Getting the finance right ?

[Derek]

Hello everyone. I am now at the starting line..have read the books, bought the PIA software, and as of now have registered for this forum.. I would like some thoughts on financing my first IP. I have bank appointment next week. My PPOR valued $500,000 and owe $55k. No other debts. My income 40k and wifes 50k. Looking to purchase locally for my first IP up to abt 300k.

My thoughts concerning financial arrangements are...
1/ Refinance home loan to LOC to approx 80k
2/ Take second credit line for 320k bringing total LVR on PPOR to 80%
3/ Take fixed rate IO for IP for 240k (LVR 80%) and use the above second credit line to finance the remaining 20%..

I am champing at the bit to get started but want to get the financial side correct so as I dont have to tidy it up at a later date. Your comments/alternatives greatly appreciated..

 

[Rolf Latham]

Hiya Derek

Sounds great.

Id prefer the use of an IO term loan with 100 % offset for the home loan bit for my clients, but otherwise you have it about right !

ta
rolf

 

[Candide]

This plan of action doesn't sound great at all to me Derek.

If you increase your LoC facility to $400k your subsequent borrowing capacity will be assessed on the basis that you and your wife, severally and jointly, are repaying the full $400k. On your respective incomes, will you now be in a position to source additional funds for the proposed Investment Property (and future IPs)? You are advised to limit the LoC facility to the amount of funds you immediately require with the option of increasing the LoC limit when and if required into the future. (Why pay mortgage stamp duty on unused funds?)

Have you considered the ownership structure of the IP? Will it be owned by you both, you, your wife, or perhaps via a very effective Trust structure maximising asset protection amd minimising tax liability (including Land tax). Such structuring can also maximise your borrowing capacity into the future.

I see you have an appointment with the bank. You are presently not ready for the Bank and I am certain the Bank is no way ready for you or your future investemnt aspirations.


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[Mr Ed]

Derek,

I reckon like Rolf you have it about right. Take your PPoR to 80% LVR total of the two loans. Buy your IP with the Deposit & Acquistion costs from the new LoC.

By having a $320k LoC you'll be able to manage your cashflow much easier during highs and lows. Remember to keep the two separated for your accountant.

As for mortgage document stamp duty costs, it's only $4/1000. It's the cost of doing business.

Be mindful that this lender you are visiting may only give you what you want and no more in the furture so get all you can and park it for a rainy day as they say.

If you want to check what they offer talk to a broker, Rolf works by ph.

Good luck and happy shopping for the IP

 

[Rolf Schaefer]

I would say, go for the full 400K LOC while you can, paying $4 mortgage insurance per $1K loan is (IMHO) a small price to pay.

Your circumstances could change further down the track and you may no longer be able to increase the LOC.

Just my 5 cents.

 

[Rolf Latham]

Basic Maxim I feel

Borrow money when you need it most, for when you truly need it, no one will give it to you

Candide raises some valid points but my experience suggests that limiting the LOC to the dollars required for the transaction isnt one of them. Have had too many clients fall into challenges, or miss BIG opportunities by not having immediate funds to hand.

There are the costs (aka "investment") of doing something, and then there are the COSTS of not doing something, my 2 bobs.


ta
rolf

 

[Derek]

Thankyou to all for your input. This forum is great..so many opinions. I have taken on board all that has been said and as a result have broadened my knowledge which is after all the intention of this forum. Thankyou to Candide for raising an important point to consider concerning LOC...take to the maximum or just enough as is required for each IP purchase. Yes Candide I have considered ownership structure. As its my first IP I am sure I wont everything right ( unlike some no doubt!) but I will maintain my investment aspirations and if mistakes arent made then either are decisions.

 

[jjae]

Hi
Whats PIA software how much how good are there other opyions
Thanks

 

[emu]

Hi
Whats PIA software how much how good are there other opyions
Thanks

jjae
search for "pia software", there's lots of threads

 

[Simon]

PIA is great.

 

[Whozat]

Derek,

I reckon like Rolf you have it about right. Take your PPoR to 80% LVR total of the two loans. Buy your IP with the Deposit & Acquistion costs from the new LoC.

By having a $320k LoC you'll be able to manage your cashflow much easier during highs and lows. Remember to keep the two separated for your accountant.

As for mortgage document stamp duty costs, it's only $4/1000. It's the cost of doing business.

A friend is in a similar situation to Derek and keen to set up loans as effectively as possible. In the same situation as above:

1. Would anyone know if the portion of stamp duty on the $320K LOC would be tax deductible, even though the $320K hasn't been fully drawn in this scenario?

2. If after some time savings + wages alone brought the home loan $80K LOC to a zero balance ie. the $80K is essentially paid off, would the logical thing then be to put extra funds into the $320K LOC? (assuming the $80K is plenty for personal expenses)

3. If all rent from the IP also boosted the repayment of the $80K LOC that is the home loan, while maintenance and interest costs came out of the $320K LOC, does this equate to a 'split loan' situation that the ATO frowns upon?

Thanks,

Whozat

 

[Rolf Latham]

Hiya Who

Stamp Duty q will come donw to whom you ask. I would argue that its a borrowing cost and an integral part of the transaction. regardless of how much money you use out of the facility right now. So the Mortgage stamps are depreciable over 5 years or the term of the loan if over less than 5 years for 320. Logic . ................... commercial benefit, Im not going back 3 times to my lender to pull a little bit of loc each time, new fees, new paper work, new vals etc etc, also lcoking in my exist equity. Id be interested to hear an acctant view...............

Once the 320 k home loan is paid off, I would argue friend convert some or all of the LOC, OR any IP loan to an IO offset acct and park spare cash in that. Logic..........Dont pollute tax ded debt with tax paid money, the 320 will quikcly become all non deductible since every redraw made from the 320 for living expenses will then be a NEW loan for non ded reasons.

Answer to 3 is NO. The Harts Vs ATO decision was about the nature of capilatised interest in a scenario where the structure ( and product was specifically marketed as a tax minimisation tool) was specifically derived to minimise the non ded loan by paying nothing down on the IP loan, yet capitalising ALL interest to the investment loan. If I recall its was BOTH the PPOR and the IP interest that was capitalised.................asking for trouble.

ta
rolf

 

[Whozat]

Thanks for the thorough answer Rolf. Clarifies the situation nicely.

Whozat