First IP, Structure the loan

[glenn123]

Hi Guys,

this is my first invesment property. my position is as below:

PPOR Loan $80,000 ;
Money in Offset : $60,000 ;
Value of PPOR: $450,000

Loan (borrowing capacity) approved for $850,000
IP Value : 620,000
Stamp duty : ~ 16,000 (includes NSW brand new house grant of -$5000)
conveyencing cost : $1400

I want to get the maximum tax deductability, so i have asked the lender(same for PPOR and IP) to include all the cost on the loan (i.e 100% of property value plus other costs). this arrangement is being offered at no extra cost to me.

The IP builder wants me to put in a token amount when signing the contract and after than within 10 days put in the 10% bond.

I am getting the 10% deposit bond from the lender for a fee (~$600), now if i put in the token amount (which is from my saving account and not borrowed) , i am worried that this token amount will not be tax deductible (because its not borrowed),

Is there a way oround this or is my understanding incorrect? Thanks heaps....

 

[Jamie M]

Hi Glenn

You generally set-up a second loan against the PPOR which is enough to cover the deposit and costs on your IP purchase.

You then borrow the balance as a separate loan securing the IP only. It can be with the same or another lender just as long as the properties aren't cross collaterised.

You're right about using savings - I'd avoid it and use borrowed funds instead to maintain full deductibility on the purchase.

Cheers

Jamie

 

[Mick C]

PPOR Loan $80,000 ;
Money in Offset : $60,000 ;
Value of PPOR: $450,000

^ either you have a lot in redraw or you started with a very low LVR loan...
I hope it's the latter.

I want to get the maximum tax deductability, so i have asked the lender(same for PPOR and IP) to include all the cost on the loan (i.e 100% of property value plus other costs). this arrangement is being offered at no extra cost to me.
.

Your crossing your loan...avoid if you can ( search the forum regarding pros and cons of crossing)

You should split the PPOR loan and then use this funds as 100% lend towards the IP, it can still be done with the same lender- same outcome, more flexibility and less hassle in the future.

The IP builder wants me to put in a token amount when signing the contract and after than within 10 days put in the 10% bond.

I am getting the 10% deposit bond from the lender for a fee (~$600), now if i put in the token amount (which is from my saving account and not borrowed) , i am worried that this token amount will not be tax deductible (because its not borrowed),

Is there a way oround this or is my understanding incorrect? Thanks heaps....

^ the token amount is probably only less then $1,000 im pressuring? if so small cost to worry...just let it go. I always suggest to my clients to pay all token and holding deposits from your own cash- in case you do NOT end up going ahead with the deal/purchase.


As always seek independent advice, as the info given are general in nature.

Regards
Michael

 

[vaughan]

I want to get the maximum tax deductability, so i have asked the lender(same for PPOR and IP) to include all the cost on the loan (i.e 100% of property value plus other costs). this arrangement is being offered at no extra cost to me.

Oh, there probably is a cost to you, it's just not up-front.

Make sure, and check twice, that your PPOR is not being used as security for the IP. This is called cross-collateralisation. It most likely is, because 100% loans is typically a sign.

Search the form for the pros and cons of x-col. (Hint: the pros are few for you, many for the lender.)

You can get close to 100% deductibility without x-col, but you need to structure your loans right. Basically, you free the equity on your PPOR and get separate accounts for the loan (preferably interest only). You use this equity-loan for the buying costs and the 20% deposit (or less if you want to pay LMI). Do NOT use any money in this account for personal or non-deductible purchases. Never, ever.

The rest of the 80% (or more of you got LMI) of the IP's purchase price is a completely new loan that is secured ONLY against the IP itself, not your PPOR. (It's the securing the IP against itself and the PPOR that is the cross-collateralisation. It means that when you go to sell either property you'll need to un-scrabmble the securities, and it can get complex and expensive.)

The smart thing is that you have only spent 20% of you own money, so there is more left for other purchases.

 

[Terry_w]

Sounds like you may be cross collateralising.

I wouldn't do it the way you described myself.

I would set up a separate LOC on your PPOR and pay the token deposit from that account. Also borrow all associated costs. This can avoid the bank guarantee/deposit bond too too.

You are right to be worry about the deductibility of interest on your deposit money. Although this would be a small amount.