First property - IP or no?

[Auri]

Hello,

I'd really like your thoughts on this. I'm new to this and feel like there's so much to learn (including learning what exactly are the things that I have to learn), so I'd like to bounce some ideas off people who have more experience than I do.

Here's my situation:
Purchased a unit OTP 3 years ago, settlement is in a few months. This is in Belconnen, ACT.. (Yes, area currently has issues with oversupply :/) Initially, I wanted the place because I love the area. Right next to the lake and shopping centre. University of Canberra nearby (where I worked part time) and easy public transpo to CBD (where I worked full time). I was going to live there for a while, claim it as my first home, get the FHOG + stamp duty concession. However, since then I found an awesome job in Sydney and had to relocate. Currently renting in Sydney.

What I think my options are:
- Continue with claiming it as first home for the first 6 months then convert to IP - I've got opportunites to do some contract work for my current company which would require me to be in ACT next year - only a few days per week though so that means I will have to keep renting my current place in Sydney.
- Forego the FHOG etc for now and just have it as an IP from the start.
- Sell - Probably not ideal considering the market at the moment?

Another thing I'm not sure about:
- I will have spare cash after 20% deposit and 12 months of repayments (P+I or I at current rates). I could either put in a bigger deposit or leave the extra cash in an offset account - should I aim to pay off this loan quicker (and I guess build equity quicker) or leave myself some cash?

My current thoughts:
- Claiming it as first home means 20k in savings (stamp duty + FHOG).
- Having it as IP from the start means claiming interest only repayments as deductions for those first 6 months which would be about 3k less tax. Also means that I can opt for FHOG later. Best case scenario I get a tenant straight away, that would be maybe 8.5k.

I'd really appreciate your thoughts on:
- What you would do in my situation or
- What other things I should look into to compare my options or
- What kind/s of professional advisor should I go talk to (and any specific suggestions for Sydney?)

 

[zimby]

Visit an Property Accountant maybe?

 

[Jamie M]

Hi Auri

Without knowing the full details of your situation I'd be inclined to set up the loan as interest only with an offset as opposed to principal and interest.

This will provide you with flexibility - which it sounds like you really need (transient job, etc).

If you do some reading on this forum about interest only with an offset you'll clearly work out why it could benefit you.

Cheers

Jamie

 

[Auri]

Hi Auri

Without knowing the full details of your situation I'd be inclined to set up the loan as interest only with an offset as opposed to principal and interest.

This will provide you with flexibility - which it sounds like you really need (transient job, etc).

If you do some reading on this forum about interest only with an offset you'll clearly work out why it could benefit you.

Cheers

Jamie

Hi Jamie,

Thanks for that - My current understanding is that having the money in an offset account would decrease the total amount of interest I will have to pay overall + give me the flexibility to take that money back if in case I need it (instead of eg redraw which usually comes with fees). While having that flexibility would be a plus, it is not really a necessity for me (my job isn't transient, I've got permanent full time work but my company would contract employees out to clients from time to time).

I guess I'm trying to weigh that flexibility against increasing equity through paying off the principal. I will definitely look around a bit more on these forums about offset accounts though, and see what else I can learn.

Auri

 

[Brady]

IO w/offset FTW.

If funds are in the offset you can always create equity by paying off the pricipal whenever you like. But you can't create flexibility by redrawing and placing funds into the offset without possible issues.

 

[travelbug]

I guess I'm trying to weigh that flexibility against increasing equity through paying off the principal. I will definitely look around a bit more on these forums about offset accounts though, and see what else I can learn.

Auri

Hi, you almost have it right BUT- it's not have an offset OR p[aying off the principal. It's the same thing. You pay extra money into the offset account as oposed to giving it to the bank BUT you have the option of taking it out if you want.
What Jamie is referring to wioth flexability is the fact that you can take the money out and still have the amount as tax deductable. So if you pay down the loan then want to borrow to buy a home to live in that loan will NOT be deductable. However, if you put the extra payments into an offset instead, you can take the money out and all the loan is tax deductable, thereby saving you thousands of dollars every year on tax.

This is NOT the case with a redraw. Make sure you have an offset, NOT a redraw.