help with loans please

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From: Kevin Fielding


I have just been to see the loans manager at the bank to get some advice on how to structure the loans for my IP.
She suggested the following:
With an investment loan of say $140,000 for the IP, the bank will loan 80% of this bringing the loan to $112,000. The remaining 20% ($28,000)is classed as deposit and is added to my existing mortgage of $40,000 bringing it to $68,000. To this is added $6000 borrowing costs bringing this loan to $74,000.(p&i with minimum repayments)
Can someone please advise if this is the best way to structure the 2 loans.
The interest on the deposit amount of $28,000 can’t be tax deductible if it’s added to my existing mortgage can it??
Some help would be much appreciated.

Regards,
Kevin
 
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Reply: 1
From: Duncan M


Its not the BEST way but it will work.

The Best Way is for the Bank to restablish your current PPOR morgtage at the
current balance and then establish a LOC against your PPOR back up to 80% of
its value, the bank can then advance you money from this LOC for your
deposit and costs.

Interest incurred as a result of an advance against this LOC will be tax
deductible.

Interest incurred as a result of an advance from your Home Loan will still
be deductible but it'll be a bit of a Record Keeping nightmare trying to
seperate the non deductible and deductible debt.

Duncan.




-----Original Message-----
From: propertyforum Listmanager
[mailto:listmanager@bne003w.webcentral.com.au]
Sent: None
Subject: help with loans please


From: "Kevin Fielding" <kayaref@yahoo.com>

I have just been to see the loans manager at the bank to get some advice on
how to structure the loans for my IP.
She suggested the following:
With an investment loan of say $140,000 for the IP, the bank will loan 80%
of this bringing the loan to $112,000. The remaining 20% ($28,000)is classed
as deposit and is added to my existing mortgage of $40,000 bringing it to
$68,000. To this is added $6000 borrowing costs bringing this loan to
$74,000.(p&i with minimum repayments)
Can someone please advise if this is the best way to structure the 2 loans.
The interest on the deposit amount of $28,000 can't be tax deductible if
it's added to my existing mortgage can it??
Some help would be much appreciated.

Regards,
Kevin



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Reply: 2
From: Geoff Whitfield


Kevin,

I agree completely with Duncan- but if you're new, do you understand the abbreviations?

PPOR = Principal Place of residence
LOC = Line of Credit loan (Taken against your house).

So you can take a loan against the equity in your existing house. You can borrow up to 80% of the value of your "PPOR" for this loan- which you can use for anything- but PLEASE DON'T. (I had friends who borrowed against their house to go on a trip to England- he got prematurely terminated, and ended up getting a job in England- leaving their expensive house in Australia severely untenanted).

Use this loan (Line of Credit- LOC) STRICTLY for investment purposes. Use it to buy an investment property.

Advantages:
1. There's no second mortgage on your PPOR
2. If you need to borrow more than 80% of your IP, the Mortgage insurance is ONLY on your IP. If you had a second mortgage on your PPOR, the insurance would be calculated on the combined value of both properties.

Also:
I use my LOC for ANY deductible expenses. So if I buy Jan's book for $29.95, it goes out of the LOC, and I reduce my home mortgage by $29.95. So the interest on the $29.95 becomes deductible, and I reduce my non-deductible mortgage by the same amount. Not much in one transaction- but ir adds up- especially when I have things to do on the IPs.
 
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Reply: 2.1
From: Martin .


Geoff,

you said,

>Also:
I use my LOC for ANY deductible expenses. So if I buy Jan's book for $29.95, it goes out of the LOC,

Ok but the next -

>, and I reduce my home mortgage by $29.95.

this bit I don't understand,

>So the interest on the $29.95 becomes deductible, and I reduce my non-deductible mortgage by the same amount

Which direction is the $29.95 going?

It sounds interesting but I can't see it yet,

ML
 
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Sim

Administrator
Reply: 2.1.1
From: Sim' Hampel


I agree with Martin here... Geoff, can you please expand on your money juggling here... exactly what are you doing and why ?

 
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Reply: 2.1.2
From: Felicity W.


My guess is what he means is that by buying the book through the investment loan, he technically "reduces" the home mortgage because otherwise the $29.95 would be added to the mortgage. In reality the mortgage isn't reduced, it just isn't added to.
So the $29.95 doesn't actually move anywhere other than to the bookseller.
Hope this makes sense, it is early!
Keep smiling
Felicity :cool:
 
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Reply: 2.2
From: Duncan M




Actually, as a follow-up to this:

I've found in the last 6months or so that the Mortgage Insurers wont touch
me with a bargepole now, early on in our acquisitions we used 20% deposits
from our PPOR.. I wish I'd only used 5% deposits and got as many properties
using LMI as a I could.. I think we'd have 1-2 more now than we currently
do.

Rolf mentioned this to me about 6months ago and it didnt really sink in at
the time.. Duh..

Duncan.
 
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Reply: 2.2.1
From: Owen .


Duncan,

Do you have the capacity to add value to your properties via a reno? Then you could revalue, refinance and empty out your LOC to get your deposits back. I like the ideas of "getting your money back ASAP" and this is how I achieve it. In this way I always try to empty my LOC as fast as I can and this helps me avoid LMI and keeps my LVR low.

I then prove to the bank that this is what the LOC is for and to take it out of the calculations for more funds. Kind of like cutting up the credit card in front of them to get them to ignore it.

Admittedly it keeps me away from newer and good condition properties because I have no way of adding value and getting my deposit back in the short term.

Owen

"Gambling promises the poor what property performs for the rich – something for nothing"
 
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Reply: 2.2.1.1
From: Duncan M



Hi Owen,

Yes, possibly, of our properties, one unit and one house could benefit, with
2 very young kids and the rat race competing for our time however it'll be
difficult.

I've been talking with a guy at work in much the same situation, multiple
properties, rat race, young kids.. One thing we're thinking of doing is
forming a reno team with 1-2 other Husband/Wife teams (giving us 6-8 ppl),
an informal agreement to pool our labour and work on each other's
properties, moving from one to the next, 10-15 weekends of the year.. All of
us would bring specific skills to the table, gardens, electrical, cabinet
making, plumbing, welding etc.. Kids can all play in the backyard, cook up a
BBQ lunch.. could be fun!

Regards,

Duncan.





-----Original Message-----
From: propertyforum Listmanager
[mailto:listmanager@bne003w.webcentral.com.au]
Sent: None
Subject: RE: help with loans please


From: "Owen ." <mandos1@dingoblue.net.au>

Duncan,

Do you have the capacity to add value to your properties via a reno? Then
you could revalue, refinance and empty out your LOC to get your deposits
back. I like the ideas of "getting your money back ASAP" and this is how I
achieve it. In this way I always try to empty my LOC as fast as I can and
this helps me avoid LMI and keeps my LVR low.

I then prove to the bank that this is what the LOC is for and to take it out
of the calculations for more funds. Kind of like cutting up the credit card
in front of them to get them to ignore it.

Admittedly it keeps me away from newer and good condition properties because
I have no way of adding value and getting my deposit back in the short term.

Owen

"Gambling promises the poor what property performs for the rich - something
for nothing"



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Reply: 2.2.1.1.1
From: Owen .


Excellent idea. I guess without much in the way of family commitments I can get in and do a lot of the work myself but I am limiting myself to just pulling things apart and doing the painting. I just project manage the rest and am slowly getting my team together so I can step away altogether in time. I aim to get to the point where I can call up a tradie on my team and say "remember that place last year, do the same to this new one" and I can trust that it will be done. I'm also just doing cosmetic renovations so don't get into knocking down walls or anything. I generally do a reno in 6 weeks, get the revaluation and then start the battle with the banks to agree to to that value and refinance. Then go again.

I have to credit Geoff Doidge, Peter Spann and Michael Croft for the inspiration to do this. Can't wait to meet Michael next Wednesday in Sydney.

Owen

"Gambling promises the poor what property performs for the rich – something for nothing"
 
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Reply: 2.1.3
From: Geoff Whitfield


What I'm trying to do is reduce my non-deductible mortgage on my own house and increasing the deductible LOC.

$29.95 does not change the payments much.

But, for instance, If I received a tax refund cheque for $10,000 I could decide that I could invest that $10,000 in shares.

But instead of investing it directly in the shares, I put it against my house mortgage. And then I take out $10,000 out of the LOC to buy the shares.

I'm now paying about $650 pa less on my house mortgage, and $650 pa more on my LOC. So net effect is $325 more tax refund.
 
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Reply: 2.1.3.1
From: Duncan M


I like this thinking, use cash to reduce personal debt, the reduction in the
debt allows a larger LOC, draw down on the LOC to pay for what you were
going to use the cash for..

Duncan.
 
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Sim

Administrator
Reply: 2.1.3.2
From: Sim' Hampel


Okay Geoff, that sounds good. I was worried for a moment that you were just transferring money from the LOC to the PPOR mortgage because you had incurred an "investment related expense" and were then claiming interest on the LOC. But the way you described it this time makes sense.

There were some loan products a while back which had a linked PPOR mortgage and a LOC which were set up so that you capitalised interest on the LOC while putting all payments towards the PPOR mortgage. This was marketed as a great way to maximise tax deductions etc.

Of course, using the "no commercial advantage" argument, the ATO disallowed the extra capitalised interest claim .

The ATO ruling can be found at:

http://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR9822/NAT/ATO/00001

But Geoff, the way you are doing it seems very reasonable to me, and indeed I think it is a good idea (assuming you are managing your debt levels). Well done.

 
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Reply: 2.1.3.1.1
From: Pierre .


Indeedy Yes - a good idea. I just drew 5000 out of a Colonial First State investment that I had invested originally from residential LOC. Plonked the cash back into the LOC, then reinvested the 5000 from the investment LOC. Dunno why I didn't do it earlier.
 
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Reply: 2.2.1.1.1.1
From: .watto .


Hi Geoff,

Could you please explain how you increase your investment LOC by paying down your PPOR mortgage?

My understanding of LOC's is that the amounts are fixed at setup and cannot be adjusted without new contracts etc etc.

So a typical setup of PPOR valued at 250K with a non deductible debt of 100K gives:

LOC on PPOR @ 100k
LOC for IP'S @ 100K

assuming no LMI used.

If 10K paid off PPOR LOC = 90K, but IP LOC still = 100K.

If your LOC product is different i would like to know who it is with or if there is any such product available without the extreme fees that St George have please let me know.


Cheers
Watto
Melb Freestyler
 
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Reply: 2.1.3.1.1.1
From: Robert Forward


Pierre....

This is our East Timor Pierre isn't it.

Good to see your back. How was life in East Timor, and how is everything going now your back here in Australia?

Let us all know what you've been up to. How is the investing going?

Cheers,
Robert

Property Inspection Reports @
http://www.creativefinance.com.au

The Sydney "Freestylers" Group Leader.
 
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Reply: 2.2.1.1.1.1.1
From: Geoff Whitfield


Watto,

I'm not increasing my LOC.

In the above example, I have $10K available in my LOC. That's what I'm using for my share investment.

But then, having paid $10K of my mortgage and added $10K to my LOC, I can go to my friendly bank manager and tell him that I have another $10K available in my mortgage available for more in my LOC.

He gives me papers to sign, and it's a done deal.

I've no experience with other banks. I'm with NAB Professionals Choice. They charge me $400 pa, and there's no more fees for readjusting LOCs, or even applying for more loans.

Also bear in mind, that in the example I've given of $10K used for shares, that the amount is not big. $325 for $10,000 investment.

But, unless I'm paying off my entire mortgage in one or two years, that interest deduction stays- it might be 10 years. So that's $3,250 back from taxes that I would not otherwise have received.
 
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Reply: 2.2.1.1.1.1.1.1
From: .watto .


Damn my LOC is fixed...have to go thru the whole process of reapplying...new vals...new personal asset statements...blah blah...costs too...


Cheers
Watto
Melb Freestyler
 
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Reply: 2.2.1.1.1.1.1.1.1
From: Martin .


Thanks Geoff,

Owen said,

>Do you have the capacity to add value to your properties via a reno? Then you could revalue, refinance and empty out your LOC....

>I then prove to the bank that this is what the LOC is for and to take it out of the calculations for more funds. Kind of like cutting up the credit card in front of them to get them to ignore it.

This is such an appealing thought, to have the bank ignore the LOC in its calculations is definitely a carrot worth chasing.

Out of all the fees and charges (stamp duty through to establishment and transfer etc...)involved with loans are there any that aren't able to be put into the "claimable on tax basket"? (Don't want to contaminate LOC).

ML
 
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Reply: 2.2.1.1.1.1.1.1.1.1
From: Geoff Whitfield


Martin,

An accountant will step in on this one if I'm wrong- I hope!

My understanding is that there are a number of items which I can't claim on tax- but if I use my LOC to pay for them, I can. So I can't claim for the cost of a house, but I can claim on the interest. A number of the fees associated with purchasing of a house are capital in nature, and are not claimable in tax, but they can be claimed when selling the house against capital gains. I claim the interest on these amounts when I borrow (using the LOC).

There's information on the ATO web site which covers interest on items of a capital nature on http://www.ato.gov.au/content.asp?doc=/content/Individuals/9033.htm&page=9
 
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