Converting a PPOR to IP

[Firefrog]

Long time occasional lurker but trying to get my skates on to do something. If there is a better place to ask this please let me know

We have a PPOR purchased 24 months ago. LVR probably around 80% but confirming this over the coming few days. Fixed at 7.25 for 12 more months. Current Value about $300,000

I know I may need more equity before we do this but just starting the education.

We want to move to a larger PPOR and I want to convert the current PPOR to an IP. But am not sure how I would need to structure things. We would need the equity in the current property to fund part of the new PPOR, what are the options for doing this. I assume the use of the equity for the new PPOR can not be deducted and would be another loan payment????

Is my thinking here right:
Current PPOR converted to IP with current Loan.
Take a home equity loan or line of credit and use that cash to assist with new PPOR purchase.
Take new loan over new PPOR.

Total three loans?

Or am I better off selling the current PPOR upgrading the PPOR to what we want and start with an IP later???????

Just after options on how this stuff can be done....

 

[danwatto]

Long time occasional lurker but trying to get my skates on to do something. If there is a better place to ask this please let me know

We have a PPOR purchased 24 months ago. LVR probably around 80% but confirming this over the coming few days. Fixed at 7.25 for 12 more months. Current Value about $300,000

I know I may need more equity before we do this but just starting the education.

We want to move to a larger PPOR and I want to convert the current PPOR to an IP. But am not sure how I would need to structure things. We would need the equity in the current property to fund part of the new PPOR, what are the options for doing this. I assume the use of the equity for the new PPOR can not be deducted and would be another loan payment????

Is my thinking here right:
Current PPOR converted to IP with current Loan.
Take a home equity loan or line of credit and use that cash to assist with new PPOR purchase.
Take new loan over new PPOR.

Total three loans?

Or am I better off selling the current PPOR upgrading the PPOR to what we want and start with an IP later???????

Just after options on how this stuff can be done....

Hi Firefrog,

Welcome to somersoft, it's a great place I get loads of ideas here!

Your idea looks pretty good. Firstly ask your accountant! But I know it's good to educate yourself first.

You can't deduct the new loan, but the original one should be fine if you haven't had any private use besides paying for the income producing asset (i.e. no redraw to buy cars, boats, holidays etc).

I would consider changing the current loan to interest only, so that instead of paying off the investment, you can focus on paying down your new PPOR.

Did you pay mortgage insurance on the existing property? If yes, then you could borrow more equity, say to 90% and then you should only pay mortgage insurance on the new loan amount. If you didn't pay mortgage insurance I think you would need to pay on the entire loan (someone correct me if I'm wrong).

Whether to sell or not, well that's a hard decision because it looks like you will have < 20% deposit therefore have to pay mortgage insurance on your next purchase. You need to weigh up some things:
a) How good is your existing property as an investment, will it rent for a good return?
b) Is the mortgage insurance you will pay going to be more than you have already invested in stamp duty to aquire a property? If it is less, then your mortgage insurance is probably not large enough to worry about
c) Do you really want to go through the hassle of selling and paying costs? Some properties sit on the market for a long time and sell for much less than the real estate agent appraisal. You'll lose the stamp duty you have already committed, and you'll have to pay agents fees. If one day you will acquire another property then consider keeping this one instead.
d) Can you afford to pay for both properties! Consider an AWOL tenant that doesn't pay rent for 3 months. It's rare but you gotta live with the possibilty.

My personal bias is that I never sell, because of the hassle as I'm lazy. But also because of the cost. Most people don't consider the cost to get INTO the investment when selling. But remember when getting to the same level of investment in future you will have to spend that again because one was sold.

 

[Firefrog]

Thanks for the reply!

I have read two variations on a theme that I want to make sure I understand. Is taking a home equity loan or LOC the same as using a property for security?

I have struggled in my past reading to fully grasp how equity is released and how you use it, is there more than one method?

Is it always a physical release of cash (via a loan) that is then used as a deposit on the next IP?

Sorry if this is trawling through old ground.....

 

[rugrat]

Thanks for the reply!

I have read two variations on a theme that I want to make sure I understand. Is taking a home equity loan or LOC the same as using a property for security?

I have struggled in my past reading to fully grasp how equity is released and how you use it, is there more than one method?

Is it always a physical release of cash (via a loan) that is then used as a deposit on the next IP?

Sorry if this is trawling through old ground.....

Hi I am trying to 'unlock' he equity in my PPOR at the moment too. You should talk to a professional about what is best in your situation.

As someone you is just starting to understand all this, I will give you my take on it - based on MY situation (this may or may not be the case with your financial institution). There are basically three options:

1) Take out another seperate mortgage to cover the equity. This would be a seperate loan and seperate payment.
2) Take out an equity loan or line of credit to access the equity. Again, this would be a seperate loan and seperate payment.
3) 'Top up' your current loan. This would result in one loan, one payment on this property.

For tax purposes it is easiest to keep the loans seperate, so as to clearly distinguish which money belongs where - IYKWIM?

No matter which option you choose, if the total borrowe over any one property exceeds the 80% LVR then you will be required to pay LMI on it. If you have already paid LMI, then you will have to pay the difference between your orginal amount borrowed and the new amount.

If I have forgotten something or gotten something wrong I am sure someone will correct me. Like I said I am only a newbie at this.

 

[BayView]

If you are up to 80% LVR already on the current property, there isn't much left you can eek out of it to use as a deposit on the new home.

At current value of $300k, and with a current LVR of 80%, this leaves you with no useable equity normally.

I don't know of too many lenders who would allow you to use above the 80% as a deposit on the new PPoR, and then have another loan for remainder of the PPoR in this climate.

You will be paying some LMI if they do, and the interest on the new PPoR loan and the new amount of equity LOC on the current PPoR (which becomes an IP) would not be tax deductible because it applies to the new PPoR.

You might want to crunch the numbers to find out your servicability as well, because the new PPoR will be a 100% LVR with no tax releif, the IP will be 80%,. but at least it's a tax deductible debt.

There will be rent of course, but the Lenders will only allow a % of that towards servicability.

 

[Firefrog]

Hmmmm. So I think I'm looking at more time in the market with hopefully some cap growth. And some savings.

Perhaps an IP or two is needed before I buy a upgrade to the PPOR. On with the education. I feel ready to get started and don't really want to be in a holding pattern.

Cheers for the thoughts......

 

[BayView]

Hmmmm. So I think I'm looking at more time in the market with hopefully some cap growth. And some savings.

Perhaps an IP or two is needed before I buy a upgrade to the PPOR. On with the education. I feel ready to get started and don't really want to be in a holding pattern.

Cheers for the thoughts......

The fact that you are here means you have already started!! Well done.

Here's a radical thought (radical because most people don't do it);

Keep paying down the PPoR debt, and when you get enough equity built up, instead of going for the upgrade on the PPoR with more non-deductible debt, how about going for a swag of IP's that in the next 5-10 years will provide the cap growth that will allow you to sell a couple of them and use the profit to upgrade the PPoR and be debt free.

Then, use the new debt free PPoR to keep buying more income producing assets.

I like this plan.

 

[Firefrog]

I like this plan too! Now I need to convince myself that 5-10 Years in this house is tolerable.......It's nice and comfortable. But not in the area we want or the size we want. This will be a big lesson in delayed gratification, patience and learning to not look over at the grass on the other side of the fence. If I last 5-10 years I'll write a book on the topic.

 

[Learnings]

The fact that you are here means you have already started!! Well done.

Here's a radical thought (radical because most people don't do it);

Keep paying down the PPoR debt, and when you get enough equity built up, instead of going for the upgrade on the PPoR with more non-deductible debt, how about going for a swag of IP's that in the next 5-10 years will provide the cap growth that will allow you to sell a couple of them and use the profit to upgrade the PPoR and be debt free.

Then, use the new debt free PPoR to keep buying more income producing assets.

I like this plan.

Great idea.

To expand a little on this idea, you could

*swtich to interest only now to save cashflow
*use a small amount of savings/borrowings for BASIC value adding reno with return in mind.
*aim for $3 for every $1 of reno money you put into it
*revalue at say $330k

Free up that little extra equity with 10k savings/borrowings

Should get you over the line into another %90 place