2nd IP & PPOR into IP

[Pumpkin]

Any advice greatly appreciated !
We bought current PPOR in 3.5 years ago for 250k. We have been making additional payments on this loan in this time & have completed some renovations & the loan is now 210k, valued 7 months ago at 320k. We are currently in advance about 15k on this loan that we can redraw, but loan only ever used as a loan so all payments have been loan repayments with 2 redraws for renovations over the 4 years.

We purchased 1st IP in November 2009 for 237k, borrowed the total amount using some equity in PPOR for deposit. This property is negatively geared & we are making the minimum required payments.

We are now looking at purchasing a 2nd IP (350k), we have cash for deposit & will negatively gear this property too.

We are also planning on soon moving in to my partner's parents family home (will only pay minimal rent as they have a second home they are moving to so we are doing them a favour by looking after this large empty home) for the next few years & renting out our PPOR. The PPOR has been renovated, but there are a few things we want to finish off (like a new front fence) before we rent it out.

I am just wondering if there is anything we need to take into consideration with this? should we use the 15k in advance to make these final renovations on this PPOR before it becomes an IP? Would this affect claiming interest as a deduction when it becomes an IP? Would any of the renovations we have completed on this property whilst being an IP be deductible or will they just be used in a depreciation schedule ?

& if we have the cash deposit for the 2nd IP (350k) & also an additional 30k (recent inheritance from an aunt) should we pay this off one of the IP loans or is there some way we can put it in an offset account?
Excuse my ignorance, I am just not sure how offset accounts work, but if we are ultimately going to have 3 IPs in a few months I want to ensure we have everything right & maximising the 3 IPs.

Thanks in anticipation

 

[artlez]

I can't comment too much on your overall situation as I'm fairly new to this myself but offset accounts are basically bank accounts you use to store your money in but the advantage to them is that the amount in the account is subtracted from your loan so you effectively pay less interest. e.g. if you have $30k in the offset account, your interest-paying loan value will reduce from $210k to $180k, so you'll only be paying interest equivalent to a loan of $180k. The major benefit to this is that it allows your cash to be flexible if you want to take it out for home deposits or renovations.

 

[Propertunity]

First off pumkin, well done on the journey so far.

A couple of things:
1. For goodness sake stop making additional repayments on your PPOR if you plan to turn it into an IP (a common mistake). Only the interest on the remaining loan will be tax deductible.
2. The interest on loans being deductible or not rests on the "purpose" of the loan. If you redraw for a fence or a reno or another deposit on another IP - all fine.
3. The renos you have done on the PPOR (soon to be an IP) are depreciable - yes. So before you move out, get a QS report done.

All the best.

 

[Pumpkin]

Thanks for the responses.

That really clears things up for me Propertunity I really appreciate your help.

Sorry if I sound stupid, but so if we choose to redraw the 15k or so we are in advance on the PPOR (soon to be IP) & either use on finishing the renos, getting a new fence or putting it toward a deposit on next IP we are fine & the loan can go back up to 225k we can then claim the interest on the whole 225k again? What if we were to just put repayments on hold & wait for it to catch up?

Sorry just wanted to clarify !!

Also just one other thing - would it be best to borrow the full amount (minus deposit) for the next IP (350k) rather then have a bigger deposit ? & what is the best thing to do if we have a lump sum of savings (30K) & 3 IPS as I know it is not good to pay it off one of the loans & get ahead.

Many thanks

 

[PeterC]

you need to go back an track down each and every extra repayment and redraw - not just the net difference (which it sounds like you're mentioning, i.e. you dont mention how many times you paid extra and how many times you redrawed and how much each was).

e.g. if you had a loan of 250k, and since getting the loan, on 25 occasions made an extra repayment of 10k, and then subsequently redrew that during the month (for non-investment purposes) you could no longer claim any of the loan - each extra repayment was reducing the loan amount, and each non-investment redraw was not 'restoring' it back to normal.

if you've only made a couple of extra repayments and a couple of redraws, it makes it easier, you only 'lose' the redraws that were for non-investment purposes.

but forgetting all that, if you had made only a total of 15k extra repayments, then you could redraw that 15k for investment purposes (as you have suggested) and the loan would be deductible back up to 225k (only if no past redraws were for non-investment purposes).

generally you will want to have the highest loan amounts against IP (deductible) and put as much money into your non-deductible new PPOR offset (make sure its IO+offset so you dont repeat the mistake you have with your current PPOR). the question then ends up being one of doing 80% with no LMI, or as high as you can with LMI - you've had to work out which scenario is better for you.

of course, you should speak to an accountant for the details of it all and the tax side of things (justifying re-draws that you're claiming were for investment purposes)