Buy IP or Pay Off Home

I raised this question as a side-issue in another thread, but it seems like a good question to ask.

I am in Melbourne. Our house is valued $290K by Council Rates but the house next door is going to Auction soon and their expectation is $350K, so I think that is a reasonable estimate.

Our mortgage is $130K, leaving us around $220K equity.

Mortage has another 18 years left, roughly, at about $1060 per month I think.

At our current rate of paying it off we should clear the mortgage in 5 years approximately.

Should I pay the mortgage off as fast as possible or divert some of the money into an IP (on the assumption that I'll be very unlikely to find a positively geared property unless I do something alternative like wrapping etc - in which I have no experience [heck, I have no experience in IP full stop]).

Will I have to cross-collateralise the loan?

What would be the suggested minimum maximum IP investment borrowings you would recommend based on existing equity and let's say $800-1000 per month available for servicing the loan (on top of rental income etc).

No you wont have to xcoll, though some lenders seem not to know any other way

Much depends on:

1. Your Tax situation
2. Your impression of where property values are going

One school says get as much property under your belt as posssible, that way youll get the maximum growth.

Another says that, at this time we should focus on debt reduction, and not gear at all.

WHo is right, both are depending on what you want to achieve, what you are willing to put into it in terms of time, the players on your team, and most improtantly what your emotional attitude is to the risks you may face.


Hi Rolf,

Can you please explain why I would not have to xcoll?

I mean, won't the lender _want_ my PPOR as security for the IP because I don't have a deposit for the IP.

Or is finance structured in such a way that it alleviates the need for xcoll. eg.

On $250K property.

LOC of $60-70K against PPOR used for the "deposit" part of the IP, plus costs.

LOC or P&I or IO loan of $200K against IP?

Hi Kev

Yep, structure the deal so xcoll is not required. While xcoll probably wont cause any headaches now, its like alcohol, tolerable and pleasurable in most cases in small doses, potentially lethal in large doses.

So say for a 250 prop to avoid LMI youd need 50 k + costs in some form of loan directly against the PPOR.

The lenderw will commonly try to sell you away from this idea - persist you will find it pays dividens in the long term.

DONT let others with vested interests dictate your security arrangements.


Great! I understand.

Would I be better off obtain the LOC on the PPOR for the largest amount possible (eg. 80% PPOR value - outstanding mortgage amount), or just for the amount needed, assuming that debt serviceability was not an issue?

I'm thinking for the future that if we haven't spent all of our equity on the first IP there may be enough for a second IP, and having the LOC at max amount would save the application fees etc?

The downside is that if you need access to some of the equity in PPOR for "non-IP" purposes you are already up to your limit, right?

Is it easy to make adjustments to the amount of an LOC credit facility or split it into separate accounts and stuff like that? To accommodate situations like above?

two points.

If you do xcoll (and it sounds as if you won't)- if you borrow over 80% of the value of you IP, you will (or at least may) be charged Mortgage Insurance on the combined value of the two houses. If you use LOC using PPOR as security, it will be based on the value of th IP only.

Second, take out the LOC for the maximum amount. You can use the extra for other things.

What I've done is to use the LOC for only things which are tax deductible. If, for instance, I do a course which is related to my work, at a cost of $2000, I know I can claim the cost of the course as a deduction.

BUT I don't pay the course directly out of my pocket. I pay $2000 against my ppor, reducing the debt. And I take $2000 out of my LOC to pay for the course.

Because I only use the LOC for deductibles, I claim all the interest on the LOC. So my deductible debt has gone up, and the non-deductible debt on my ppor has gone down.