Here we go - financing that 1st IP

[marty998]

Have to admit I've been so captivated by the stories on here that it has given me the final kick needed to get me started on "the journey". The final straw was reading through all the prior year threads in the investor psych section and realising there's no excuse for me sitting on the sidelines anymore.

I have my sights on a 2,1,1 in Western Sydney for around $295k renting for $360/wk.

Have a PPOR valued at $400k, P&I loan (1st mistake sorry) of $257k (variable), with a further $61k parked in an offset. So equity of $400*80% - 257 = $63, + $61 cash.

Would like to buy the IP using as little of my own cash as possible. 3 months ago a chat with my lender for a $330k property came up with "Use offset cash, top up PPOR by $26k with a split loan, borrow $260k secured against IP. Needless to say I was not thrilled about emptying my $50k pot of gold in the offset account.

So what is the correct strategy? Do I top up and split the PPOR loan to fund a 20% deposit, and then have an 80% LVR (240k loan) on the IP? Is that feasible to both avoid LMI and using my cash? Or is there a better way?

FYI for completeness, I am a single income with no dependants (SINK?), generating free cash of about $30k a year. Work for a big bad bank, currently paying an interest rate of 5.79%. Short term goal is to move to a bigger/better PPOR in 18-24 months and keep current PPOR as IP#2

thanks
Marty

 

[Aaron_C]

Did your lender mention the cross collateralisation too?
You could top up your current loan to $63,000 to contribute to the 20% deposit, and put in some of your own cash to pay for stamp duty etc.
Alternatively you could just pay LMI for the new purchase so you borrow say 85-90% of the property's value and avoid putting any of the offset money in there.

 

[Peter_Tersteeg]

If I'm interpreting your post correctly, you won't be be getting the most out of your tax deductions which are available. Here's what I'd suggest:

* Figure out how much of your offset you're willing to sacrifice. It might be the full $61k or it might be less. Let's assume you want to keep $11k in the offset and you are okay to use the other $50k for investment purposes.

* Transfer the $50k to your mortgage, reducing the amount owing to $207k and leave the other $11k in the offset.

* In a second interest only loan against your PPOR, borrow the balance of 80%.
$400k x 80% - $207k = $113k

* You've now $113k in an isolated account for the purpose of covering deposits for investment properties. This amount would cover the 20% deposit and costs for a purchase of a little over $400k (you'd borrow the other 80% in a separate loan).

* Interest on the $113k loan and the new investment property loan is fully tax deductable. Your $207k PPOR loan is not tax deductable.

This structure still uses your offset cash (the numbers can be different to whatever level you're okay with), but the strategy your lender suggested would only leave you with the loan against the new IP and about $26k being deductable. My suggested structure gives you the same result but with much more deductable debt.

 

[marty998]

Yes they did Aaron! And that did end the conversation right there. A family friend's experience has taught me Rule 1, never put the roof over your head at risk.

From what I gather there's an LMI jump between 89.9 and 90%?

Don't mind coughing up a little bit but trying to hang on to as much as I can to reduce that blessed non-deductible interest cost

Edit: Wow Peter...amazing post, something I should have known and seems so obvious, but I guess thats what makes you the expert. Kudos to you

 

[Aaron_C]

Yes they did Aaron! And that did end the conversation right there. A family friend's experience has taught me Rule 1, never put the roof over your head at risk.

From what I gather there's an LMI jump between 89.9 and 90%?

Don't mind coughing up a little bit but trying to hang on to as much as I can to reduce that blessed non-deductible interest cost

Edit: Wow Peter...amazing post, something I should have known and seems so obvious, but I guess thats what makes you the expert. Kudos to you

LMI jump tends to be about the 88-89% mark.

Peter's advice is fine if you are going to live in your PPOR forever. If you move out of it you are just reducing the deductible debt if the PPOR becomes an IP.

 

[Peter_Tersteeg]

The structure I suggested can be tweeked to accomidate the PPOR turning into an IP at a later date, but at some point you've also got to accept that there isn't a single structure that will cover every possible scenario and there's a chance you might miss out on some deductions somewhere.

Best to just work with what you do know and what you expect to happen.

 

[matto_]

at point of converting now PPOR into IP - couldnt the OP do a spousal sale?

I guess the other way to release the funds would be to sell?

 

[Terry_w]

Crikey!

Imagine if you used $60,000 from your offset account.

This would result in you paying more interest on your nondeductible home loan.

at 6% this would be around $3600 per year. Assuming you pay 20% tax, that would result in the loss of $720 in extra tax deductions per year. Roughly a months repayments. That would mean it would take you x years longer to pay off your home loan!

 

[marty998]

That would require a spouse

Food for thought. Thanks for the replies gentlemen