any suggestions for loan structure

Hello all,

My wife and I bought our first property in May last year in Sydney's inner west. Before that, I had not read this forum and didn't really know much about property investment. Consequently, when we chose the loan, we just went for the cheapest interest rate possible on a P&I loan (with RESI). It's a good product, but I've come to realise it probably wasn't the wisest choice in terms of our long term strategy.

Long term we'd like to move out of our current PPOR into a larger house. But we'd like to keep the first place as it is a good rental property in a high priced market. From reading this forum, I know now that the best loan structure to do this would have been an interest only loan with an offset account. That way we could take the money out from the offset account to use as a deposit for our new PPOR, and the remaining loan on our first property would have been tax deductible.

But now I find myself with a bit of a problem that I was hoping to get opinions on. We paid off the P&I loan to $134k before we realised that an offset account would be worthwhile. Therefore, if we were to re-finance now to an offset account, we'd only have a loan amount of $134k that will be tax deductible when we rent the property out. Since the property rents for $300 pw (at the very least) the property will then be positively geared which doesn't really help tax wise (both of us are on the highest marginal tax rates). Plus, we'd only have a relatively small deposit of $134k for our new home. So would this mean that re-financing to an IO loan with an offset account now would therefore not be worthwhile???

Also, the property is worth about $360k at present. We expect to pay it off by the end of 2006. So the $134k that we could get for a deposit on a new property by re-financing to an offset account now is pretty small compared to the money we could get by selling the property in 2006 (thereby releasing the locked up equity in the property). (Hope that makes sense).

So the only other alternative I can think of to keep our first property "in the family" is to sell it to a family trust when we're reading to upgrade to a new house. That way, we get a fairly large deposit for our new home, and we still keep the property.

The other thing we could do is pay off our current property and then save up for a large deposit again for the second house. We would never sell the first property, but simply use the rental income from it to pay off our new PPOR mortgage and live with the fact that we'd have a highly positively geared IP. But I don't really like this strategy. It would take years to save up a large new deposit, and in the sydney market it doesn't really pay to wait all that long.

Any other suggestions??? Amy I missing something here???

Thanks in anticipation of your replies