Buying First IP - Financing Advice Needed

[Newbee]

We own a PPOR (bought Feb 2008) for 350K ... owe about 330K on it with CBA with 2 loans:

Loan 1 : Fixed 230K @ 8.4%
Loan 2 : Variable 100K

Our annual income is 165K exclusive of super; we borrowed below our borrowing capacity to leave a room for an IP which we are considering buying in the next 1-2 months. (Looking for a 3 bedder townhouse in & around Runcorn, Brizzy which has decent rental returns)

We do not have any significant equity in the property to use for our IP. So that leaves us with an option of going for a new loan. We have saved up 5% deposit + SD & Legals for a 300K property. The money currently sits in the offset a/c (MISA)

Can some of the experienced forumites help us with:

1) A reality check : Whether we are right in going for an IP in our current situation ....we have modelled our cashflow & are comfortable with cost of ownership of upto $ 200/wk without compromising our lifestyle.

2) Would we get a loan with an LVR of 95% considering our circumstances?

3) Any financing ideas ?

4) Any better/ alternate strategies ?

Thanks

 

[Rolf Latham]

Hiya

I will leave the should you or shouldnt you to someone else.

In terms of financing, id put a split into that 100 k variable loan, representing that 5 % plus costs.

The fully repay that split with the savings you have.

Then redraw on that split for the deposit and costs.

This will be a little more tax effective than spending the straight tax paid savings, and over time can be worth quite a bit of money

ta
rolf

 

[Boyler_Room]

Newbee,

There's no reason you shouldn't be able to get up to 100% finance for an investment property in your situation (unless you've got a mountain of personal consumer debt), although you have to consider LMI costs etc and whether it's worth it .

You've got a myriad of options available in terms of financing, but since you're already with CBA, they'd be a good place to start, assuming you've got the MAV pack (you're borrowings are over 300k). Means your costs to get in and ongoing costs don't change, but there are always other things to consider.

Seems like you've got a simple and straight-forward plan, which is always good. If you've identified areas that you can purchase a property within your range with your expected return then you're off to a good start.

Not knowing Brisbane too much, I can't comment about the areas you're looking and whether or not they're worth jumping into. i tend to think the hard part is actually getting in the game. Seems to me you're well and truly heading down that road and once you get your toe in the water, you'll be off and running, regardless of the suburb.

IMO, now is a good time to grab yourself an IP. I'm sure you've read a lot of the comments going around on the board with expectations of market increases in the next few years, and now is the perfect time to set yourself up for that next wave.

Hope that helps.

Cheers
BR

 

[Qlds007]

I guess I am a Brissie Western Suburbs boy so wont comment on Runcorn or the area with regards to rental returns.

Personally I would be leaving my 5% deposit and costs in the offset A/c and then structuring the loan so that you maximise your tax deductible interest.

Income (assuming no other loans or expenditure) appears certainly sufficient (subject to the split) to service a new IP.

 

[Newbee]

Thanks ... some interesting suggestions.

We dont have any major debts ... a car loan worth abt 5K finishing next year which I am not too bothered clearing as I have paid the bulk of interest & my exit costs compensate for the hundred dollars of interest I could potentially save.

We are on a professional package with CBA ... so I guess that shud help. Is that what you meant by MAV, Boyler_Room ?

Never thought about splitting the variable loan. Will hassle you all with a few more questions on splitting the same:

If I understand you correctly Rolf, if my 5% deposit + costs come to 30K I shud pay the same from my savings into the variable loan & redraw the same while putting towards a deposit for the IP (Assuming its the same lender).

How do I go about splitting the loan as you said ? And how will the tax benefits be maximised by doing this ?

Some more clarifications would be highly appreciated.

Thanks

 

[Boyler_Room]

Yes, the MAV pack is CBAs professional package. That's what I was referring to.

The suggestion to get a split and pay it down using your savings is to reduce your NON-DEDUCTIBLE debt. By redrawing from that split and using it for investment purposes, it becomes TAX DEDUCTIBLE. This is how it helps to maximise the tax benefits.

You would then be using that split to finance any deposit and other purchasing costs using a tax deductible loan, rather than using savings to pay for these things and keeping non-deductible debt.

Your first goal should be to reduce your non-deductible debt, and the suggested split helps to do that.

Hope that makes sense to you.

Cheers
BR

 

[Qlds007]

If the property is $300K and you take out a loan for 95% funding the rest of the deposit and acquisition costs from your own savings then the maximum amount of interest you can claim is based on an amount of $300K x 95% = $285,000.

If you borrow the full $300K + say $15K for costs then the deductible interest is based on $315K.

The extra $30K from your own cash sources which you would have used can be offset against your non deductible interest charged on the home loan.

Personally depending on the equity available in the original PPOR I would try and split the loans so that they are no cross collateralised but thats just me.

 

[Spectre]

And noting that cba x colls in the fine print...

New property with cba (maybe)

existing property take it elsewhere - anz, westpac... for an offset account that is functional.