which loan would be best for first IP?

I earn roughly $40k a yr. (pretty low isn't it? )

living with parents still, no assets, no debts except HECS i guess (still haven't recieved that yet)

been saving up for purchase cost and deposit (still on its way unfortunately) so in the meanwhile, wanted to learn as much as possible.

When I am ready to buy, which type of loan would be best?

If you ask me what strategy / what goals, i dunno yet as I haven't even got my 1st IP. No IP meaning no expereince in knowing the real cashflow...I guess vaguely, i want to buy as many in future, liquidate some to pay off debt at the end lol. (that's the only way i know at the moment)

Hi myBB

$40,000 is not low. $40,000 is a good income any many families with children live on less than that.

You are off to a good start.

I just recently wrote a 97% loan for a young lady who earns exactly $40,000 per annum (plus super, less HECS/HELP). She has bought a very smart two bedroom villa unit in Ringwood for $212,000 and is happily living there right now!

She managed to save $8,000 in less than five months and with that, plus the FHOG, she managed to settle by the skin of her teeth!

We decided on a fully discounted loan for the bulk of the money, with a small ($20,000) variable loan with a further discounted 'honeymoon' period and an attached off set account so that she could get some benefit from the cashflow from her salary.

Keep saving and you could have your first property by Christmas!

Cheers

Kristine

Hi MyBB

40k per year and all spent on disposable goods is the same as 100k per year and all spent on disposable goods. It's not what you earn that count's its all about what you keep. (invest) Find the book (The Richest Man in Babalon)and read it twice.

Happy investing

Wayne

I agree, Its not so much as "what you earn", but rather "what you do with what you earn" (though it helps if you earn big dollars and you're a smart investor), most Investors started out small (Read Peter Spann and Michael Yardneys book as well....after reading The Richest man in Babylon twice as that advice is gold).

Living at home must help you out as well when it comes to saving a deposit. How about a High Interest on-line account to use as your deposit account,plus you have the FHOG (maybe start investigating that now).

Plus Kristine's post is pretty motivational (as usual) and it may be worthwhile starting to line up your ducks so you are ready when the time comes.

Maybe start researching areas and looking at deals as if you could afford them now to practise and see what you would purchase if you could, even if you start going to some home opens as well in your chosen area-I used to go through the real estate papers from agents shops as i then got a feel for what i wanted when I could eventually afford it, I also used to talk to the REA's as if I could afford it and go looking with them, agents actually used to drive you around back then and show you the properties they had (from the kerbside or if unoccupied they'd take you through).

you'll be eligible for FHOG, which is very nice

you could buy the IP
rent it out for the 6 months

then
1. live in it and reno for 6 months
2. reno and sell after 3 months

i recently went through all this this year, reno'ing myself
be prepared for a bit of paperwork, if you're not used to it
also, you can start looking now...

as a rough figure, i would suggest looking and visiting many many properties -its sort of fun

better off than you think mate !!

My BB,
Living at home with NO mortage, NO bills ( rates, phone, electricity,gas, etc) , NO kids at school , NO car payments (maybe two car payments) etc ....and $40K income .. and probably no rent .... and good health.

BB ...you are better off than you will ever believe !!

Don't waste the opportunity.

LL
PS Read Jan's book .....but before that go and hug your parents.

thanx for the encouragement

umm....which loan type is BEST for first IP?? lol

We decided on a fully discounted loan for the bulk of the money, with a small ($20,000) variable loan......

Click to expand...

What does this mean?

an attached off set account so that she could get some benefit from the cashflow from her salary

Click to expand...

what's an off set account, what does it do?

Hey there myBB..

We are in a similar position where we are purchasing our first PPOR (principle place of residence) which will one day become our IP.. Me and my boyfriend are living at home too, but we dont want to stay here forever which is why we are buying our own home first. (Plus you get First Home Owners)

The type of loan you want will really depend on your investing strategy- for us we want to invest ASAP and have as much cashflow as possible- So we've chosen an Interest Only Loan with a mortgage offset account for our PPOR- if we were buying an IP first we would have the same type of loan.

Not sure how much you know about the whole Loan thing so I'll try and explain it as I understand it.

For investment properties most people choose an Interest Only loan so your only paying off the INTEREST on the loan instead of the principle as well..

For example- you borrow $200,000 over 25 years for your IP and you choose interest only repayments- You will pay $1,304 per month over the life of the loan and when the interest only period is finished you will still owe the bank the original $200,000.

If you chose a principle and interest loan (P&I) you would pay the bank $1,443 per month over the life of the loan. - that extra $100 is paying off the principle amont of $200,000 so at the end of the loan (after 25 years) you have nothing else to pay off and you own the house outright.

Most investors choose an interest only loan because the interest is tax deductible so you will get $x back at the end of the financial year- the principle amount is not tax deductible so these type of loans are best for your own home.

ANYWAY- I'm not sure if you already knew that- I hope i haven't screwed any numbers up there but you get the drift.

With interest only repayments there is less money coming out of your pocket each month- so you have more money to invest with.

The interest only account with offset attached is even better.

An offset account is an extra account that is linked to the mortgage- any money that is in the offset account is "offset" against the mortgage-

You have a $200,000 IO mortgage with an offset account attached. ALL your salary etc. goes into this offset account, so when it comes time to work out the monthly repayment any money IN the offset is taken off the mortgage amount and then the repayment is calculated. Hard to explain without using numbers so here we go.

For example, you have a $200,000 loan and in your offset you have $10,000. When it comes time to pay the mortgage that month, you will only pay interest on $190,000 because that $10,000 you have in the offset account which is taken off the mortgage amount.

This means that you can use this offset account as a big savings account, it will reduce your mortgage the more you put into it- but you aren't giving your money/equity to the bank- so to access this money you don't need to refinance- you can just take $10,000 straight out of the offset with no fees or anything.

So your still reducing your mortgage but you don't have to refinance to get it back..

That way when you need a quick $10,000 for a deposit on your second IP, it's sitting there in the offset which you can access at any time.

Our plan is to have all our income go into the offset, so it reduces are repayments each month- and then we will use a credit card to buy anything we need (food, bills etc.). This means that we have the maximum amount of money we can in the offset over the month. At the end of each month we will take some money out off the offset to pay off the credit card.... that way we fully maximise the offset potential.

Your best bet is to just read heaps and heaps of books- you'll find out so much information in there.. Jan Somers is great for really detailed information.. I just finished reading two steve mcknight books too which i thought were great.. there is heaps on somersoft too..

I started a similar thread HERE .. read through that one too- a fair bit of info in there..

Hope that helps!

Hi mmBB,

One of the greatest bonuses of having an offset account against an IP, is that it reduces your payments while the money is sitting in there, but you can take it out for ANY reason, and use it for ANY purpose - investment or personal, and the total interest on the IP loan remains tax deductible. We use it as our everday savings account, and funnel all salary, rent, and other income payments into it so that it "offsets" the amount on our IP loan. At the same time, we can use that money for whatever purposes we choose, and don't have to keep massive amount of records to determine what interest is deductible and what isn't.

On the other hand, if you funnel exrta money into your actual loan accout, and you want some of that money back at sometime in the future, you will have to refinance, and if you want to use that money for personal reasons, the interest on it will not be tax deductible (but if you use it for investment purposes, the interest will be tax deductible). So, you'll need to decide how quick of access you want to your funds when setting up your loan.

If you have a Principle and Interest loan with an Offset account against it - you make the same repayments each month, but the amount that goes into the principle component increases with money you have in the offset. So if your monthly payments are $2,000 P&I and you have an offset account hooked up to the loan - you will continue paying $2000 each month - the interest you save from the offset amount goes straight into the Principle component of thet loan.

If the loan is Interest Only, your payments will differ each month depending on how much is in your offset - if your Interest payments were set up to be $1000 per month on a $200,000 loan - and you have $20,000 sitting in your offset account, you will only pay interest on $180,000 and the rest stays in your pocket.

For our first IP, we used an Interest Only loan with an offset account attached, which gave us incredible flexibility and a much higher cashflow.

Cheers,
Jen

MyBB, I did these calcs for a young guy in Brisbane last year.

As hinted at above, it is better to get an IO loan (with offset) even if you are going to live in it.

When I modelled the numbers, the best thing my Queenslander friend could do when buying his first property turned out to be thus:

- buy house and get a valuation straight away for the dwelling excl. the land
- buy with IO loan and haggle to get enough to do a reno...
- live in for minimum time for ATO to classify as PPOR (6 mths)...
- while there, do a quick reno, the best in my books being a granny flat and a cosmetic lift. get friends and relies to help with expertise and labour...
- get it revalued before you start renting it out
- go home and live with parents or share accom with mates....and live cheaply....save cash for futher purchases
- do the property management yourself if the house is in a nice area. others might disagree with me, but I think there are so many slack PMs that one can do better oneself....but read up on the pros and cons before you do...

the valuations are there to protect the capital gain you add with the reno from being subject to capital gains tax, as it would be if the ATO decided to equally spread realized capital gains equally over holding time from purchase.


the big advantage in Qld for first home buyers is that you pay virtually no stamp duty in addition to getting the $7k FHOG....someone else can tell you how generous the Vic govt is with stamp duty concessions for first buyers, as I haven't looked for a while.

thefirstbruce said:

someone else can tell you how generous the Vic govt is with stamp duty concessions for first buyers, as I haven't looked for a while.

Click to expand...

Concession? On our stamp duty? Hahaha you gotta be kidding ..

We do get the first home owners 'bonus' of $3000 which will be accessible up until June next year. So that takes the grant from $7000 to $10000- however on a $200,000 loan your looking at $9,000 stamp duty anyway, so aren't we lucky that the government gives us that money only to take it back again hehee..

If you do have a valid concession card or health care card (woo hoo) you do get a full stamp duty exemption up to $250,000 I think.. if you or your partner has one, you can take half the stamp duty away which is what we are doing. I've still got my card from being a uni student so instead of taking the bonus of $3,000 we get a stamp duty exemption of $4,100. Its not a huge difference but every little bit helps!

Hiya

In short, depends on how sensitive you are to rate rises.

A generalaity would be a 10 year Interest only Loan with 100 % Offset, reverting to 20 years PI.

Depending on your rate risk profile you may decide a mix of fixed 3 or 5 years fixed rate IO, with the variable offset

ta
rolf

Shonnie said:

Concession? On our stamp duty? Hahaha you gotta be kidding ..

Click to expand...

Shonnie, Victoria is more generous to her citizens than you may realise.

Apart from the $3,000 First Home Buyer's Bonus, Victoria has phased out paying stamp duty on the actual mortgage.

Other states are still paying stamp duty per dollar value of the mortgage, and this includes refinancing, where the whole mortgage is restamped and paid again.

There is a lot more to buying a property than just paying stamp duty. We also pay quite low municipal rates and get a whole lot of bang for our buck here. I have customers in far north Queensland who are paying twice the municipal rate for half the property value - and all of the mortgage stamp duty!

As with all things, if we are only dealing with a small piece of the puzzle the whole picture is not revealed.

Cheers

Kristine

Read, Read, read....

This list of books has proved invaluable to my wife and I as we seek to get out thinking converted to investing.....It includes The richest man in babylon, of course!
HTH,

JB

http://www.somersoft.com/forums/showthread.php?t=9652&highlight=FAQ:+Books+Authors

For example, you have a $200,000 loan and in your offset you have $10,000. When it comes time to pay the mortgage that month, you will only pay interest on $190,000 because that $10,000 you have in the offset account which is taken off the mortgage amount.

This means that you can use this offset account as a big savings account, it will reduce your mortgage the more you put into it- but you aren't giving your money/equity to the bank- so to access this money you don't need to refinance- you can just take $10,000 straight out of the offset with no fees or anything.

So your still reducing your mortgage but you don't have to refinance to get it back..

That way when you need a quick $10,000 for a deposit on your second IP, it's sitting there in the offset which you can access at any time.

Our plan is to have all our income go into the offset, so it reduces are repayments each month- and then we will use a credit card to buy anything we need (food, bills etc.). This means that we have the maximum amount of money we can in the offset over the month. At the end of each month we will take some money out off the offset to pay off the credit card.... that way we fully maximise the offset potential.

Click to expand...

WOW thx! I understand much more now!!
OK, so $200k loan IO with an offset account. If offset account has $0, interest repayment every month is based on $200k. If offset account has $10k next month, next month repayment => interest of $190k? wow that's pretty cool. It works just like P + I loan with the advantage of more cashflow when needed, having extra cashflow can go bk to offset account to reduce repayment!

But IO loans only last for 5 or 10 years right? So..is it worth it in the long run since after 10 years, goes bk to P + I loan, meaing the overall repayment is higher, but the downside is -> short cashflow for other use.

Thx for book recommendations - i have read Jan's book, Margaret lomas's, Steve McKnight's too.

JenD said:

Hi mmBB,

One of the greatest bonuses of having an offset account against an IP, is that it reduces your payments while the money is sitting in there, but you can take it out for ANY reason, and use it for ANY purpose - investment or personal, and the total interest on the IP loan remains tax deductible.

Click to expand...

hey Jen, how does the tax deduction work on IP loan Interests?

I guess if monthly repayment on Interest is $1k => $12k a year
If my tax rate is say 30%, so I get ($12k*30%) => $3600 bk a year?

myBB said:

But IO loans only last for 5 or 10 years right?

Click to expand...

When the term is up you go to the bank and renegotiate and extend the IO period. If they don't come to the party you go mortgage shopping elsewhere. No bank likes to lose a loan as it's too hard to get them in the first place.

If you have a Principle and Interest loan with an Offset account against it - you make the same repayments each month, but the amount that goes into the principle component increases with money you have in the offset. So if your monthly payments are $2,000 P&I and you have an offset account hooked up to the loan - you will continue paying $2000 each month - the interest you save from the offset amount goes straight into the Principle component of thet loan

Click to expand...

hmm bit confusing for me on this one...

So...say $2,000 monthly repayment for a P+I loan with an offset account:

$2,000 repayment monthly when offset account has $0

less than $2,000 a month when offset account has some money, since interest on the principal is now reduced by the offset amount?

So...comparing P+I loan with Offset account vs IO loan with offset account:
IO is very flexible in terms of more cashflow to use especially when times get tough

Sultan of Swing said:

When the term is up you go to the bank and renegotiate and extend the IO period. If they don't come to the party you go mortgage shopping elsewhere. No bank likes to lose a loan as it's too hard to get them in the first place.

Click to expand...

wow, I could keep repeating and never pay bk the loan except interest?

myBB said:

hey Jen, how does the tax deduction work on IP loan Interests?

I guess if monthly repayment on Interest is $1k => $12k a year
If my tax rate is say 30%, so I get ($12k*30%) => $3600 bk a year?

Click to expand...

Hi myBB,

Yes, basically - but it also depends on the rental income you recieve.

Taxable income (presuming you purchase in your own name would be = Salary + rental income + any other income - IP interest payments - IP depreciation - IP costs (body corp, rates, insurance, property management expenses, etc) - any other deductions you may have for your work.

If the interest, depreciation, and expenses from your IP are higher than your rental income (which they most likely will be in the beginning) then that loss gets taken from your salary income, and you get 30% or whatever you tax rate is back from that loss.

Hope that wasn't too confusing

Cheers,
Jen