FHB Finance help

Hi all,

my first post so firstly want to say great forum. :)
Have been reading this forum for some time and have managed to learn a lot about the property market but now need some advice/opinions as we are starting down the path of first home ownership.

Here is my situation:
Currently overseas but am looking to buy later in the year once we return.
Will have around 150K deposit by then and am looking in the eastern suburbs of Melbourne (FT Gully, Croydon, Boronia etc).

Initially our plan was to buy a house (PPOR), then in a few years down the track use whatever equity we have to buy our first IP.

But from having read a few others posts on here I see a lot of opinions to buy with an IO loan and not use all of the deposit (i.e. leave some cash sitting there in an offset).
Can someone give me good reasons why to do this?

I would have thought with a PPOR you would want to be building as much equity as you can, especially as the areas I've mentioned haven't had such huge growth over the last few years, and aren't predicted to in the next few.

Now, we also may live in said house for a few years and instead of buying an IP, turn that into an IP and buy something else to live in. I guess in this situation it would be good to have it with an IO loan, but if it doesn't work out that way and we stay there then I'd feel I'd wasted x number of years paying interest but no principal.

Any help would be appreciated.

G.
 
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Just because you have it as IO doesn't mean you're wasting time. Instead of having the principle portion going to the home loan it is saved in the off-set account. In essence you are paying the same interest (COST) either way but when it comes to time to change to IP you have a higher debt to claim interest expenses on.
 
Hi and Welcome

What Bradsdad said

Another immediate upside of using an IO loan with the "ideal minimum deposit: ( and that varies with each transaction, risk profiles etc ) is that you retain the cash as cash.

Sounds dump,but lets say one commits most or all of their deposit into the home deposit.

lets say in your case 150 k, 500 k purchase , so 350 k loan. The min deposit without LMI is 100, leaving 50 k as a buffer or 50 k with a moderate LMIE premium leaving 100 k as a buffer.

When the place is turned into an IP ( as it often is with people that come to this site, since they have a different view on properties), on the 50 k deposit you then have 100 k for the new PPOR, and you have 100 k more deductible debt from day on you trun the old PPOR nto an IP'

The other benefit thats not so obvious is in the case of loss of income you can draw on your cash for a while to overcome job loss or illness etc.

Some say, no worry I can borrow the extra deposit back. Try that when you have no income, its not good forward planning.

Its good you are looking at all these options because the wrong decision can cost tens of thousands and cause lots of tears.

ta
rolf
 
Thanks Rolf and Bradsdad for your replies.

One thing I have been thinking is, does the money in an offset yield any interest? Never had one so really don't know.
And doing what you have suggested would need dicipline to save that principal and not use it for other things right? I guess that's what I meant when I said it may feel like a waste of time.

I think if you are committed to x amount each month on a P&I loan you will find ways to pay it even in tough times, but if you only have to pay interest, then you may get lazy or commit to other things.

I'm certainly open to suggestions and have considered what you have said above, I guess I just want to be clearer on the benefits of doing it either way.

Thanks,
G
 
Offset accounts don't pay interest like a regular savings account, but they do save you interest on the mortgage.

A high interest savings account might pay 6% interest. The recent budget will change how this is taxed so it's a good place to store cash. After about $20k in the savings account, you'll start to pay tax on the savings so the returns decrease after a point.

An offset account might save you 6.7% interest, so you're 0.7% ahead. You don't pay any tax on this at all.

It's hard to find a better place to park cash if you want to maintain it as cash.


You've also identified one of the biggest downfalls of offset accounts. The cash is easily accessible and people often don't have the discipline to maintain the extra savings, put an bit extra in every month and make sure it stays there. You can do things to help yourself such as have a second account for your living expenses and keep a budget, but ultimately it comes down to being responsible to yourself.
 
yep other people have mentioned, the reason to go IO+offset (with minimum deposit,, e.g. maybe 80%, rest in offset) is not that its better for a PPOR that you can guarantee with be a PPOR forever (who really can? unlikely), its to cover you for if/when you want to upgrade or whatever, and turn that PPOR into IP.

just look at all the threads people are posting about a PPOR which has been paid down a lot, and now they want to turn it into an IP, but can only claim a fraction of interest on it as tax deduction due to the smaller remaining loan amount. cant just whisk away all the cash in the offset and put into the (non-deductable) offset of the new PPOR, because if u increase the loan amount on the IP for a non-investment purpose (funding PPOR) then that increase portion isnt tax deductible.
 
Thanks PT_Bear and PeterC.

Prior to starting this thread I had a different way of thinking
and I found this older thread from last year which basically agrees with what I was thinking.

http://www.somersoft.com/forums/showthread.php?t=54812
Good work crc_error :)

I know it may not suit everyone, but I'd think I'd rather have at least 60% equity in my PPOR and then buy an IP, then repeat and buy second IP etc..

I know there are benefits to using IO, but I'd like to have x number of properties fully owned by the time I retire and not have to worry about IR's, servicability etc.
 
Hi GMAN

Pls dont take it the wrong way, but the discussion may have gone right by you.

If you have a 60 % actual LVR, or a 60 % notional LVR ( the 20 % sitting on offset) has the same effect on IRs and other cashflow related issues.

Indeed its a much better risk managed tool in most ( but not all) cases.

Where its not smart to hold cash in offset is where you have really tight serviceability ( then the argument there is that you will be taling an increased risk of default to lack of buffer) and where there are reasons why cash isnt a good thing around you.

Unless you are going to buy an IP within 3 mths or so of buying the PPOR, you could be taking an increased risk with the so called low risk, lowest LVR position

ta
rolf
 
going P&I for your PPOR means you can never turn that into an IP without losing all/a lot of tax deductibility. going P&I for an IP, unless you have fully paid off your PPOR, means paying off the IP when it should be going to the non-deductible debt.

whats your strategy here? are you planning to only have 1 active loan at any time?

as for the P&I as a means to force you to make repayments in tough times, that just comes down to self-control. if you dont have any then its going to severly limit your abilities to successfully invest in property (or anything).
 
Thanks for the replies.

Hi GMAN
Pls dont take it the wrong way, but the discussion may have gone right by you.
No, I understood it but I guess I should have stated my investment intentions a little more clearly to begin with.
If you have a 60 % actual LVR, or a 60 % notional LVR ( the 20 % sitting on offset) has the same effect on IRs and other cashflow related issues.
That I understand
Unless you are going to buy an IP within 3 mths or so of buying the PPOR, you could be taking an increased risk with the so called low risk, lowest LVR position
Why is it an increased risk? I wasn't planning on buying for at least a few years (2-3) as we have a small child and planning on another after the house purchase so we'll see how things go after that. Hence my thought of paying down the debt for a few years first.
ta
rolf
whats your strategy here? are you planning to only have 1 active loan at any time?
Not necessarily, but I would rather have 5 smaller debts than 5 big ones.
as for the P&I as a means to force you to make repayments in tough times, that just comes down to self-control. if you dont have any then its going to severly limit your abilities to successfully invest in property (or anything).
Agree, and I should point out I am a very good saver and have very good control with money, I guess I was making the point of self control as a general comment for people on IO loans for their PPOR rather than my own personal experience

I guess my stategy (if you could call it one) is to own CF+/Neutral places in rural areas as I can get in with less money up front.
I earn reasonably good money now and that should continue so I don't think servicability would be that much of an issue, but I'd rather have something which is (eventually) paying for itself.
I'd like at some point to have a number of properties with decent cashflow and no outgoings from my pocket.
 
Why is it an increased risk? I wasn't planning on buying for at least a few years (2-3) as we have a small child and planning on another after the house purchase so we'll see how things go after that. Hence my thought of paying down the debt for a few years first.

Taking a step back from ur current personal circumstacnes the following are just some circumstances that we have come acors in real life. This is where people (perhaps like you) wish they had retained their cash and not tipped it all into their current PPOR as a deposit

1. Income loss. If you have taken the majority of your cash into aPPOR deposit, you have small or zero buffer. You cant re borrow with pension based or insurance based income such as compo or Income Protection Insurance

2. Loss of opportunity ( investment business or the like) due to serviceability or changes in lending environment. Had cash been held back instead of tipped into the PPOR as a deposit..............

3. Change of circumstances. Your best laid 5 to 10 year plan will probably change. If your current PPOR needs to be turned into an IP for whatever reason you have lost 10s of ks ( or more) of tax deductions


All for what ?

Payyour debt down by all means, Smart move, But do it in a way that maximises your future options.

There is this undertow of thinking which is along the lines of if I have less debt Im at less risk of xyz

The core thing really I believe is to make sure you manage YOUR RISK, not the lender

ta
rolf
 
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If you have a 60 % actual LVR, or a 60 % notional LVR ( the 20 % sitting on offset) has the same effect on IRs and other cashflow related issues.

Hi Rolf,
thanks.
This is the point that has stuck and also from reading other posts of a similair nature makes much more sense to me.
I've still got a few months to think about it so I appreciate the advice and will certainly take it on board.

Cheers,
G
 
Great thread.

I am in a similar situation to G Man, except I have just purchased first home yesterday and am going to the bank tomorrow to clarify finance.

Subsequent to reading this thread I have spoken to an accountant who has suggested the advice here is correct. Provided you have the discipline there is no reason not to use an offset to maintain the tax deductibility on the debt, particularly if you intend to tranform to an IP.

A couple of questions:

- When I got pre-approval from CBA it was on an I+P basis. Will it be a problem changing the actual loan to IO?
- Will I pay a higher rate of interest? At what point does it become not worthwhile if this is the case?
- If I go IO and offset, would it be correct to say there is no need to have a redraw facility attached to the loan, as there will be nothing to redraw? Or is it good to still have the facility in case I decide to pay down debt in the future?

Thanks for the thread so far and for any responses, this sort of info is quite honestly brilliant. I imagine alot of FHB's get caught out who aren't aware of such things. I was lucky to have stumbled on this thread.

Thanks

SYDB
 
Hi Syd

IO request should be ok, as long as your serviceablity isnt marginal, since with IO they calc repayments over 25 years rather than 30

Rate should be the same PI or IO

I would still activate the redraw, its free and sometims its useful

ta
rolf
 
Hi Rolf,

My serviceability is excellent so should be fine to go IO with offset. I will activate the redraw, its part of the package as I understand anyway.

I was once a cynical bear on property. Now that I have come full circle, I can only say the advice here is invaluable.

Thanks again

SYDB
 
I was once a cynical bear on property. Now that I have come full circle, I can only say the advice here is invaluable.

Thanks again

SYDB

Welcome SYDB into the light!!

Full circle is not an understatement if i remember your earlier posts a bear u sure were. :)

Now you have left the dark side try and avoid the perma bears on this site that have no investment properties and will try and bring you down. Personally I can't understand what motivates people who have no investment property and no intention of buying one to post on such a forum.

I don't knit and have no intention of knitting either so the prospect of spending hours on a knitting site telling people their knitting will lead to their ruin has no interest to me at all.;)


Cheers Bt
 
Welcome SYDB into the light!!

Full circle is not an understatement if i remember your earlier posts a bear u sure were. :)

Now you have left the dark side try and avoid the perma bears on this site that have no investment properties and will try and bring you down. Personally I can't understand what motivates people who have no investment property and no intention of buying one to post on such a forum.

I don't knit and have no intention of knitting either so the prospect of spending hours on a knitting site telling people their knitting will lead to their ruin has no interest to me at all.;)


Cheers Bt

Thanks BT. Just waiting for finance and val to be approved, then off we go.

Decided we couldnt put our life on hold forever for fear of what might happen, of the Steve Keen crash. Very very happy we made this decision. It was certainly the right time for us.

I still understand where the bears are coming from though, property is relatively expensive in Sydney and Melbourne in particular and it becomes quite emotional for people as they cant afford what they may have hoped for.

I think in the end you have to make a choice and live by it. There are risks both ways, no one should complain, their decisions are their own.

SYDB
 
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