capitalisation

[THEGREAT888]

Hi Members,

I know my question is very simple and may have been mentioned in the previous thread

The reason I need to ask this question again, because I need a specific answer in dealing with my current situation whereas previous thread may have been discussed in someone else's situation.

So this is my simplified situation.

PPOR paid off.
IP purchased and loan taken $300000.00 a decade ago
Current value $320000.00
Current loan balance $ 200000.00
Advance in repayment approxiamately $70000.00

I intend to purchase a new IP with a new loan 100% borrowed fund, totally separated from first loan. So in case I decided to sell one of them in the near future, it will not complicate things for me.

I have small issue with servicability but has no problem with equity.
I want to apply for a capitalisation so that my monthly repayment will be lowered. That way, I can borrow more fund with the new loan as my total loan and repayments will be lowered.

May I ask the members of their opinions. Is there any issue with my plan?

Kind Regards
T

 

[Marty McDonald]

If you want to let the interest capatalise you will need to borrow in excess of the funds required for the purchase. If that's the case you will still have to be able to show you can service the fully drawn amounts.

 

[StuartW]

Did I read this correctly? You bought the property 10 years ago and borrowed $300k and now its worth only $320k??? If so, SELL THE PROPERTY. The property should be worth at least $600k by now.

What you are suggesting - i.e. borrowing to afford debt is very risky and you should think twice about this. The key risk is 'access to more money'. Once lenders work out what you are doing they might get concerned - particularly if your property grows in value by only $20k every 10 years.

 

[Rolf Latham]

I have no issues with capitalisation of interest provided

1. Your Tax adviser agrees
2 The asset(s) you have purchased with the debt are strong "growth" assets

ta
rolf

 

[Ski-bum]

Agree with all above - that is poor capital growth in 10 years. Underperformer+++ to say the least.

My advice: sell current IP. Get a new loan secured by your PPOR for another IP's deposit + costs. Another loan for the balance secured by your new IP. Park the proceeds from the sale in an offset against either loans.

RE: capitalisation - this plan will not help with your servicability, as per Marty MacDonald's reply. It will only help with your cash flow. And only consider it if there is strong growth - ie. not you current IP!!!

 

[THEGREAT888]

Thank you all for your responses

@Marty
Once my application for capitalisation approved, I will be able to have some idea how much I can afford to borrow and what price I would be prepared to pay. I will only borrow the amount I am comfortable with.

@StuartW
It was definitely a mistake. A lesson has been learnt. OTP without GC. This property definitely hold my advancement in property market for almost a decade. BTW, I am in the border of positive gearing now so do you think I should still sell the property. As you can imagine all my savings went into the IP for several years and this property is currently rented $400/wk.

@Rolf Latham
Rolf. May I ask why my tax adviser would have to agree to my plan. In regards to strong growth assets, I would definitely intent to purchase a property with potential, but I can't predict where the strong growth area are. With limited knowledge and some luck I am really hoping my next IP will bring a better GC.

@Ski-Bum
agreed with your comment in regards to underperformance.
Selling the property is in my agenda. I am looking at the right timing. I do not want to miss any opportunity in the next 3-6 months if there is a good property to purchase

 

[tobe]

a) You cant apply for capitalisation loan, so it wont be approved. You need to show the lender how you can affford the loan, not the other way around
b) You have lost 10 years. Id suggest its unlikely to turn around for he next 10 years. Sell the property.
c) If your tax adviser doesnt agree, you might find yourself at odds with your tax adviser, and paying too much, or too little tax.

In terms of picking growth assets, if you leave it to luck again, I think youll be in the same position in 10 years time you are now. Do some research, its not going to fall in your lap.

 

[Rolf Latham]

@Rolf Latham
Rolf. May I ask why my tax adviser would have to agree to my plan. In regards to strong growth assets, I would definitely intent to purchase a property with potential, but I can't predict where the strong growth area are. With limited knowledge and some luck I am really hoping my next IP will bring a better GC.

Capitalisation is ok with some tax people and some will tell you you are mad

ta
rolf