Am I thinking right?

Currently my financial plan is in its early stages with my partner and I's PPoR being built.

We plan to stay in this for the next 3-5 years, then redraw to build a new PPoR and use the first as an IP. Savings during this period is also being dumped onto the mortgage for said redraw.

How is this looking so far? Am i not seeing any possible issues with this plan?

My partner also is wanting to start a share portfolio, however I thought especially under this economic climate it would be better to put those funds onto the mortgage saving interest repayments, than in the topsy-turby share market, with gains having to far exceed my loans interest rate + inflation + taxes to make any real gain. Or am I looking at this the wrong way?

Any suggestions, criticisms or ideas would be a great help guys.
 
We plan to stay in this for the next 3-5 years, then redraw to build a new PPoR and use the first as an IP. Savings during this period is also being dumped onto the mortgage for said redraw.

How is this looking so far? Am i not seeing any possible issues with this plan?

Your problem is that anything you dump into the loan and then redraw as a deposit for your next PPOR will NOT be deductible as it will be new borrowings used for a new PPOR. This reduces deductible debt and increases non-deductible debt when you turn it into an IP. An offset would be better.

My partner also is wanting to start a share portfolio, however I thought especially under this economic climate it would be better to put those funds onto the mortgage saving interest repayments, than in the topsy-turby share market, with gains having to far exceed my loans interest rate + inflation + taxes to make any real gain. Or am I looking at this the wrong way?

If you don't believe the shares you buy will do better than your mortgage rate, don't buy shares. There's no right or wrong way to do it. However, by focusing on paying off your own home, you're limiting your asset base to your home only. By buying shares, for example, you're increasing your asset base. Higher asset base --> higher risk but possibly higher returns. Very much depends on your circumstances, plans, age, etc.

Also ask yourself, if you're saying you shouldn't buy shares when the markets look risky, does this mean you should buy when everything looks really rosy and no one expects it to fall? Not saying you should buy or not, but ask yourself if I don't buy now, under what circumstances would I buy? Would I have to believe that everything is booming?
 
Your problem is that anything you dump into the loan and then redraw as a deposit for your next PPOR will NOT be deductible as it will be new borrowings used for a new PPOR. This reduces deductible debt and increases non-deductible debt when you turn it into an IP. An offset would be better.

My banker expressed the same concern, however this would only be an issue if its neg geared right? The circumstances in regards to this house mean that it should be easily pos geared by that point, so in this scenario it would be fine?

I understand what you mean in regards to the share market, while i wouldn't require a real 'booming' period, I was thinking more along the lines that it would be more efficient during this slower period to be focusing on debt reduction for redraws. But you're right, I will have to put my toe into the water eventually :)
 
My banker expressed the same concern, however this would only be an issue if its neg geared right? The circumstances in regards to this house mean that it should be easily pos geared by that point, so in this scenario it would be fine?

Regardless of whether it's positively geared or negatively geared, it just comes down to this: do you want more of your debt to be deductible, or more of your debt to be non-deductible? If you say it doesn't matter, I'll drop it.

I understand what you mean in regards to the share market, while i wouldn't require a real 'booming' period, I was thinking more along the lines that it would be more efficient during this slower period to be focusing on debt reduction for redraws. But you're right, I will have to put my toe into the water eventually :)

While there is nothing wrong with sitting out a period in any market, many people will end up waiting, and waiting, and waiting. The question is, are you better off taking a risk with going in, maybe small at first, than risk waiting so long that you don't get in at all? Really depends on you. Your income, your age, your risk profile, etc.
 
Hi CJ, your lines of thought have a number of flaws & Alex has said some impt things to you.

Your current PPOR will in future be your IP. Thus, the loan needs to be at maximum. You can set this up by borrowing the maximum the bank will lend you & any funds over & above can be parked in a linked offset account. Better yet, if you have the means to a line of credit, use it to pay expenses eg landscaping, curtains, etc etc then in time, the accumulated loan is all tax deductible when it becomes a rental.

Why are you so absolutely certain that you'll have any excess redraw in 3-5 years or that your property will be cf+? Do you have a crystal ball?

KY
 
Kim:

In regards to the redraw, cf+, redraw will be due to having 55k cash after the build is finished, with the final loan amount being 170k for property with value 210k+. This is prior to following 3-5 years payments + $300/week extra.


the reason why I believe it will be cf+ is because barring property market meltdown, I'll only be redrawing to the point of cf+ and intend to keep it as such. Then when second PPoR is setup fund to purchase 2 or so heavily neg geared IP's.

The intention for this first property is to be cheaper than renting for myself while saving and then using it to help balance the neg IP's in the future.
 
Hi, therein lies the problem. Your deductible loan amount will be $170000 only. Can you not organise a higher loan than that with the excess monies in offset acct which can be used to fund PPOR 2?

A redraw is not deductible whereas funds drawn from an offset acct is.

Alternatively, can you do this?

Build PPOR 2 earlier & use it as IP until you milk all the depreciation from it then move into the 2nd build to make it your PPOR until further notice.

KY
 
The second option is less than likely but in regards to the first Kum:

My loan offers a lower rate with the downside of no offset account for the first three years. Could I then perhaps refinance, redraw + some more to a higher LVR, then dump this into offset account? This would bring my deductible amount up yes?
 
Hi again, the problem would be that you're refinancing to buy/build your 2nd property & that portion will not be tax deductible cos you're buying/building your PPOR.

Let's say you have 160K left of your current PPOR loan. You can redraw 70K. We assume your current house has gone up in value to 300K [very reasonable]

This 70K redraw is NOT going to be tax deductible which means you end up with your new PPOR [2nd build] @ a higher loan amount than your IP.

Your husband's idea of taking out a loan to buy shares is not such a bad idea except with shares, buying the 'correct' ones takes a lot more skill & luck perhaps.

Anyway, give the whole thing some more thought.

KY
 
I think I'm getting it now.

Heres an example, if theres any flaws anyone feel free to point out:

loan starts at 170k for prop valued at 210k

3 years from now loan is at 150k, value at 300k

Build new PPoR without using any funds from current PPoR.

When new PPoR is finished and settled, old PPoR becomes IP no. 1

When it is IP1 then refinance loan to 250k, with 100k in offset account.

Under this scenario, would the 250k be deductible?

Or is this non-deductible portion inescapable in my scenario?
 
Absolutely do everything you can to get a 100% offset account. Pay not 1 cent more off your loan than you have to and place every extra cent you can into the offset account. Has the exact same effect as paying more of but is totally different in the way the ATO will treat it.
 
Well under these circumstances then I see it would be probably best to sell this property towards the 5 year mark and get a IP or two in between.

Thank you for the help.

While I'm at it, i have holidays for the next two weeks and would like to get my nose into the books in researching more into property investing, so situations like this don't occur in the future. From what I've seen however much of the book available have seemed, eh, less than academic. Is this just the style for this particular field, or are there reputable academic(ish) works out there?
 
If you sell, I'm sure you realise you will have selling costs (usually between 2-3%) and then buying costs on a new place.

I'm with the others; try and get the right structure (ownership/financial) NOW to avoid "having" to sell in the future. (As opposed to "choosing" to sell.)
 
Uh oh.

Oh Dear, I think I have made a terrible mistake. :eek:

Please help!

I Have:

PPOR: Original loan amount of $170K Now down to $85K p and I plus extra repayments (to be able to redraw but is NOT offset) (Val currently at $460K)
IP 1: $217K IO
IP 2: $202K IO

About to exchange on IP 3 at $283K IO which will eventually become our PPOR in about 2 yrs.

Our plan was to Pay off our current PPOR and then refinance to the max value, pay out fully our new (IP3) PPOR and then live mortgage free and all investments nuetrally geared..

It sounds like I have got it wrong according to the previous posts.

Any suggestions other than getting an offset account?

Glad I saw this thread.
 
One of your options would be to sell current ppor when the time comes and then turn that into your IP3 (new ppor) putting minimal onto what will be your new IP3 (and maybe IP4).

You may be adviced to get your place revalued when it goes from being a IP to PPOR, for cgt benefits etc. Someone one here will know all the technical terms and will probably put it better.
 
PPOR: Original loan amount of $170K Now down to $85K p and I plus extra repayments (to be able to redraw but is NOT offset) (Val currently at $460K)
IP 1: $217K IO
IP 2: $202K IO

About to exchange on IP 3 at $283K IO which will eventually become our PPOR in about 2 yrs.

Our plan was to Pay off our current PPOR and then refinance to the max value, pay out fully our new (IP3) PPOR and then live mortgage free and all investments nuetrally geared.

Wouldn't work, since deductibility is based on use of funds, not what it's secured against. In this scenario, the amount you use to pay out the new PPOR would NOT be deductible. DJB, did you speak to an accountant about these plans?

One option might be just to NOT convert IP3 into PPOR, and just buy another property (No5) as PPOR. If you have properties that have only ever been used as an IP and property that has only ever been used as PPOR, interest capitalisation is cleaner. Check with your accountant.

Selling obviously would work, but it would involve costs.

One scenario might be: you buy property 5 as PPOR from day 1. Most of the debt is non-deductible. Refi the old PPOR and interest cap all your IPs using the proceeds from that. Then put the rent into an offset against property 5.

However, it's very messy if you do interest capitalisation when converting from PPOR to IP and back, so you would need to speak to your accountant and make sure your paperwork is clear.
 
Thankyou for the input. I will see an accountant ASAP to work things out.

Bit of a bummer but it is all a steep learning curve. Make a mistake and learn from it.
 
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