A Few Starter Questions

[Raid]

Hello

Have recently decided to purchase an IO. Have also just discovered this site, and feel like a kid in candy shop with the info on offer. I expect that answers to my questions can be found in many places on this site, but I am still finding my way around, and I have to decide on the first question very soon.

Loan arrangement
An example figure IP is 500k. We could pay a cash deposit of 100k and take loan on IP for 400k, leaving us no spare cash. Instead we thought of doing the following:

• Use our unencumbered PPOR to borrow $500k as an IP loan. The IP will be unencumbered. I assume we can still claim interest costs because the loan purpose is investment, even though security is PPOR ?
• Immediately pay the $100k as redraw or into an offset account, until we need the cash (or find an investment that pays better than mortgage rate). The bank said either method would work. My concern is, if it is redraw, the ATO would not allow interest on the redrawn amount unless it was for investment. With offset, the investment loan amount remains untouched - it is just the periodic interest amount that changes and we claim for. Is this correct?

Depreciation
The IP is 1970s, therefore I assume the building value cannot be depreciated. However, the current owner did major renovations a year or so ago. Can the value of these renovations be depreciated. For eg, if they installed a $30k kitchen, can this be depreciated. If so, how do you assess the renovation value - do I need their receipts?

Title Insurance Is it worth it?

Thank You

 

[Rolf Latham]

Hello

Have recently decided to purchase an IO. Have also just discovered this site, and feel like a kid in candy shop with the info on offer. I expect that answers to my questions can be found in many places on this site, but I am still finding my way around, and I have to decide on the first question very soon.

Loan arrangement
An example figure IP is 500k. We could pay a cash deposit of 100k and take loan on IP for 400k, leaving us no spare cash. Instead we thought of doing the following:

• Use our unencumbered PPOR to borrow $500k as an IP loan. The IP will be unencumbered. I assume we can still claim interest costs because the loan purpose is investment, even though security is PPOR ?
• Immediately pay the $100k as redraw or into an offset account, until we need the cash (or find an investment that pays better than mortgage rate). The bank said either method would work. My concern is, if it is redraw, the ATO would not allow interest on the redrawn amount unless it was for investment. With offset, the investment loan amount remains untouched - it is just the periodic interest amount that changes and we claim for. Is this correct?

Depreciation
The IP is 1970s, therefore I assume the building value cannot be depreciated. However, the current owner did major renovations a year or so ago. Can the value of these renovations be depreciated. For eg, if they installed a $30k kitchen, can this be depreciated. If so, how do you assess the renovation value - do I need their receipts?

Title Insurance Is it worth it?

Thank You

Hiya

Welcome

Simpler method that also avoids cross collateralisation.


1. Draw an equity loan of some sort on your PPOR, say 200k limit, secured ONLY to the PPOR. Use 120 k of this for deposit and costs for the new IP and leave X as buffer for the next opportunity

2. get a 400 k loan secured only to the NEW PPOR only

3. Have a SEPARATE offset facility on either of the loans to park your 100 k cash in. Make sure that the offset account contains NO borrowed money, only tax paid cash.

Id recommend you spend some time with a decent broker, because if you want to maximise your investment resources and opportunities, that isnt in the banks interest.

ta
rolf

 

[Aaron_C]

Sounds like you are in a good position to create wealth but please don't cross collateralise the properties because it is 'easier' to do so.

 

[Raid]

Thank you for the responses. Some aspects of the advice are a little unclear to me, and it’s possible I did not explain my intentions clearly.

Cross-collateralisation. I understand this to mean a single financial arrangement that bundles all properties and loans into 1 tangled mess. This is not what we planned to do.

We currently don’t have any loans. We planned to take out a single loan secured only against our PPOR. The cash the bank give us when we draw this will be used to purchase the IP. The bank has not requested that the IP also be used as security – it won’t have a mortgage on it.

The reason we thought to do this is that our PPOR is worth more than the IP, therefore the bank will lend the full IP purchase price, which enables us to retain the cash (which would otherwise be used as a deposit if we took the mortgage was on the IP) for a rainy day.

Rolf, your suggestion to have the mortgage on the IP and take out a line of credit loan on our PPOR would mean that both properties will be encumbered?
Assuming what we propose is not cross-collateralisation, I think the questions for me are:

• Does the ATO look twice if the loan purpose (IP) and the security (PPOR) are not the same.
  [*]Are there any advantages/disadvantages with using Offset instead of Redraw to store our cash (and effectively reduce our interest) for the rainy day needs.

I assume that if we Redraw the cash for a rainy day need, the ATO would consider the redraw to be not for investment, and this portion of the loan cease to be tax deductible. However, if we withdraw it from Offset, the deduction would still apply to the whole of loan amount.

Rolf – wrt to banks and brokers, as far as I can ascertain the bank is not charging a raft of fees – essentially only interest. The rate seems competitive, charged as owner occupier instead of investment, as well as a 0.2 discount.

Thanks

 

[Aaron_C]

It makes no difference whether the property is for owner occupied or investment purposes. The rate / product is the same.

 

[matto_]

sounds like you need a discussion with a mortgage broker - they will give you some good/direct advice. Plenty to choose from here...........

 

[vaughan]

We planned to take out a single loan secured only against our PPOR. The cash the bank give us when we draw this will be used to purchase the IP. The bank has not requested that the IP also be used as security – it won’t have a mortgage on it.

Get a line of credit against the equity in the PPOR. Use this LOC for the DEPOSIT for the IP. Get a loan for the rest of the IP using the IP itself as the security (just like you did for the PPOR).

The interest for the IP will be a tax deduction. The rest of the money that you would have spent on the IP can be used for more deposits for more IPs, up to your maximum serviceability.