Finance implications for no mortage PPOR?

[jech]

Hi all,

Planning to buy a PPOR outright, and wondering if there are any things I should consider?

One thing would be if I intend to rent this out down the line, I wouldn't get any deductions and it'd be positive geared - is this good or bad

Edit: Thanks for all responses from the usual guru's. I understand what's been said, however I should add that the cash is coming from my parents, who cannot seem to understand all the said principles. I figured if they insist, then why refuse...

 

[Aaron_C]

Having no interest deductions is bad. The only time you should repay all your mortgage debt is if you intend to live in the PPOR forever and invest elsewhere.

 

[Peter_Tersteeg]

Owning your own home outright is a wonderful thing, but as Aaron suggests, you'll miss out on future deductions if you turn it into an IP later. There may be more effective ways to structure this.

An alternative would be to purchase the property with an 80% interest only loan and an offset account. This is essentially what an investment loan might look like from day one.

Immedately after settlement, you put funds into the offset account to effectively pay off the loan. You should not put it into the redraw account, but into the offset account.

This will reduce your interest bill to zero, but you'll still effectively owe the bank the full amount. This way, when the property becomes an investment, you can draw down the cash in the offset account for any other purpose (such as buying a new PPOR), without effecting the tax deductability of the loan over your first property.


If you simply buy the property outright, you can still get a loan over it later to access your equity. The problem is if you want to do this to buy an new PPOR, the loan won't be tax deductable becuase the purpose of the loan is to purchase a PPOR (even though it's secured against an IP).

 

[Rolf Latham]

Hi all,

Planning to buy a PPOR outright, and wondering if there are any things I should consider?

One thing would be if I intend to rent this out down the line, I wouldn't get any deductions and it'd be positive geared - is this good or bad

Hi jech

Pete's advice is sound

Be careful though with the lender choice.l

Not all offsets are created equal, and some kenders don't do io on ppors

Ta
Rolf

 

[Sunfish]

Having no interest deductions is bad. The only time you should repay all your mortgage debt is if you intend to live in the PPOR forever and invest elsewhere.

Having no interest to pay is great freedom. Don't believe anything to the contrary.

 

[Rolf Latham]

Having no interest to pay is great freedom. Don't believe anything to the contrary.

Absolutes don't always hold.

In this particular case, the lack of a loan to gear against later may be a very expensive bit of poor planning.

If one will stay in their ppor or always sell to move on thenits not an issue, but if the op converts an unencumbered poor to an IP, and then borrows to buy a poor. Ouch that will hurt to the tune of thousands per year

Ta
Rolf

 

[Jamie M]

I would seriously take into account Pete's advice above.

From your post, there seems to be a bit of uncertainty as to how this property will be treated in the future.

The structure Pete has outlined provides you with flexibility in the future (if it becomes an IP you'll have a deductable debt to claim against). This could potentially save you a lot down the track.

Cheers

Jamie

 

[htopg]

Having no interest to pay is great freedom. Don't believe anything to the contrary.

Both strategy will have no ongoing interests.

Strategy 1: buy PPOR outright
PROs:
- no interests whatsoever
- no annual fee of $300-$400 or so
- sense of achievement in life, hold your title deed in hand
CONs:
- if need to convert to IP, lose tax deductibility

Strategy 2: borrowing 80% and then cash into a 100% offset account
PROs:
- no ongoing interests
- if need to convert to IP, you have max (80%) tax deductivity
- you have large money in your offset for unexpected events
CONs:
- interests between the date when money was drawn from loan and the date you put cash into 100% offset account
- annual fee of $300-$400 (most loans charge annual fee for offset feature)
- no title deed in your hand

 

[Terryw]

after paying cash for this how much extra cash would you have?

probably still not good idea to pay cash for a property i think - even if very wealthy.

i would gift the cash to a discretionary trust and borrow it back . the spouse least at risk should borrow and go on title.

 

[Rolf Latham]

after paying cash for this how much extra cash would you have?

probably still not good idea to pay cash for a property i think - even if very wealthy.

i would gift the cash to a discretionary trust and borrow it back . the spouse least at risk should borrow and go on title.

But I was told the best place for my title deed is my safe

ta

rolf

 

[Aaron_C]

I disagree sunfish. It is always good to have a mortgage on the property. It protects you against fraud.

 

[THEGREAT888]

I disagree sunfish. It is always good to have a mortgage on the property. It protects you against fraud.

Agree.

Though it is also important to remind people, the benefit of a deduction for tax purpose will be useful MAINLY to high bracket tax payer.

 

[jech]

Updated edit

 

[Rolf Latham]

Agree.

Though it is also important to remind people, the benefit of a deduction for tax purpose will be useful MAINLY to high bracket tax payer.

um, disagree, in this scenarion even someone on 30 k would benefit

Agreed someone on 100 k plus would benefit even more

ta
rolf

 

[Terry_w]

Get some legal advice if your parents are gifting. many things to conisder:
- is it a gift or a loan?
- whichever it is it should be documented
-centrelink issues
- asset protection issues - yours and parents
- borrowing issues
- estate planning issues

Generally I would recommend parents not directly gift to children.

 

[Sunfish]

Though it is also important to remind people, the benefit of a deduction for tax purpose will be useful MAINLY to high bracket tax payer.

Where did Jech say he was in a high tax bracket? Did I miss something?

His recent edit did not give me that impression.

I stand by my statement, unedited.

 

[Lawry]

I disagree sunfish. It is always good to have a mortgage on the property. It protects you against fraud.

Hi, can you please elaborate on this comment? What type of fraud do you mean?

 

[Aaron_C]

Hi, can you please elaborate on this comment? What type of fraud do you mean?

Unencumbered property means that you own the property and can deal with it as you wish. The issue with this is that someone can pretend to be you (aka fraud) and sell the property to someone without you knowing. If a mortgage is on it, the bank will be notified of any sale and hence stop any fraud occurring.

 

[Sunfish]

I can't remember the details of the case but I believe it was a one off. My deeds are still with the bank which once had a covenant, am I not covered for your infinitesimal risk?

Do you get out of bed in the morning?

Edit: He was not living in it. I actually live in my casa.

 

[Terry_w]

There has been lots of title deed fraud. Always happens on unencumbered properties because there is no discharge of mortgage that needs to be followed, so it is much easier.

What the offenders do is forge the owners signatures and sell. The owner would generally be covered if this happens - I think there is a title assurance fund for this. But having a mortgage is a simple way of preventing this and having to go to the hassle of proving fraud and trying to get your house back - what if an innocent third party was registered having bought it from the criminal? In Australia there is indefeasibility of title.