Finance Options

[Milkieboy]

Hi All

Just about to buy my first IP. Have spent weeks reading all the threads on here and gaining alot of knowledge. Just want to hear some experienced peoples advice on the following for financing on a sub250k IP, with plans to by IP2 within 12 months and then regularly from then on.

If this has been answered somewhere else please point me to the thred

Currently my PPoR is worth +450k with a 240k LOC with 125+ owing.

Broker advises
draw 20% plus costs out of PPoR and finance the rest to purchase IP so not to pay mortgage insurance

Tax Advisor advises
refinance PPoR with same bank that IP will be purchased borrowing the full amount for IP plus costs EG +100% finance on IP, thus keeping non dectuctable loans low and tax deductable loans high. Better for tax time.

He figured
PPoR value +450k
IP value +250K
Total equity 700k
Total loan with one bank would be approx 400k therefore under 80%lvr so no mortage insurance.

Any advice on the pros and cons of each setup would be greatly appreciated.

Thanks in advance
Ian

 

[Qlds007]

Think you will find the 2 strategies produce the same result just the structures are different.

Establish a LOC behind your existing PPOR loan and draw the 20% deposit and acquisition costs out of this.

Set up the new IP loan on a standalone basis and borrow 80% - 85% to avoid LMI.

The total amount interest on the 2 loans will be tax deductible yet not X collateralised.

Sounds like your broker could be the way to go.

 

[alexlee]

I don't see a tax difference, here. Either way you're going to be able to deduct the full amount of whatever the IP costs you, but no more. I don't see the advantage in what the tax guy is suggesting. You'll have to keep the paperwork straight, and I agree that you can and will be able to avoid LMI in this case.

The only thing I would ask is, is your PPOR loan IO or P&I? It may make more sense to refinance the PPOR, get a new IO loan with an offset, use part of the loan proceeds to pay the 25% for the new IP (borrowing 80% against it) and put the remainder into your offset account.
Alex

 

[Milkieboy]

Thanks Richard and Alex.

To summarise what I think you are saying that the 20% +costs from the PPOR used to purchase the IP are classed as costs of the IP and therefore dont increase my non deductable debt?

EG my total deductable dept is the 80% mortage on the IP and the 20% plus costs against my PPOR debt

Yes Richard the PPOR LOC is IO

I also dont want to be x-collaterised and was concernedthe tax guys way seemed to do this.

Ian

 

[Qlds007]

Absolutely.

 

[Milkieboy]

Thanks Richard. I am a bit baffled by the Tax Accountant saying that his way gives more tax deductable debt. Maybe had something to do with the business card he put in my hand for another broker saying use this guy

 

[willy1111]

The main thing is that if you do the 20% for costs out of your current bank - make sure it is a split, ie it is a separate account from your actual home loan.

I'm probably stating the obvious here, but thought it was worth mentioning.

 

[Milkieboy]

Hi Willy, your not stating the obvious to me i wasnt aware I needed to do this . By just using 20% plus costs from my PPOR doesnt give me a split loan.

How do I achieve this, PPOR is with one bank and IP will be with another. Might be easier just finance the whole lot with one bank with the broker and have it setup right from day dot.

Ian

 

[Les]

G'day MB,

How do I achieve this, PPOR is with one bank and IP will be with another.

To my mind, that is a GOOD way to be !! For good reasons:-

1. If things got "tight" for you, and the Bank came looking to sell a property, they'd see a PPOR with lots of equity, and an IP in hock up to the eye-balls. Guess which one they'd choose to sell to recoup their money?

2. By keeping your PPOR with one Bank, and IP's with another, step 1. can NEVER apply !!

Might be easier just finance the whole lot with one bank with the broker and have it setup right from day dot.

3. By NOT refinancing all with one Bank, you save a lot of costs that are unnecessary. And the above scenario (step 1.) never applies as you have one Bank holding PPOR, and another holding the IP.

HOW you do it, is by approaching the PPOR's mortgagee (Bank) and asking for a separate loan to be set up against the Equity you have in the PPOR today. Usually a LOC (Line of Credit), but doesn't have to be. Keeping PPOR (undeductable) and IP (deductable) costs separate is PARAMOUNT !! Don't mix the funds up, once you have it set up,

Regards,

 

[Milkieboy]

Thanks Les some great advice in there. Sorry for all the questions but:

If PPOR with one bank is made up of PPOR mortgage and 20% deposit plus costs for IP (currently a line of credit). As long as I only make interest payements and not withdraw any of the LOC for other purposes on this account is this still classed as seperate (on paper anyway)?

Thanks
Ian

 

[Les]

G'day Ian,

Having re-read this from you:-

Currently my PPoR is worth +450k with a 240k LOC with 125+ owing.

I guess I have questions of you.

First, what was the $125k on LOC used for? All purely investment? Or personal? Or a mixture

Second, depending on the answer to 1. consider asking the Bank to split the current LOC into "sub-accounts" (shouldn't cost much). Then use the new sub-account with $240k minus $125k = $115k available as your "Investment Only" account - take Deposits, costs, etc. from there, and DON'T draw any personal funds from it.

If the $125k was already for Investments, (shares, or whatever), I think I'd still do a "split" to keep the IP part separate anyway.

And, if there might be a need to draw Personal funds from the LOC, then set up a third sub-account - and only use THAT account for Personal drawings. In this way, you prevent giving your Accountant a heart attack at Tax Time and save yourself a lot of future grief too.

If PPOR with one bank is made up of PPOR mortgage and 20% deposit plus costs for IP (currently a line of credit). As long as I only make interest payements and not withdraw any of the LOC for other purposes on this account is this still classed as seperate (on paper anyway)?

Sorry, Ian, I wasn't quite sure just what you were asking there - so I decided to spell things out a bit better (above). Hopefully that has already answered what you were asking. But do come back if still unclear,

Regards,

 

[Rolf Latham]

use a separate loan split agaisnt the PPOR for the IP deposit and costs..

Dont muc around with trying to leave it just the one loan to try and save some pennies to later find you have created the Frankestein of tax.

Your broker seems to have more savvy than your accountant here.



ta
rolf

 

[Milkieboy]

Hi Les, thanks for taking the time to provide input

I will try and sum up how loan will look aftering buying IP (based on how broker will set it up). My current LOC is my PPOR mortgage, with salary going in and credit card and cash coming out. It is my only bank account.

So after IP purchase

Loan 1
LOC with bank 1 comprising of
125k PPOR mortgage
20% deposit and costs for IP

Loan 2
IO loan with bank 2 comprising of
80% of mortgage of IP

I undestand that in this situation I will now longer be able to have my salary going in to loan 1 and drawing any funds out for personal spending. Will need an everyday account with any bank from now on.

My two questions are

Tax accountant wont have the heart attack.

The 20% deposit and costs in loan 1 are tax deductable debt as they were used in the purchase of an IP

Thanks
Ian

 

[Les]

Still missing something there, Ian:-

Hi Willy, your not stating the obvious to me i wasnt aware I needed to do this . By just using 20% plus costs from my PPOR doesnt give me a split loan.

When looking to purchase an IP, FIRST set up a sub-account on your LOC so that transactions are recorded SEPARATELY from your Personal (wage, credit card, etc) loan.

So, using your last example, let me add to it:-

So after IP purchase

Loan 1
LOC with bank 1 comprising of 125k PPOR mortgage
Sub-Account of Loan 1 = 20% deposit and costs for IP

Loan 2
IO loan with bank 2 comprising of
80% of mortgage of IP

I understand that in this situation I will now longer be able to have my salary going in to loan 1 and drawing any funds out for personal spending. Will need an everyday account with any bank from now on. Ian, if you set up the sub-account (to be used ONLY for Investing) then you can continue to use the original LOC account just as you are today. The Sub-Account will track the IP side of things

Have a big re-read of all that others have said here - we are all pretty much on the same track. It seems we agree that your MB may be giving better advice than your current Acct.

I'm off to hit the sack - see you tomorrow,

Regards,

 

[Milkieboy]

Thanks to everyone for the advice, I am clear what I need to do now.

Ian

 

[wpggtom]

Hi, this advice is great as it's answered much the same questions I had. I just have a question of Les... do you have a separate sub-account for each IP or just the one sub-account for all properties? Also, would you go to a different lender for each property?

Wendy

 

[Les]

G'day Wendy,

I just have a question of Les... do you have a separate sub-account for each IP or just the one sub-account for all properties?

Sub-accounts are worthwhile where a mix of Personal and IP loans are held against the same asset (usually your PPOR). Most times, you will end up with different Accounts - based on your purchases. The sub-accounts are useful where you may wish to draw down Equity for a mixture of Personal and Investing purposes
e.g. It's now 5 years down the track - you have 5 IP's, you want to buy another IP, and you also need to borrow a "little more" for personal use too. So, you check your Equity, find an IP that has $120k available, draw $80k as a deposit on your next one, but ALSO take $40k for "Personal Use". In this case, I'd suggest getting a separate account (or sub-account) for the personal use. This keeps the Personal and Investment loans separate, even though they are held against the same property. Saves a Tax nightmare down the track.

Also, would you go to a different lender for each property?

I can't see a need to do that, but, over time, I have accumulated IP loans from a few different lenders in different accounts as circumstances dictate.

The main point is still to keep the personal loans separate from the IP loans.

Regards,