Join our investing community

New loans, deposits, and equity

Discussion in 'Real Estate' started by Thudd, 17th Sep, 2008.

  1. Thudd

    Thudd Well-Known Member

    Joined:
    5th May, 2008
    Posts:
    49
    Location:
    Perth, W.A.
    I'm just trying to get some things straight in my own head so I have some questions for people without vested interests (ie, banks or mortgage brokers whom I might be a potential customer of)

    Let's say I bought a PPOR for $400k. This house will ultimately become an IP at a future point so I borrowed 80% = $320k IO+offset. $80k deposit came from existing cash. Into the offset went $200k of spare cash, so currently therefore currently servicing a loan of $120k. (the actual figures are less than this and I'm ignoring stamp duty etc but these are easy figures for illustration)

    I now wish to purchase an IP for $300k. So I can take out another IO loan for $240k (80% again) and throw down $60k for deposit.

    My question is, is there a way I can arrange that $60k deposit for my maximum future benefit? If I take it out of my cash offset then that's effectively $60k extra non-deductible debt that I'm paying. Not only that, but that $60k effectively 'disappears' and becomes unavailable to use in a future PPOR purchase. And I haven't owned the PPOR long enough - especially in this market - to get any appreciable capital increase so there is no extra equity I can borrow against; to be generous let's say it has increased in value $10k. But can the significant offset savings be somehow classified as 'equity' that I can borrow against so that I can claim the deposit as deductible debt? Or does the fact that the loan on my PPOR is still currently close enough for government work to 80% of the value mean that regardless of offset contents that's the overriding factor that banks look at?

    (I did find a loan pro package that goes up to 85% without MI which is good, every little bit helps, but any way I can maximise the use of OPM (Other People's Money) is better for me)
     
  2. Billv

    Billv Getting there

    Joined:
    15th Jul, 2007
    Posts:
    1,796
    Location:
    Sydney, NSW
    Thudd

    When are you planning to buy the PPOR and how far down the track are you thinking of buying the $300K IP?

    A better option would be to wait till you have some equity in property A and then use that as a deposit for property B and so on.

    If you are going to use all the offset money to buy IP's then IMO
    you would be better off having a LOC and not an Offset account.

    Cheers
     
  3. ashwright

    ashwright Well-Known Member

    Joined:
    30th Nov, 2007
    Posts:
    116
    Location:
    Brisbane, Qld
    This is just a thought. I am not sure if it works.

    What about if you take $60K from the offset account and pay this into the PPOR loan? You now have $60K equity on your PPOR you can borrow for investment purposes, with a separate loan.

    So, if that works, you should have a 2 investment loans equivalent to 100% of the IP value.
     
  4. Thudd

    Thudd Well-Known Member

    Joined:
    5th May, 2008
    Posts:
    49
    Location:
    Perth, W.A.
    That could vary. I'm angling for a new job atm and if I land that then the extra $ will likely go towards purchasing a block of land to build on at a later date. If that falls through then PPOR purchase would be 18-24 months away.
    My concern with that is the flat and potentially even negative market for A means equity growth will likely be small and slow in the short term.
    Not all the money, just some, for a single property. Baby steps :eek:
    Current PPOR will become an IP in 18 or so months time so I hadn't planned to pay down any principal on it in anticipation. The money in the current PPOR offset will ultimately be used in a future PPOR offset so I wanted to keep that as large as possible for minimum PPOR debt both now and in the future.
     
  5. ashwright

    ashwright Well-Known Member

    Joined:
    30th Nov, 2007
    Posts:
    116
    Location:
    Brisbane, Qld
    My thoughts were that, if you were going to buy an IP you need the 20% deposits from somewhere?

    My paying the 60K into the current PPOR, and 'reborrowing' this to pay for the investment. You have converted 60K of non-deductible debt to deductible debt. So in the current situation you are better off. The total loan amount on the PPOR is the same.

    But by buying the IP you are going to be 'spending' the 20% deposit, and this will not be available for use to buy your PPOR. I guess the other option is to borrow 100% of the new IP, and pay mortgage insurance.
     
  6. Thudd

    Thudd Well-Known Member

    Joined:
    5th May, 2008
    Posts:
    49
    Location:
    Perth, W.A.
    Yeah, either way the 20% is 'gone' but your debt recycling idea of paying down the PPOR loan by $60k then redrawing it as an investment loan is good. The deduction on $60k pa is about $1600pa if I've worked it out right, let's say $1000 at worst, that's $1k in my pocket instead of the bank manager.

    Edit: I've thought about it some more. Let's say we do this. In 12 months we move into property B (the IP, and it becomes for the time being our PPOR) and property A our current PPOR becomes an IP. The $60k that we borrowed against property A is now being used for non-investment purposes (that is, we're now living in the house it was originally borrowed for). So while we might have got a year of tax advantage out of it that equity loan is now stuffed for deductibility, and we've lost that $60k as a source of guaranteed future deductibility on property A as an IP. I think?? Garrghh brain hurts.
     
    Last edited by a moderator: 18th Sep, 2008
  7. ashwright

    ashwright Well-Known Member

    Joined:
    30th Nov, 2007
    Posts:
    116
    Location:
    Brisbane, Qld
    I think it comes from the tax man. The bank manager gets to keep his share :(
     
  8. Billv

    Billv Getting there

    Joined:
    15th Jul, 2007
    Posts:
    1,796
    Location:
    Sydney, NSW
    Thudd,

    You could borrow 90% or more so at least your deposit is small but it will cost you on LMI
     
  9. ashwright

    ashwright Well-Known Member

    Joined:
    30th Nov, 2007
    Posts:
    116
    Location:
    Brisbane, Qld
    I think you are right, You borrowed 100% (80%+20%) to purchase property B, which when was an IP was deductible, but as a PPOR is not deductible.

    I think if you are going to live in a property which was originally an IP, it is going to hurt no matter how you structure it. (maybe ???)