked (in the offset account) for your deposit and costs for your new PPOR in the original scenario. This money still needs to be ear-marked for this purpose in the future. However, you now have a choice of how you use this money!!!!

i) obviously you could use some of this money to help with the interest payments on the LOC. However, please note this is now locked away as investment money. It cannot, easily, be used for your new PPOR.

ii) You can take this money and invest it (in a monthly installment plan) to make a better return (CG or income) over the 5 years. You will have to accept that these investments will eventually have to be traded in to realise the cash for the deposit and costs for your new PPOR. Hopefully, this will be quite a substantial amount. (Actually, I think you may be able to borrow against these to get a deposit without having to sell, but I do not know enough to explain this approach.) The key is to realise that this is a completely separate investment fund designated explicitly to generating a good deposit for your PPOR and as such should probably be totally quarantined from any other investments. The quarantine is to ensure that you do actually have a deposit in 5 years time.

I think this is no longer in context given the above discussion. Hence, I will ignore it.

I do not know enough to comment on this.

Happy contemplating .


Tailcat

 

Tailcat, again many thanks for your post. As a result I've decided to leave loan as is until the break cost period has passed (6 months away). At that point I'll create a IO account with 100% offset.

I'm also now convinced that I must see a knowledgeable mortgage broker to arrange this. Whereas previously I viewed mortgage brokers in the same category as car salesmen, I'm starting to realise that skilled mortgage brokers are probably up there with accountants and other key members of one's personal investment team.

 

Try mortgage choice first, they cost nothing. Their charges actually goes to the bank they hook you up with.

If you wanted to get a different broker, still go to mortgage choice first, they might show you a few good loans, and then mention them to the next broker you see.

Good luck.

 

Nearly all brokers have no direct charges and are paid by the lender.

I must admit to being not too keen on MacChoice

 

Yeah, no harm in going there and using them for a few ideas tho...

 

Well sim, i was under the impression they are professionals, they should know what to look for, but i'd take your word for it.

What are some good brokers you'd recommend? Besides Simon..

 

Voigtstr,

Having read most of your posts over the last couple of months, I think you should leave your mortgage as is.

A fixed rate of 6.74 is looking fairly good at the moment......

If the fixed period runs until 2009, when you want to buy the new property, I think this is a good option to maintain.

I would really concentrate on all of your other debts over the next year.

The only downside is that you are making P&I repayments. Looking at a loan of 167k on a 200k property, I do not think that there is a significant Principal component in your repayments. I would simply wear that. I think it may be less than the increased interest payments if you go to a higher interest rate IO loan. You will recover these principal payments in 2009 when you refinance everything.

In 2009, I would just sit down and re-evaluate everything. It is too far in the future to give any advice at the moment.

Tailcat

 

I'm with LoanAustralia. But I'm also a complete investing novice!
I have their Standard variable in 2 splits. 1 for my PPOR and 1 for my rapidly diminishing investment portfolio.
I think it's similar to a LOC, it just takes more effort to get money in and out of it.

LoanAustralia used to be listed as one of CANNEX's best loans. They don't get a mention at all now - they don't even appear on CANNEX webiste, RateCity. Not sure why.

Hopefully they aren't now in the same position as RAMs, Aussie etc. and poised to raise their rates.

Good luck.

 

Thanks Tailcat. I'll have the all my debt paid by Feb...by the end of 2008 I'll have two choices... I'll have 20000 saved. With the equity from the villa I reckon it could be time to go shopping for a new house. but that equity would be at 95%lvr... so there would be LMI to worry about.....

OR

I could wait till the end of 2009 and would have the purchase costs of the new place saved up without having to use the equity.

Personally I'd like to accumulate properties as quickly as possible, and pay the holding costs out of navra income.

 

voigtstr, aren't you concerned that your strategy would then rely on one manager (navra)?