Bought 1st PPOR - interest only and offset loan for flexibility?

[rack201]

Hi All,

Exciting times - I purchased my first home as PPOR on the weekend, now I'm looking at the best way to structure finance, such that I can have some flexibility to purchase an small investment property in the short-med term.

I'd like to determine if it makes sense to borrow the absolute minimum I need for the PPOR or the following approach which I think gives me better flexibility:


Eg: I need to borrow 700k for the PPOR, and I have borrowing power of say 1M, borrow the full 1M, as an interest only loan, tied to a transactional offset account. Use the 700k for the PPOR, so my interest is only calculated on the 700k, plus make additional monthly payments in excess of what the P+I repayments would be on the 700k.

If/when I find a suitable small investment property, do I then have the flexibility to use the 300k (or whatever is in the offset) as a deposit?

I'm somewhat out of my depth here, and will engage the services of a broker/planner but assuming I have the discipline to make the extra repayments, is there a major downside to this approach?

 

[Peter_Tersteeg]

Eg: I need to borrow 700k for the PPOR, and I have borrowing power of say 1M, borrow the full 1M, as an interest only loan, tied to a transactional offset account. Use the 700k for the PPOR, so my interest is only calculated on the 700k, plus make additional monthly payments in excess of what the P+I repayments would be on the 700k.

If/when I find a suitable small investment property, do I then have the flexibility to use the 300k (or whatever is in the offset) as a deposit?

Borrowing the larger amount is somewhat on track as it puts you in a good position to have a deposit ready for the IP, but you should do it in a structured manner. You don't want to do it all in one loan, it needs to be structured to keep your future investment money separate from the loan on your PPOR.

There's also potentially a lot of other structuring considerations which need to be addressed depending on your longer term goals. Using a P&I loan may not be the best solution for the future.

Getting it right up front can make a big difference to ensuring you get the right tax deductions later. It is usually something that you need to get good advice on however.

 

[Redom]

Congrats on your first home!

You're on the right track by having flexibility front of mind. A lot of this will depend on what you envisage doing.

Do you intend on purchasing an IP soon? It makes sense to have your additional funds, split into separate loan amounts for each deposit + closing costs for your investment purchase.

That is, it may not make sense in having your 300k all in one loan split. With that amount of funds and good servicing ability, you can purchase multiple investment properties (if thats your goal). If you intend on utilising this option, then apportion your loan splits to reflect deposit + closing amount.

Re P&I, it may make sense to go interest only and park additional repayments in an offset facility. It will allow you to better draw on these funds if required.

Goodluck!

 

[superAndrew]

I wouldn't borrow $1m. I would borrow just enough for your PPOR. You want to keep this debt as low as possible if you can, since the interest on this loan won't be deductible. Here use an IO loan + offset account and keep your savings in this account to lower your interest.

Once you find an investment property you can draw equity from your PPOR to fund the deposit of your IP. This part will be tax deductible. Here also use an IO loan.

Over time store your saving in the offset account of your PPOR. Your goal should be to reduce your PPOR loan and eventually fully offset it.

As you purchase more IPs you can draw equity from your PPOR to fund the deposit of your new IPs

Cheers

Andrew

 

[rack201]

The input is much appreciated.

IP is probably ~2 years away, at least not in the very short term. On that basis/timing, does borrowing the minimum for the PPOR (IO+offset & extra funds) and using the equity in the home in that time period to fund an IP purchase sound appropriate?

Cheers

 

[Peter_Tersteeg]

It's difficult to realistically determine if you should borrow more now with the offset, or borrow less and access equity later.

The problem is that it's hard to say what financial position you'll be in in 2 years time. It's quite possible that you can borrow the extra money now with no problem. In 2 years time however, interest rates may rise and this would change your affordability scenario to the point where the lender you choose today may not give you the money then.

The argument for getting the extra funding now is because you can. It removes an unknown from the future equation.

The argument for accessing equity later is that it removes the temptation to spend the money on something else.

It's easier to ask for money when you don't need it but human nature does need to be considered. It can also depend on how much your financial surplus is. The scenario does require more detailed analysis using the actual financial figures.

 

[Simon]

As long as you have self discipline and you don't use the excess funds for consumer spending.

 

[superAndrew]

IP is probably ~2 years away, at least not in the very short term. On that basis/timing, does borrowing the minimum for the PPOR (IO+offset & extra funds) and using the equity in the home in that time period to fund an IP purchase sound appropriate?

Yes it does. It is plenty of time for you to have created equity either through growth or your savings.

I don't see the point in borrowing more than you need today. If interest rates rise then the banks might not lend you as much in 2 years as they can lend you now. However there is a reason for that. It's more riskier for them and it's also more riskier for you.

Cheers

Andrew

 

[rack201]

So I left out one important bit of info. In the near term there is a likelihood I will expatriate overseas again. At this time I would likely want to convert the property from PPOR to IP. With that in mind, this is what my broker is suggesting (in my own language). Apologies for the long post - helps me understand it as I type it..

? Borrow full 80% of the property value in an interest only loan
? Put my cash in an offset account against the loan, so the interest repayments are minimized ? interest only on (loan amount ? offset balance)
? Get salary paid into the offset, use credit cards day to day and pay credit card bill monthly from the offset leaving everything left over in the offset
? If/when it comes time to buy an investment, use cash to pay down 20% of the investment property purchase prince on the home loan and use that equity to fund the investment loan

Advantages
? As I might expat again in the short term, I will want to convert the property from PPOR to an investment
? With this approach, I can covert to an investment property, and still claim the interest on the full value of the loan as tax deduction while keeping my cash free for other investments or activities
? If I don?t expat, no problem, cash in the offset keeps interest repayments lower and can use the cash to can pay down the loan at any time
? Provided the monthly ?add? to the offset account is equal to or greater than the corresponding (principal + interest) repayment on the (loan amount ? offset balance), no worse off than a regular (P+I) loan

Sound ok?

 

[Rolf Latham]

Borrow the max that you can right now without LMI costs (usually)

Place the balance of the unused funds back into the loan, and park your personal tax paid cash outside the loan in a 100 % offset acct.

Logic ?

1. Borrow money when you dont need it............correcty structured you pay no more interest than paying the min.
2.Risk transfer....... by holding back YOUR cash, you are giving yourself more rope
3.Cash for challenge or opportunity
4. Future proofing againts changed personal, real estate, financial system,or general economic changes.
5. Hold cash back for future non deductible purchases


There are very few arguments that hold water to borrow only "what you need now". One of those is that clients with poor money habits dont need the temptation

I have seen too many people suffer quite badly as a result of risk management based on "populist opinion" rather then client specific fact and stated need.


ta
rolf



Generalist advice only, please seek speciailist advice.

ta
rolf

 

[lup15]

this is an interesting point which I didn't consider previously.

I'm thinking very similar lines to the OP where I will be getting a PPOR first with a n IO loan + offset a/c. The PPOR will be converted to IP in a few years.

So, if I have serviceability to 900k but only need 350k, the bank will still lend me the remaining 550k and have funds just sitting there? I'm also guessing that I will need a sizeable deposit to take out a total loan of 900k?

I see superAndrew's point that this is risky for the borrower if they fall into repayment trouble due to rate rises. But if you plan appropriately taking into consideration the repayments with rate rises, are there any other negatives to this besides temptation to blow the money?

 

[Colin Rice]

So, if I have serviceability to 900k but only need 350k, the bank will still lend me the remaining 550k and have funds just sitting there? I'm also guessing that I will need a sizeable deposit to take out a total loan of 900k?

Depends on the bank as allowing "control of the funds" varies from bank to bank and then again how you present the deal.

900k loan can be secured with as little as a 5% deposit all things being equal but the trade of is a higher LMI premium.

Have to agree with others and get it while the going is good as is typical when you really need you cant get it, finance that is.