Deposit using LOC or funds from Offset?

[dajackal]

My current PPOR is approx 70% LVR with approx an additional 100K sitting in an offset account.

I'll be taking out a 90% loan for a $650,000 property, and in funding the deposit and purchasing costs (13~14%) should I:
A) Take out an equity loan against my PPOR taking the LVR up to 85% (LMI is approx $3000)
B) Pull out the funds from the offset account which increases my non-tax-deductible debt.

Given that this next property will be high growth but low yield, I am concerned that going with option A will mean the property is fully funded by debt and the interest expenses will be too high in relation to the rental income. Negative cashflow will be more than $25,000/year.

Hope you can help

 

[Rob G.]

You need to do a present value calculation on an up-front LMI cost that may be tax deductible over 5 years along with the tax deductions on the additional interest.

Compare that with the present value of increased PPOR interest expense (non-tax deductible) if you use the money from the offset account ... assuming you keep the money in the offset account for the whole period you are considering.

Your biggest decisions would be choice of discount rate and timeframe.

Cheers,

Rob

 

[Rolf Latham]

Hi DAJ

In general, and not giving any specific advice because we only have some surface data

Id leave as much of my tax paid cash in offset against my PPOR

Id even go so far as taking an 88 % lend on the poor using a separate loan facility secured ONLY to the PPOR.

The home loan split ideally could be interest only as well, since that may free up a little more cashflow

Structured in such a way, it wont make any difference to the cashflow position of you borrow all the IP money, or use some of your cash.


ta
rolf

 

[dajackal]

Thanks Rob & Rolf!

Thanks to your inputs I did the sums and it revealed that borrowing against the PPOR equity is the way to go. The negative gearing benefits (at 37% marginal) means that my net cashflow position is considerably better than if I took the funds out of the PPOR offset account.

Also the equity will be secured against the PPOR only such that I'm not cross-collateralizing. Loan will be interest only.

Rolf, what do you mean by a separate loan facility and why is this required?



Looking back I was hesitant about taking on too much debt but after this analysis the numbers speak for themselves.

Another quick question. Does it make sense to take money out of the PPOR offset account to pay down the principal? Just enough so that I can get a 80% loan on the PPOR without incurring LMI.

 

[Rolf Latham]

Thanks Rob & Rolf!

Thanks to your inputs I did the sums and it revealed that borrowing against the PPOR equity is the way to go. The negative gearing benefits (at 37% marginal) means that my net cashflow position is considerably better than if I took the funds out of the PPOR offset account.
.

Glad u found that to be the case. The fact that we were cannibalising our post tax cash flow to place funds into a -ve investment, AND reducing our risk buffer at the same time can only have one outcome, even if the marginal tax rate was in the lower brackets.

Also the equity will be secured against the PPOR only such that I'm not cross-collateralizing. Loan will be interest only.

Good. Will u also have your PPOR loan as IO ?

Rolf, what do you mean by a separate loan facility and why is this required?

Currently you have a PPOR loan. The purpose of that loan is NOT deductible at the moment, but may be once you turn your current PPOR into an IP loan.

By taking a loan separate to that existing PPOR loan you are making your accounting simpler and more transparent. If your PPOR loan is IO, then you can muck around with a spreadsheet to allocate interest components, but if the loan is PI, then it becomes messy and tax ineffective, ESPECIALLY so for you because you have that CASH sitting in the offest

Another quick question. Does it make sense to take money out of the PPOR offset account to pay down the principal? Just enough so that I can get a 80% loan on the PPOR without incurring LMI.

That depends on what your emotions tell you what "sense"

Financially I believe the LMI cost is generally viable for the benefit gained, but Im making some big assumptions, and I dont want to be a donkey

I dont know enough about your soft data to really help you with that here.

Get away from the cold numbers for a moment and look at the flesh and blood.

Id consider some of the following issues

1. When do u want to buy your next ip ?
2. Do you have the cashflow resources to do it
3. What are the chances of you moving from your current PPOR, turning it into an IP, and purchasing another
4. What are the chances that you may need access to that large cash amount for an opportunity or challenge ?
5. Do you have good life and income protection in place
6. Are you familiar with debt recycle strategies ?
7. How much longer do u want to keep working doing what you are doing
8. What are your retirement income goals, what about the financial goals for the next 5 10 and 15 years ?


Finally , dont let convenience or "saving" a few bucks get in the way of doing the "right" thing.

ta
rolf

 

[dajackal]

We are in the process of purchasing our future PPOR initially as an IP.

The current PPOR loan is currently IO and we will likely turn this property into an IP in a few years time when future PPOR becomes PPOR.

Thanks for clarifying the separate loan facility. I'll make sure we get it.

Regarding the flesh and blood, I've sent you a PM