FHB PPoR>IP offset account loan?

[PeterC]

you can only claim interest on the portion of any loan which is used for producing an income. if you somehow get a 500k loan (not sure how you'll manage that?) for which only 350k is for the house, only 70% of the interest is deductible (350/500)

http://www.ato.gov.au/individuals/c...htm&pc=001/002/002/010/005&mnu=&mfp=&st=&cy=1

 

[Jasmine]

you can only claim interest on the portion of any loan which is used for producing an income. if you somehow get a 500k loan (not sure how you'll manage that?) for which only 350k is for the house, only 70% of the interest is deductible (350/500)

http://www.ato.gov.au/individuals/c...htm&pc=001/002/002/010/005&mnu=&mfp=&st=&cy=1

Thanks, but if I purchase an IP first, and use the $150k (i.e. $500k-$350k) as the deposit of my IP. I think the interest of $150k should be fully deductible, right?! Then I get some savings few years later, say $100k, and put it in the offset account (that make the interest charge on $500K-100K=$400K only, interest for $150k is deductible or only 30% of interest is deductible?!). another few years later, when I buy another PPOR, I take the $100k from offset account to the new PPOR, but I still get fully deduction on $500k (means $350k for the PPOR converting to IP, and $150k for my IP). Is that correct?

 

[Rolf Latham]

Hiya jasmine


refering to your original q, only 345 would be deductible because that was the remnant debt when the old PPOR became an IP. The money refinanced in that model you are using for NEW ppor, thus is not deductible.

ta
rolf

 

[josko]

Thanks Spectre, although I think I'm going to have to rule out all non-Offset loan types, which scrubs out ING all together. Ideally I'd want that same ING deal with an extra offset functionality at $15/month or so. (which is like BankWest, but with a permanent setup, not just for 3yrs!!)

Hi Barry,

After the three years is up with the Rate Tracker, you could pay a switch fee and switch to another product with an Offset account for $350.

For Instance: Bankwest premium Home Loan at 5.10% (If borrowings > 500k). This is still better than St George, Westpac etc atm.

In the end the Rate Tracker is only converting to around 0.30% higher than most banks are offering AT TODAY'S RATES. In three years time, CBA, Westpac etc may have bumped their variable rates up higher.

It's a fun game.

Regards JO

 

[mortgagedet.]

Why wouldnt you take a 90% lvr or higher and deposit the balance into a 100% offset account from day 1.

Richard,

Putting aside the debate over offset accounts which is a little distracting, this advice seems a little counter intuitive to me.

Barry2104 is initially purchasing a PPoR, which means the LMI is non-deductible. Unless I missed something in his post, he does not have a current requirement for access to the additional 10%.

This begs the question of why he should spend thousands on LMI to deepen his debt burden now? The definite upstream impact of this is:

• LMI is definitely non-deductible

• LMI is spent creating an unecessary, non-deductible write off in it's thousands if Barry2104 wants to switch lenders in the PPoR:IP conversion process

• Barry2104's equity growth is retarded as he effectively pays non-deductible interest on the LMI premium

• The mortgage broker makes more upfront commission

• The lender makes more interest

• Barry2104 has a pile of tempting cash sitting there waiting to be spent (no offence intended Barry2104, however for many mere mortals this money gets whittled away on new carpets.. maybe a widescreen tv etc - I sincerely hope this would not happen to you)

When it comes time to convert, Barry2104 may not need to use that extra $40,000 or so and whilst there is a possibility that market conditions force LMI premiums up, they could also drive them down. The other factor is that we do not know is exactly WHEN this process will happen so the FV of the spent premium is also likely to work against Barrie2104, worsening his outcome as time slips by.

In terms of the discussion around the planned conversion, I am a little at a loss to comprehend the redraw vs. offset argument as PeterC's observation is correct (regardless of term). Barry2104 can bank the extra money in redraw then whip it out (sorry ladies) the day before he buys the new PPoR. I'm not suggesting this is a reason to ignore offset, just pointing out that it doesn't really support it. ie the offset vs redraw consideration can be isolated from this part of the analysis.

On the BankWest product, it is important to factor a couple of costs like the $655 to get in and the 'up to $700' to get out if Bankwest aren't right at the end of the intro - so the better part of $1400...

By the way, also worth noting that at current rates, Barry2104 needs to maintain a balance of almost $3,700 in the offset just to break even on the $15 a month fee.

Anyhow, there's plenty more that is debatable about this thread, but that should be enough to spark the odd flame. After all, it is my first post here.

Protect your interest!

Michael Lee

 

[Rolf Latham]

Hi MD

Perhaps this stated need from barry might have something to do with the general advice ?


I'm considering purchasing my first property (FHB) with my partner. We have a good 20% deposit (excluding the grant) and are looking at townhouses or units/apartments in the low $400's. We plan on living in this place as a PPoR for a couple of years before renting it out & buying a new PPoR but just have a question regarding the deposit:

Redraw or LOC will poison the tax deductability of the redrawn amount and possibly much more. Thats the only thing we know for sure, the rest is perhaps a bit fluffy and open to argument as you say.



ta
rolf

 

[mortgagedet.]

Comm has pros and cons but the offset does sit (for me) more on the con side as most people need to keep a float in the streamline - its lots of balls up in the air...

Gidday Spectre,

Just a quick thought, Nards likes the MISA and she's the one who foots the bill.

With the MISA, the important part to focus on is the last two letters and what they stand for - Saver Account i.e. it operates like the old fashion savings account and lets face it, offset doesn't really achieve that much savings if a good chunk of money doesn't sit still for more than a moment.

A CBA alternative to leaving it in the streamline for those who want transactional offset facilities is run a small LoC ($20K min) which creates an old fashioned kind of structure separation your transaction account (LoC) from the savings account (MISA).

Three downsides (i) LoC may spend most of it's time fully drawn down if the borrower has a revolver profile; (ii) an extra 0.05% on the LoC and of course (iii) an extra $700 DEF for MAV/Wealth customers - but a good broker can get that waived.

Anyhow, main point is that Nards is happy and there is more than one way to skin a cat if CBA makes sense to other borrowers.

Protect your interest!

Michael Lee

 

[mortgagedet.]

Hi MD

Perhaps this stated need from barry might have something to do with the general advice ?

Gidday Rolf,

The potential future need (which I agree needs to be acknowledged and considered) does not explain why Barry2104 should spend the nickle now.

Once he does, there is no turning back, the money spent on LMI is worth more today than it will be in the future even if Barry2104's current 'couple of years' view remains on track.

All of that said, it would help me greatly and perhaps others, to understand which of upstream impacts you consider contestable and what about them is incorrect.

Hiya

the simple way to work this one out is the "purpose test"

whats the use of the money, what are we purchasing with it NOW ? if its investment, then deductible, if PPOR or doodad then no deduction.

Importantly I did not mention LoC, so sticking with Redraw vs Offset and inline with your earlier comment on the 'purpose test', providing the funds are drawn out of the current loan prior to the conversion and the loan is fully drawn at the time of conversion (i.e. no redraw) there should be no impact.

See: http://law.ato.gov.au/atolaw/view.htm?locid='TXR/TR20002/NAT/ATO'&PiT=99991231235958

Having said that, this is a matter of tax law and Barrie2104 should get written advice on his plan from his accountant prior to starting out if he wants a higher degree of certainty.

As for arguing, I'm here to discuss, learn, grow and share, so please keep me on track.

Thank you for your feedback, I appreciate it.

Protect your interest!

Michael Lee

 

[Rolf Latham]

Hiya

There are other good reasons why some people could look at doing a higher than 80 % lvr, like a simple concept I have used and called " whose risk is it anyway"

On why RT suggested Barry might want to look at doing a 90 % lend vs the 80..............

I suppose u could see it like this .


Example

500 k purchase.

400 k loan, means 400 k in tax deduction for the old PPOR when made into an IP.

450 k loan means 450 k in tax deduction for the old PPOR when made into an IP.

The value of offset vs LOC ( and redraw), this is for a separate discussion.

ta
rolf

 

[mortgagedet.]

" whose risk is it anyway"

Thanks Rolf,

The risk is Barry2104's - no doubt. So too is the cost.

This is why I am curious to understand Richards advice which seems quite instructional, yet light on justification or balance. I have found it very hard to come up with a cost-benefit analysis where Richard's advice provides the compelling 'must do now' case in his post.

Whilst Barry2104 hasn't queried this, I thought someone should before he spends his nickel at the risk of discovering the downside through real life experience.

If I roll in your suggestion of CBA (accepting the lowest rate in your range and Barry2104's two year view - higher rate = worse outcome), the numbers, albeit roughly, pan out like this:

LMI

• Premium (including Stamps): $5,787
• FV of LMI (assume 4.25% inflation): $ 502
• 2 Years interest (at 5.14%): $ 586
• Total Non-deductible cost: $6,875

For that Barry2104 money, Barry2104 gets:

• A potential tax deduction on the interest on $50,000 at some time in the future
• plus the other stuff I originally mentioned

That’s the main part of the benefit assuming I follow the strategy properly (and of course there's a number of risks as well).

What is Barry2104's cost recovery view?

Looking at the tax deduction side, assume a normalised rate of 7.24% Interest Only (I assume) so:

$50,000 x 7.24% = $3,620

If Barry2104 has the worst possible tax structure and his marginal rate (albeit current rates) is 45%, his nett annual benefit is:

$3,620 x 45% = $1,629 p.a. (so cost neutral in around 7 years)

If his tax structure is okay, then he's looking more like:

$3620 x 30% = $1,086 p.a. (so cost neutral in say 8.3 years)

So it's reasonable to surmise that it will be at least 7 years before any benefit becomes realised. Of course the 7 year view is way up the end of a best case scenario (i.e. using lower rate for interest costs during PPoR phase, accepting no tax planning, conversion deifinately taking place at 2years etc).

Barrie2104 should properly consider a range of scenarios including the ugly worst case.

It seems more a case of spending the better part of $7,000 in the hope that it will produce a return after a decade or so, during which, Barry2104 is likely to see quite a bit of change that may not be in his plan just yet.

What have I missed in the analysis? Richard - any thoughts or is your thinking the same as Rolf's?

Thanks again Rolf, I've really enjoyed reading your posts.

Protect your interest!

Michael Lee

 

[Rolf Latham]

Hi Micheal


I will leave RT to the bits you have asked there.

The dollars and cents often dont translate into real life, and one can turn the figures over and over and not get a specific result, that will suit a clients actual needs. Suffice to say there are always at least 2 views.

On whose risk is it anyway, it involves a risk transfer, just like buying any form of insurance. Borrowing more than needed can be useful for covering a challenge or an opportity.

It goes something like this


Client scrapes by with a 20 % deposit, to save LMI, since many believe that LMI is a clearly a waste of money.

On the day of settlement the borrower has a 100 bucks in their account,but thats ok, because next week is pay week, and the mortgage isnt due for another month.

Lost opportunity
Now that investment property or share deal of a life time has come past.........but I need to make that depsoit NOW, easy I will refinance and get my cash back out. If you have 3 to 4 weeks to wait then you MAY be ok

Challenge
Need quick cash for various things, medium to longer term loss of income, cash buffer in case of investment shortfall etc etc

I could go on, I have seen such things more than once. There is no vanilla soln,and often the "price" of the loss goes beyond mere dollars,

ta

rolf

 

[mortgagedet.]

Thanks Rolf,

That's a little clearer, as it relates to a different investment opportunity that Barry2104 I must have missed in the thread somewhere. I thought he had only mentioned the IP in a couple of years (which I took to mean 2 years) and which I would hope has a little more planning than one which results in a 3-4 week cash out interval. You know, fools rush in… etc.

Of course it is also not impossible to meet a 3-4 week turn with a well managed top up either.

If there was an urgent need for funds for investment, the home loan is not the only source and short term funding via a range of options could be taken whilst the top-up rolls through.

Importantly, if the investment opportunity is the reason for the top up, the related costs become deductible, whereas Richards structure locks those significant costs into non-deductibility land for an event that may never happen.

This scenario you have laid out seems to deepen the downside and creates a rather compelling argument for Barry2104 to wait until the opportunity is realised, wouldn't you think?

Richard?

Protect your interest!

Michael Lee

 

[Spectre]

Michael

From what I believe you are saying (for some reason I'm sure you'll clarify me here), borrow to 80% for the PPR and skip the LMI. When the IP opportunity comes up, then go back and get the additional 10% cashout from the bank at that time as its more 'easily claimable', and that is what is used as the deposit on the next IP. Or do you recommend just one big loan for the whole IP purchase?

 

[Bradsdad]

Gidday Rolf,

The potential future need (which I agree needs to be acknowledged and considered) does not explain why Barry2104 should spend the nickle now.

Once he does, there is no turning back, the money spent on LMI is worth more today than it will be in the future even if Barry2104's current 'couple of years' view remains on track.

All of that said, it would help me greatly and perhaps others, to understand which of upstream impacts you consider contestable and what about them is incorrect.



Importantly I did not mention LoC, so sticking with Redraw vs Offset and inline with your earlier comment on the 'purpose test', providing the funds are drawn out of the current loan prior to the conversion and the loan is fully drawn at the time of conversion (i.e. no redraw) there should be no impact.

See: http://law.ato.gov.au/atolaw/view.htm?locid='TXR/TR20002/NAT/ATO'&PiT=99991231235958

Having said that, this is a matter of tax law and Barrie2104 should get written advice on his plan from his accountant prior to starting out if he wants a higher degree of certainty.

As for arguing, I'm here to discuss, learn, grow and share, so please keep me on track.

Thank you for your feedback, I appreciate it.

Protect your interest!

Michael Lee

Out of interest Michael,

Would you mind pointing me to the relivant section of the ATO ruling that states a client can redraw funds for personal purposes (different purpose to the acquisition or improvement of the dwelling), the change PPOR to an IP and claim the full debt?

Regards
Steve

 

[mortgagedet.]

Gidday Spectre,

Thanks for the question and yes, I can blab on, but only in the spirit of trying to deliver and support my complete thought.

When the IP opportunity comes up, then go back and get the additional 10% cashout from the bank at that time...

My understanding of what Barry2104 wants to do differs from yours as I read it to purchase a PPoR now then convert that PPoR to IP in a couple of years time, purchasing another PPoR around the same time, as opposed purchasing a new IP which is a different thing entirely - Sorry if I've misunderstand this - I'm juggling a fair bit right now.

...as its more 'easily claimable'..

Sorry Spectre, I but that's a misquote. The only observations I intended to make on claimability of the additional funds (i.e. borrowings that trigger LMI) relates to Rolf's clarification that there might be a need for quick access to the extra equity for investment purposes.

In this case, yes, they are Investment related ergo should be deductible, however Richard's recommending incurring the expense as personal, which Rolf's scenario then coverts to investment at a later date ergo not deductible. Again however, Barry2104 should get tax planning advice on that.

Overall, I'm simply seeking to understand why Richard is so clear in spending what is effectively almost $7,000 nett on something that may or may not happen two years down the track?

If Barry2104's timeframe slips, the cost of the non-deductible spend compounds. Even if it doesn't why can't it be addressed closer to the time?

In the spirit of balance, these seem like reasonable questions given the cost and risk to Barrie2104 right?

Protect your interest!

Michael Lee

 

[PeterC]

edit: re-reading the ato docs, the loan expenses like LMI are only deductible as spread over the period of the loan, to a maximum of 5 years. so the worst case is you get no deduction if you dont switch it to IP before 5 years are up.

didnt think paying the LMI up front was the only option (of paying LMI...)

 

[mortgagedet.]

Would you mind pointing me to the relivant (sic) section of the ATO ruling that states a client can redraw funds for personal purposes...

No offence intended, however would you mind pointing me to the section of the ITAA which says you can't. After all, the loan would be on his PPoR and for private use at the time.

... Barry2104 can bank the extra money in redraw then whip it out (sorry ladies) the day before he buys the new PPoR...

...inline with your earlier comment on the 'purpose test', providing the funds are drawn out of the current loan prior to the conversion and the loan is fully drawn at the time of conversion (i.e. no redraw) there should be no impact.

See: http://law.ato.gov.au/atolaw/view.htm?locid='TXR/TR20002/NAT/ATO'&PiT=99991231235958

Having said that, this is a matter of tax law and Barrie2104 should get written advice on his plan from his accountant prior to starting out if he wants a higher degree of certainty.

This is relatively minor matter compared to the core concern over Richard's advice to borrow more than required and pay LMI whilst it is non-deductible etc. However tax planning is important as well and Barry2104 should get tax planning advice (if for no other reason than to weigh up CGT implications etc).

Protect your interest!

Michael Lee

 

[Spectre]

If I can rephrase - I'm seeking your thoughts here - say if he puts 20% down today and avoids lmi and then decides to move out in a year or 2.

Assuming that he'll need (in todays terms) funds for the deposit on the new PPR - unless he's saved it - (or IP as I said before which you are correct should have been a new PPOR so apolgies for that).

If/when they go back to the bank in 2 years time, if they dont have 20% at that point in time then I'd figure they'd have to pay LMI then for the new PPOR which I am going to figure will cost more than it would in todays dollars as I cant remember the last time a LMI premium reduced. Kinda like the cost of petrol.

Leaving the deductability out of it, maybe paying a bit of it initially now might be cheaper than in 2 years time(?).

 

[mortgagedet.]

...didnt think paying the LMI up front was the only option

Gidday PeterC,

We agree on this point too, which is the one I'm still trying to get my head around.

The cost yourself unnecessary, non-deductible money now had downside risk all over it which is why I think I must be missing a key point. After all, Richard was quick to urge Barry2104 to:

take a 90% lvr or higher and deposit the balance into a 100% offset account from day 1.

Protect your interest!

Michael Lee

 

[mortgagedet.]

Thanks Spectre,

I know what it's like to miss a point which is why I wasn't sure which of us it was. Tough being human.

Great idea to set the tax bit aside and simply focus on the cost of the decision now. My point all the way through this is that Barry2104 should be offered a balanced view.

Firstly, you are dead right, LMI might go up. Besides the other costs and limitations Richards advice imposes which are a given, what if:

• Barry2104 doesn't need the full $50K - he's paid LMI for money he didn't spend.
• LMI rates didn't increase, but his PPoR value goes up - even if he needs$50K his LMI would go down.
• Market outlook on risk improves and LMI rates do go down - his LMI would go down too.
• Barry2104 decides to stay where he is and the next purchase is an IP (ever had a strategy change?) he's paid non deductible LMI for investment purpose money.
• Barry2104 does what Rolf says and decides to divest in shares - LMI and associated interest should have been tax deductible.
• Barry2104 decides to slow his plan - the FV of the spent money compounds.

... and the list goes on.

The only certainties in the strategy appear to work against Barry2104, spending money now to lock him in to what might wind up being a lemon. (Even setting aside deductibility, which I am happy to do because that's my accountants domain.)

Ironically, Barry2104 seemed to have it right at the outset (IMO) but was swayed by Richard and other folk adding support to Richard's advice.

I'm a huge fan of maintaining mobility and fluidity. Life is uncertain so why lock yourself in to a strategy where the benefits are so limited, questionable and vastly outweighed by the disadvantages?

Again, I am open to learning the rationale behind the idea, because it is yet to be laid out and it just doesn't seem to make that much sense.

Thanks for the input

Protect your interest!

Michael Lee