Better to pay off PPOR or buy Investment Property

Hi,

I would love to hear your thoughts on paying down the home loan on your PPOR compared to leaving it at around 80% LVR and investing any equity on investment properties. What are the benefits of one over the other. Is there an optimum LVR that you should target on your PPOR or is it best to pay off your PPOR before getting into investing. I know there are some tax implications from a capital gains perspective, negative gearing perspective and also positive cashflow perspective but can't get my head around where or whether there is an optimum position to be in in order to get the best outcome. Also, if your home loan is already at 80% LVR and you don't have the deposit for an investment property, when is it worth considering getting a 95-100% loan and paying mortgage insurance? Do all banks lend that much or is this just a no go zone? Lots of questions that have been going through my brain and would love any thoughts on this topic or links to old threads that may already cover this topic.

Cheers xx
 
I would love to hear your thoughts on paying down the home loan on your PPOR compared to leaving it at around 80% LVR and investing any equity on investment properties. What are the benefits of one over the other.

Paying down means no investing, less risks and of course not much rewards.

Say you can have a 100k PPOR at 60% or a 100k PPOR and an 100k IP at 80%. When the properties double in value, you will gain 100k in first example and 200k in second. A big difference. Of course, there are risks in investing.

Is there an optimum LVR that you should target on your PPOR or is it best to pay off your PPOR before getting into investing.

The LVR you are comfortable at depends on your circumstances. Some go upto 90% even 95%. I prefer around 80%. Some prefer around 60%. It depends on the income levels, age, risk tolerance, family circumstances etc. But there is no point waiting till paying off PPOR to start investing because by the time you pay off PPOR, you would have missed lots of CG opportunities,

I know there are some tax implications from a capital gains perspective, negative gearing perspective and also positive cashflow perspective but can't get my head around where or whether there is an optimum position to be in in order to get the best outcome.

You have to get your head around.
 
Definitely don't wait to pay off your PPOR before you buy your first investment property. However once you bought your first investment property, you should focus on paying off/offsetting your PPOR before you start paying off/offsetting your investment property since the interest on your investment property is tax deductible but not the interest on your PPOR.

Regarding 95-100% loans and LMI. Not all banks lend higher than 95%. Whether you should borrow up to that level depends on your level of risk aversion. It could be that you have a high salary and/or stable job but just don't have the savings or equity for the deposit. Instead of waiting to save for your deposit, you could buy the property now at a higher LVR and use the savings you will generate over time to increase your equity in the property.

Cheers
Andrew
 
Don't pay off your PPOR, keep the money in an offset account so it's readily available. Invest all the equity you can in good investments properties, hopefully positively geared.
 
Hi,

I would love to hear your thoughts on paying down the home loan on your PPOR compared to leaving it at around 80% LVR and investing any equity on investment properties. What are the benefits of one over the other. Is there an optimum LVR that you should target on your PPOR or is it best to pay off your PPOR before getting into investing. I know there are some tax implications from a capital gains perspective, negative gearing perspective and also positive cashflow perspective but can't get my head around where or whether there is an optimum position to be in in order to get the best outcome. Also, if your home loan is already at 80% LVR and you don't have the deposit for an investment property, when is it worth considering getting a 95-100% loan and paying mortgage insurance? Do all banks lend that much or is this just a no go zone? Lots of questions that have been going through my brain and would love any thoughts on this topic or links to old threads that may already cover this topic.

Cheers xx
PPoR debt is non-deductible. The faster the debt is decreased the better, and the equity increases faster for borrowing for deductible debt.

The three "worst" debts for Mr.Average is PPoR, CC and Car - no tax relief.

The 95% loans are - in my opinion - very risky, and the MI makes it moreso...it's money down the drain IMO.

I've never done it, and never will.

The offset account as others have said is the way to go.
 
There isn't any one size fits all.
We tossed up between paying off the PPOR and buying an investment property. Ended up going for the ip. For us it turned out to be the right decision, because we've had three more kids since then and although our PPOR mortgage would be lower, our servicibility has declined and house prices have increased.
Our PPOR home loan was a 105% all up including LMI, bases on sale price. But by the time we settled the valuation came in 60k more then purchase price. A year after that it had gone up the same amount again. So it wasn't really a 'risk' for us to do that.
The IP, we drew off a LOC from the equity for our deposit and then took out a 95% homeloan. So we have in essence a 105% LVR against that property (although part is secured against our PPOR). It makes more financial sense because it's all deductible. Our non deductible debt on our PPOR is currently sitting just under 70%.
Unfortunately the growth in the IP initially went up a lot, and then has dropped back a little, but it still has been growth overall and the total LVR now sits at about 90%. It is negatively geared, but not excessively, and that's not a bad thing as it is also a tax break for hubby. Either way, the goal has always been a long term buy and hold.

We have stalled since buying the first ip though, due to babies and lack of direction (we want a PPOR upgrade, and are unserviceable for the amount we need for that). So we are paying down our PPOR debt now while we figure out our next move. Very low risk option. But having the ip gives us more options then if we didn't.
 
Hi,

I would love to hear your thoughts on paying down the home loan on your PPOR compared to leaving it at around 80% LVR and investing any equity on investment properties. What are the benefits of one over the other. Is there an optimum LVR that you should target on your PPOR or is it best to pay off your PPOR before getting into investing. I know there are some tax implications from a capital gains perspective, negative gearing perspective and also positive cashflow perspective but can't get my head around where or whether there is an optimum position to be in in order to get the best outcome. Also, if your home loan is already at 80% LVR and you don't have the deposit for an investment property, when is it worth considering getting a 95-100% loan and paying mortgage insurance? Do all banks lend that much or is this just a no go zone? Lots of questions that have been going through my brain and would love any thoughts on this topic or links to old threads that may already cover this topic.

Cheers xx

You do both.

No one should use cash to invest. If you had $10,000 for example you would pay down the home loan by $10,000 and save $500 per year in non deductible interet. You would then borrow $10,000 to invest and have a $500 deduction. the income made from the investment would go onto the home loan (after paying interest on the investment). All other costs related to the investment would be borrowed as well. So this should actually speed up the paying off of the home loan.
 
Definitely pay off PPOR debt to the last cent before buying IP. Doing otherwise is just gambling. Where can you beat a risk-free after tax return of your current mortgage rate? If you do otherwise, you're basically saying you can get a risk-free return better than your mortgage rate, after tax, which is mathematically impossible in todays market.
 
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