Help with mortgage/investment idea's?

[Terry_w]

Thanks JacM

I understand the difference between the two.. But the reasoning is what I have trouble with.

I consider the money I have paid back.. to be.. well.. exactly that, money that I have paid back and is no longer mine, so i never re-draw and dont plan to.

I suppose what Im trying to get at is..

Is it in my best intrest to:

A) Continue as I am. Paying extra repayments towards the P&I loan, whilst throwing whatever left over I have into my offset account.

B) Changing the loan to Interest only and pump all my savings into the offset account... and try to live with the fact that the principle amount isnt lowering, which bugs me?

I really should buy some reading material regarding all this.. lol.

What you are doing is not wrong, but think of this.

You have a $150,000 loan and $150,000 cash.

1. You park the $150k in the offset = No interest

2. You deposit the $150k into the loan = No interest

After 12 months you decide to move but keep the current owner occupied property and rent it out.

Under scenario 1, you take your $150,000 with you to the new property and park in the offset.

under 2 above you would have to redraw $150,000 from the loan. The purpose of this new withdrawal is for an owner occupied home so the interest would not be deductible.

Scenario 1 would mean you have $150,000 x 5% less interest on your PPOR loan.

Scenario 2 would mean you have $150,000 x 5% more interest on your PPOR loan and $150,000 x 5% less on the IP loan.

$150k x 5% = $3750.

Potential tax savings would be about $1600 pa.

Imagine this on bigger numbers and over 30 years of compounding.

 

[powerranger]

Okay I think Im starting to understand it..

But I have more questions

Is there a limit on how many years you are able to make the loan interest only?

If I reached the end of the loan term, still owing $208k would i be forced to pay that amount in full?

By setting up my loan with the Interest only and offset account, id be able to build up equity and funds in my offset, which I can use for the deposit on the next property... Do you set the next properties loan up the same way?

If so, How do you ever pay your loans off?

I think im going backwards, theres no thread that answers all these begginer questions is there? if so could somone link me to it?


Thjanks for your help so far, it is Very much appreciated!!

 

[Rbellaj]

Haha Powerranger I feel the same as you. It is so overwhelming, these guys are so cluey!!! I just had to google what PPOR was!

We are using our equity to buy our first IP, we have our loan ready to go, just need to bite the bullet and do it, I am just trying to learn as much as I can first.

Good Luck

 

[JacM]

At the end of the interest only period, you simply "refinance". In other words, start the loan all over again, potentially with a separate lender. Since property generally goes up in value over time, what the property will be worth compared to the outstanding debt, will be be somewhat laughable in 10 years time, so you would not need a very high LVR (loan to value ratio). Let's say the property is worth say $300k today and the debt against it is $250k. In 10 years let's say the property is worth $600k. The debt against it is still only $250k. So you would need a loan of less than 50% of the property value to start the loan all over again. Shouldn't be too tough to convince a lender to give you such a loan. And since the rent by then will have roughly doubled also, the property will be cash flow positive by quite a bit... because the mortgage repayments in comparison to the rental return will be very small.

Make sense?

 

[Terry_w]

Okay I think Im starting to understand it..

But I have more questions

Is there a limit on how many years you are able to make the loan interest only?

If I reached the end of the loan term, still owing $208k would i be forced to pay that amount in full?

By setting up my loan with the Interest only and offset account, id be able to build up equity and funds in my offset, which I can use for the deposit on the next property... Do you set the next properties loan up the same way?

If so, How do you ever pay your loans off?

I think im going backwards, theres no thread that answers all these begginer questions is there? if so could somone link me to it?


Thjanks for your help so far, it is Very much appreciated!!

IO loans are generally a max of 5 to 10 years and then revert to PI. Once the 5/10 years is up you may be able to inrease the IO period to another 5 or 10 more years.

Don't worry about paying off a property. Imagine if you had purchased in Bexley Sydney for $16,000 in 1970 and took an IO loan. that property could be worth $1 mil now and bring in $30k pa in rent. You could pay the loan off with just 6 months rent if you wanted to.

You generally only need 1 offset, until you fill it with cash, and then move onto the next. the offset should be on the PPOR loan as this is not tax deductible. If you are going to buy a new investment then you should NOT take cash from the offset as this will mean extra interest inccurred on the main residence which won't be deductible. You should instead borrow against the equity in the house.

 

[Moon91]

Unless i am wrong, one of the reason to reduce your loan limit rather than to put extra money in the offset is to improve your DSR for future loan application.

 

[Terry_w]

Unless i am wrong, one of the reason to reduce your loan limit rather than to put extra money in the offset is to improve your DSR for future loan application.

Yes, that would probably help. But if the funds are avaiable via redraw the full loan would be taken into account generally..

I think the major reason to reduce a loan is because it feels good to pay down debt. Not a bad thing really

 

[Singo]

I think the major reason to reduce a loan is because it feels good to pay down debt. Not a bad thing really

We paid around 400 principal of a loan because we were late in submitting IO application. Still feeling bad about that More and more investment debt makes us feel better, the inflation and CG will do all the work!

 

[powerranger]

the inflation and CG will do all the work!

This is what Im having trouble with... I have trouble believing that it will do the work.

So, to recap:

I have a PI loan with an outstanding debt of 208k, which Im paying extra into fortnightly.

The property is currently rented so I should change the loan to IO, then put the extra money I was using for the repayments into my offset account. Once I build up enough funds in the offset account I can use them as a deposit for my next property purchase.

Then when the IO term is up, I can either extend it or refinance the loan with another lender.

All while inflation and CG is building equity for me.

clear as mud

 

[Singo]

So, to recap:

I have a PI loan with an outstanding debt of 208k, which Im paying extra into fortnightly.

The property is currently rented so I should change the loan to IO, then put the extra money I was using for the repayments into my offset account. Once I build up enough funds in the offset account I can use them as a deposit for my next property purchase.

Then when the IO term is up, I can either extend it or refinance the loan with another lender.

All while inflation and CG is building equity for me.

Seems fine! And when your house value goes up, you can borrow against that extra equity (but not cross-collateral) to pay further purchases as well.

 

[powerranger]

Thanks.

I have arranged a meeting with my bank to swap the loan etc. Now, off to do some more research!

Thanks all for your help and patience!