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Ok, I need some advise....

Discussion in 'Introductions' started by CCS, 7th Jan, 2008.

  1. CCS

    CCS Member

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    Hello there,

    This looks like an excellent forum and I really hope that being involved will help me get educated on investing.

    Briefly about myself. I am in my early thirties, in a de facto relationship, nil kids and I am in paid employment (have been for a year now).

    I don't have a lot of savings, as I have spent a lot of my time studying. After years of that and finally getting a real job, I have turned my head in the direction of investing what leftover of my income I might have.

    So currently I am toying with several ideas regarding what may or may not be a good idea. I really hope that somebody will be able to give me their opinion on the following.

    My partner pays the mortgage on the house we live in. When we met he already had this house so he has kept paying that. I don't pay any of the mortgage.

    The house is worth approximately $470000 and he owes app. $140000. We are considering buying a house together. The house we would be looking at buying would be around $600000-650000. So far we have all the time assumed we would sell the current house to free up around $300000 that could be put into the new house, and thereby lower the loan as well as repayments on the new home.

    Is there any way that it would be sensible to keep the current house, rent it out and take out a significantly larger loan for the house we want to buy?

    The problem as I see it is that the current house would have a small loan on it and therefore it wouldn't be the most tax efficient way to do things. Is there a way that this could work?

    Also would this mean that my partner would eventually have to pay capital gains tax? Whereas if he just sold the house and put the excess money into the new one this wouldn't be the case?

    I guess my question is; is it smarter to keep the current house, rent it out and buy a new house for living in. Or is it better to sell the current house, buy our new house and then later on buy and investment property?

    I guess I am thinking of how much we would save in terms of stamp duty, a potential period of paying two mortgages as well as the real estate charges.


    I have other questions regarding investing but I will save those and post them in the relevant forums.

    I hope somebody can answer my question.

    Thanks
    ccs
     
  2. Billv

    Billv Getting there

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    CCS
    What type of loan is it and what was the approx loan size when he first bought the house?
     
  3. CCS

    CCS Member

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    Hi Bill,

    The loan is divided into two loans one fixed and the other variable interest, principal and interest over 25 years. The total loan size was $200000.


    Cheers,

    CCS
     
  4. Billv

    Billv Getting there

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    CCS

    Unfortunately your current loan structure is not helping your situation.

    Also, you don't have much of a loan so IMO the best option is to sell this house and use the funds for the purchase of your next PPOR.

    For the new house, I would get a loan with an 100% offset account.
    I would put down a 20% or less deposit (as much required to avoid paying LMI.
    I would park the remaining funds into the offset account.

    Most lenders now offer 100% offset loans.
    While the money is in the offset account it will be offsetting the main loan
    so you wil be paying less interest.

    With such loan structure if in the future you decide to move houses again
    you can rent this 2nd house out, take the money with you and the loan will be fully tax deductible.

    Cheers
     
  5. CCS

    CCS Member

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    Thanks Bill,

    I sort of had the feeling that selling might be the better option.

    Thanks your advise on the offset account, that makes perfect sense.


    Cheers,
    Camilla
     
  6. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I would almost never advocate selling a house if you can avoid it - the costs in doing so generally outweigh the benefits (assuming it's not a dud property). You can always draw out equity in the future to increase the tax deductibility of the loan (or refinance and renew the deductibility of the loan by selling it to a trust or other structure - but there are other costs and implications there like stamp duty and potentially increased land tax).

    The only thing in your favour of selling is that since it was your PPOR, you wouldn't pay any CGT on the sale of it.

    I would concentrate on running the numbers to see if you can afford to keep it - if it is a good quality asset, it should continue to give you great dividends over the long term - well in excess of the (relatively minor) tax deductions you would be missing out on in the short term.
     
  7. CCS

    CCS Member

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    Thanks Sim...


    But now I need a few things clarified, and please excuse my ignorance... just trying to learn all of these concepts. If we choose to keep the house can we remorgage (or is that what you mean by saying drawing the equity) it so we have a larger debt in this current house and thereby gain a tax deduction on the investment loan. Then use this money to reduce the mortgage on the new house? To what extent can we draw on the equity?

    I was also thinking about the cost involved with selling it, and would like to avoid that if possible, as well as the cost of bridging finance....

    I am not quite sure about how to do the numbers... I guess my main issue is that I am a bit unsure about the real cost of having an IP.

    I am sure my lack of knowledge is shinning through... :eek:

    CCS
     
  8. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    The biggest problem you face in the short term is that only the interest on the outstanding loan on the original property will be tax deductible once it becomes an IP. Any money you borrow to buy a new PPOR or redraw from the existing equity will not be tax deductible debt.

    The idea would be to continue to pay down the non-deductible portion of the borrowings as soon as possible, while also building up equity in the properties from capital growth - and then borrow against this equity for investment purposes, which will be tax deductible.

    If you are struggling due to a lack of knowlegde about what is realistic (completely understandable!), you may need to find yourself a good property-savvy accountant to help you run the numbers and analyse your situation - they should be able to help you work out what the realistic costs and benefits are from each scenario.
     
  9. The Stig

    The Stig Well-Known Member

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    2 houses are a better investment and wealth creation vehicle than 1.

    Selling is expensive and if you intend to buy more investment properties, you will probably look back and wish you didn't because the house you sold would have made X amount over X timeframe.

    I regret selling some of my investment properties :mad:
     
  10. Billv

    Billv Getting there

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    CCS

    If you intend to buy an investment property straight away then the situation can be different but not necessarily any better.

    You can also borrow against the equity of your old place and use that money as a deposit for your PPOR but that money won't be tax deductible.

    If it was me in your situation I would sell and start fresh.
    You will incure selling expenses but they are a one off cost.

    It makes good sense to put as much money as possible into your PPOR loan.
    Even if you only end up putting $200K into your PPOR loan
    the savings at 8% interest will be $16,000 per year every year.
    In your case you will probably clean up with about $300K after the sale
    so your interest saving will be $24K per year.

    A $700K loan will be costing you (@8%) $56K per year in non deductible interest.
    If you reduce that $700K loan to $400K it will be costing you $42K per year ($800 per week, still high but easier to manage)

    If later on you decide to invest into property, you can always pull money out of the offset account and use them as a deposit for an investment property but as soon as you pull that money out
    it will not become tax deductible and your PPOR's financial position will be compromised.

    my 2 c

    Cheers
     
    Last edited by a moderator: 8th Jan, 2008
  11. DaveA

    DaveA Well-Known Member

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    i see nothing about income.. can you service a 700k loan?

    Can you borrow 700k + the current 140k?

    If so, Can you borrown 700k +140k plus any remainding equity in the IP (probably another 120k) in a LOC and invest it somewhere. That way you have the most deductible debt with out selling.

    If your going to sell and re buy an IP of similar value, your looking at 12.5k (500*2.5%) in selling costs, about 25k in stamp duty, 2k in mortgage stamp duty (soon to be abolished), solicitor and accountant costs. So you could probably say rough costs ok 50k.

    Now on a 30% bracket, it will take you a min of 4 years to make this 50k back in additional tax deductions (by having the higher interest deductability). So personally i tend the agree with Sim.

    Another option to consider is renovate (or demolish) on the current house will give you a higher deductibility state if done correctly

    As always please seek a qualified accountants opinion (which im not)
     
  12. CCS

    CCS Member

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    My partner's gross income is app. $130000 mine is $56000 so I guess my partner is in a higher tax bracket.

    We have gotten approval for 'bridging' finance to buy a house for $750000 as well as stamp duty cost of $34000 and covering $30000 interest only period when having the two mortgages while trying to sell the current house. So a total of $815000, with the provisor of putting the $300000 that we would take out of the current house into the new loan. We could have gotten finance for more but didn't want to. But I don't know if they would give us the amount without selling the current house.

    Looking purely at repayments on $815000 is quite daunting for us though...

    I guess realisticly I would not want to buy anything that cost more than $620000 + stamp duty of app $35000.

    We don't owe anything else, but we still want to be able to have spare cash e.g for a yearly trip to Europe where both our families are.

    I guess I just want to look at all possibilities. My partner is rather passive and claims he doesn't understand it all, which is probably why he is happy just paying the mortgage on the PPOR and claims everything else is too difficult.

    Does any of this information change the circumstances?

    Also Sim mentioned something about selling it to a trust... how does this work, can we set up a trust together and sell the house to the trust?

    Thanks
     
  13. tailcat

    tailcat Well-Known Member

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    Be careful how you read this, as I, for one, think it is a little unclear.

    You must ensure that PPoR debt and IP debt are completely separate (in different mortgage accounts).

    The best way to take money out of an offset account against a PPoR mortgage is to `debt recycle' it. (See various other post on how to do this.)

    If you take the money straight out of the offset account to pay the deposit on the IP then you are leaving your PPoR mortgage exposed and the interest on this is NOT tax deductible. Worse still, you have used after tax dollars to reduce the size of the deductible IP mortgage.

    Tailcat
     
  14. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Actually - now that I go back and read what BV wrote - I agree.

    Cash pulled out of an offset account for a deposit on an IP does not make any other loan tax deductible if it wasn't already.

    I think BV needs to re-write what he said to be a bit more clear.
     
  15. Billv

    Billv Getting there

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    I agree, I wrote the above in the middle of the night and half asleep...

    So here is what I should have written.
    You can use those funds as a deposit for an IP but because you are not borrowing them ( they are your own savings they are not tax deductible)

    However, if you used the equity in your new PPOR to get new borrowings and use those as a deposit for your IP then the interest will be tax deductible.

    Cheers
     
  16. CCS

    CCS Member

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    oh dear.... thanks for all your replies. I must admit that it has given food for thought... but I must also say that I really still don't have a good idea about what we should do. Except perhaps seek professional advise.

    The more I read on this forum there more I tend to lean towards sitting put in our current PPOR (getting into the terms now :) ) and instead perhaps go out and buy a property for investment.

    Unfortunately that way we don't get house of our dreams... I don't know... maybe? we can have both?

    Anyway does anybody know of a good property savvy accountant in Canberra, or know how to find one?

    Cheers
    CCS
     
  17. Billv

    Billv Getting there

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    Now that's a very good idea :)
    Low PPOR mortgage and more than enough equity to get you into the IP market.
    Cheers
     
  18. C3PO

    C3PO Well-Known Member

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    CCS:

    Of course PLEASE get your own professional advice but I reckon this might work for you:

    a) Set up a Family Trust or similar sort of structure (accountant can advise) i think they call it a discretionary trust not 100% sure
    b) Transfer ownership of the house you're living in now to the Trust (you need to do this at fair market value, use a valuer & a conveyancer). No CGT should apply if it has always been your own home.
    c) Pay the Stamp Duty (it hurts but it's worth it in the long run)
    d) Take out a loan as Trustee for the Family Trust for as much as the bank will lend you against the value of that house. You may need to act as guarantors for your Trust.
    e) Move out and rent out the first house to generate income.
    f) Pay money that the bank lends to the Trust to your partner as proceeds of the sale.
    g) Use this money to buy your new home. If you are making additional borrowings to buy the new house, that's ok - take out the additional loan in joint names or whatever and aim to pay off this loan first

    Advantages:
    - The Trust owning the house instead of yourselves gives you asset protection, a v good idea esp if you are professionals
    - You get to keep the house you're in now but reinvent it as a highly geared investment property, & it's very defined and clear.
    - The trust structure might be useful for other investments (talk to your accountant)
    - If the trust is set up with you and your partner as beneficiaries, you can distribute income when the Trust does eventually become profitable to either beneficiary.


    Disadvantages:
    - Any tax deductions that the Trust might see from investing in the rental property (or anything else) are locked into the Trust, i.e. neither you nor your partner get tax deductions but once the Trust income (say the rental income) begins to exceed the outgoings (loan repayments) then tax deductions on the interest payments it has made will start to flow back to the trust.
    - You really do have to take a long term view
    - Stamp duty cost has to be borne up front

    PS : be careful how much you borrow. it's a jungle out there
     
    Last edited by a moderator: 29th Feb, 2008
  19. Saskatoon

    Saskatoon Well-Known Member

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    Good post C3PO, but surely the new house will not be a protected asset - unless you mean for both houses to be in the Trust. If so, neither will have CGT exemption as a PPOR. This may be expensive in the long term.
     
  20. C3PO

    C3PO Well-Known Member

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    You are correct- the new house will not be asset protected because the individuals will still own it. But one out of two protected assets is better than none. Not sure if I would want to put both houses in the trust, personally I'd rather enjoy the CGT exemption for the PPOR.

    The investment property will of course attract CGT but it would have done anyway regardless of whether it is owned by an individual or a trust. Any profit income generated from its eventual resale could maybe be distributed to the lower income earner as appropriate.