Here's the deal

hello all,

First of all I would like to thank everyone for this forum and the wealth of information everyone has/shares.

Heres our scenerio. My wife and I work and have combined income of approx. 120k. We have decided to buy another property in a nicer area and have found a 1940s cottage that requires a little work and will certainly increase in value (this is what we are hoping anyhow), with a bit of elbow grease and some good ideas. So we bought it for 300K.

We went to the bank and refinanced our existing loan. We did owe 180k and the house was valued at 260k, thus we had 80k equity. The banker did the financing for us and juggled the figures around and we now have two loans, one loan for ppor at 270k PandI, and the investment loan at 243K and IO. Botht the loan are currently at 5.96%. WE have just found tenants today after one week on the market, and they have agreed to pay 270 per week for our IP, mind you we have to take PM fees from this.
We feel as though for the last few years, as our incomes were good, we have let a lot of money just slip through our hands. So this is why we decided to buy another property. And having three children we are hoping to help them out in the future as well.

We have done some figures and think that we will have to put 125 per week at the IP, this will allow for a bit extra as well. We would like to possibly purchase another home in the next few years, if everything is still going well. We believe and hope that our new house will have a fair bit of equity in the next couple of years. So if we come to the stage when we want to purchase again, do we use the equity in our PPOR for the next home?
Another question is, does it come a time when you have to look for homes that you are neutral CF, or +CF, due to issues with serviceability?
Another question is, if we have a bit of extra money or tax return money, would it be wiser to put it at the PPOR which is PandI, or the IP which is IO?
We are going back to the banker on thursday and I am going to ask about the LOC and offset account, as I have read quite a bit about them of late.
Does anyone have another recommendations on either of these?

Thanks for any input/advice, its greatly appreciated.

Andy
 
Hiya whip

well done to step upto have a go at meeting ur goals.

that alone separates you from tha majority !

We have always preferred IO for choice and to minimise cashflow out, both for IP and PPOR. This minimises YOUR risk

In most ( but not all ) we also prefer IO with 100 % offset over LOC, usually becahse the LOCs can have some nsaty little conditions attached to them


ta
rlf
 
hello all,

First of all I would like to thank everyone for this forum and the wealth of information everyone has/shares.

Heres our scenerio. My wife and I work and have combined income of approx. 120k. We have decided to buy another property in a nicer area and have found a 1940s cottage that requires a little work and will certainly increase in value (this is what we are hoping anyhow), with a bit of elbow grease and some good ideas. So we bought it for 300K.

It's not clear to me which property is your PPOR and which is the IP. Did you "upgrade" your PPOR or is this new place the IP?

We went to the bank and refinanced our existing loan. We did owe 180k and the house was valued at 260k, thus we had 80k equity. The banker did the financing for us and juggled the figures around and we now have two loans, one loan for ppor at 270k PandI, and the investment loan at 243K and IO. Botht the loan are currently at 5.96%. WE have just found tenants today after one week on the market, and they have agreed to pay 270 per week for our IP, mind you we have to take PM fees from this.
We feel as though for the last few years, as our incomes were good, we have let a lot of money just slip through our hands. So this is why we decided to buy another property. And having three children we are hoping to help them out in the future as well.

We have done some figures and think that we will have to put 125 per week at the IP, this will allow for a bit extra as well.
This $125 - do you mean you'll be paying this into the loan or you'll simply need to fund the shortfall?

There are a couple of considerations:
- if the $125/wk will put a strain on your budget, investigate getting an "Income Tax Withholding Variation" done - have a look here for more info. Basically, it means you get your tax back iv every paypacket instead of an annual lump sum.
- the place is old (assuming the 1940's house if your IP) so you'll get no original building writeoff, but you should get a depreciation schedule done, if you've done work. This will also help your tax position

I wouldn't pay money off the IP loan while you have a PPOR loan.

We would like to possibly purchase another home in the next few years, if everything is still going well. We believe and hope that our new house will have a fair bit of equity in the next couple of years. So if we come to the stage when we want to purchase again, do we use the equity in our PPOR for the next home?

Another "home" or another IP? That will change things, as you want to get your structure in place as you plan.

Another question is, does it come a time when you have to look for homes that you are neutral CF, or +CF, due to issues with serviceability?

Yes. Natural rent and value growth will help cash flow over time, but if you want to do things more quickly, you will likely hit a serviceability limit. Might need to get creative to produce more cashflow.

Another question is, if we have a bit of extra money or tax return money, would it be wiser to put it at the PPOR which is PandI, or the IP which is IO?
We are going back to the banker on thursday and I am going to ask about the LOC and offset account, as I have read quite a bit about them of late.
Does anyone have another recommendations on either of these?

Thanks for any input/advice, its greatly appreciated.

Andy

While you have a PPOR, put money off this (or into any offset you have against it) before your pay off any IP debt. If the IP debt is IO, you may even be penalised for paying early! :eek: Your IP debt is tax-deductible and inflation will eat it away. Your PPOR debt is NOT deductible.

Putting extra cash into an offset rather than the loan means that you get the same net effect (reduce the interest payable) but have the flexibility of taking that money out whenever you need it for whatever purpose (and no redraw fees)

Our strategy is to NOT pay off any IP debt while we're still in accumulation mode. This may not suit you.
 
In most ( but not all ) we also prefer IO with 100 % offset over LOC, usually becahse the LOCs can have some nsaty little conditions attached to them

I always opt for the 100% offset over LOC as I like to see the money in the offset account and know it can't be taken away or reduced due to a policy change by the lender.
 
thanks for all the replies,

The house we have just bought will become our ppor, and our current ppor will become our IP. So our IP (our current ppor) is a 1960 double brick property and our new PPor is a 1940s cottage. Hope this clears it up a bit.
With the 125 per week, this will cover the shortfall, coucil rates, insurance ect. and should be a bit extra as well, this will allow for any unexpected maint costs that may and will arise. That way we will have a bit of a buffer (saved money) for these costs. Do you all think this is a good idea?

Sorry what i meant by "home", was another IP. I believe we would probably be looking for one that is CF neutral or CF+. Due to serviceability. then again, we will cross that bridge when we get there and access the situation accordingly.

Ok so if we have a bit of extra money (say at the end of week, or tax returns ect) it is best to put this at the PPOR right. Either an offset account or into the loan. I am assuming this is because my PPor is principle and interest right? Thus my accessible equity will grow with time. And the IP, I am relying on capital growth as I am paying only interest and this interest payment is tax deductible, is this correct? So back to the offset account, what is the difference between an offset account and a redraw facility on the loan for the PPOR? Also as I stated before, with the $125 payment on the IP, if this gives us a bit of a buffer (say for maint ect) would it be better to put this extra into an offset account?

Hope this makes sense,

Thanks again
Andy
 
thanks for all the replies,

The house we have just bought will become our ppor, and our current ppor will become our IP. So our IP (our current ppor) is a 1960 double brick property and our new PPor is a 1940s cottage. Hope this clears it up a bit.
With the 125 per week, this will cover the shortfall, coucil rates, insurance ect. and should be a bit extra as well, this will allow for any unexpected maint costs that may and will arise. That way we will have a bit of a buffer (saved money) for these costs. Do you all think this is a good idea?

Absolutely a great idea to have a buffer. And if you look into the ITWV, you might find that the taxman will contribute to that buffer every week.

Sorry what i meant by "home", was another IP. I believe we would probably be looking for one that is CF neutral or CF+. Due to serviceability. then again, we will cross that bridge when we get there and access the situation accordingly.

Ok so if we have a bit of extra money (say at the end of week, or tax returns ect) it is best to put this at the PPOR right. Either an offset account or into the loan. I am assuming this is because my PPor is principle and interest right? Thus my accessible equity will grow with time. And the IP, I am relying on capital growth as I am paying only interest and this interest payment is tax deductible, is this correct? So back to the offset account, what is the difference between an offset account and a redraw facility on the loan for the PPOR? Also as I stated before, with the $125 payment on the IP, if this gives us a bit of a buffer (say for maint ect) would it be better to put this extra into an offset account?

Hope this makes sense,

Thanks again
Andy

The biggest difference, in my mind, between a redraw and an offset is that the offset is YOUR money. It sits in a transaction account and you can put into and take our whatever you want. Any outstanding balance is deemed to be paid off the loan.

eg. $100,000 loan, with no offset. Interest (@6%) = 500pm
$100,000 loan, with $10,000 offset = interest on $90,000 (@6%) = 450pm

A redraw is the BANK'S money. You've paid it off the loan. And often there is a both redraw fee, and a minimum redraw amount.
 
I am assuming this is because my PPor is principle and interest right? Thus my accessible equity will grow with time. And the IP, I am relying on capital growth as I am paying only interest and this interest payment is tax deductible, is this correct?

Whippee, it is because the interest payments on the IP are tax deductible but are not for the PPOR. It doesn't matter if the IP is IO or P&I the interest component is deductible. Just like with the PPOR, it doesn't matter if IO or P&I it isn't deductible.

Gools
 
Absolutely a great idea to have a buffer. And if you look into the ITWV, you might find that the taxman will contribute to that buffer every week.




Thanks again for replies, just another question , What is the ITWV?

Yep I understand about the IO tax deductions now thanks

Andy
 
Absolutely a great idea to have a buffer. And if you look into the ITWV, you might find that the taxman will contribute to that buffer every week.




Thanks again for replies, just another question , What is the ITWV?

Yep I understand about the IO tax deductions now thanks

Andy

Income Tax Withholding Variation. Assuming you're a PAYG employee, your employer will take tax out every pay, yeah? And then at the end of the year, you do your tax return, your IP has generated a "loss" for you, so you claim that back on your tax.

Instead of waiting for the annual tax return to get a lump sum, you can apply to the ATO to get them to advise your employer to reduce the tax they take out of your pay. That goes into your pocket!

If you were to get a $5200 tax refund, that means $100pw EXTRA in your takehome pay every week. Now you only need to find $25pw to fund the shortfall on your IP.

(Check the link in my earlier post #3)
 
I always opt for the 100% offset over LOC as I like to see the money in the offset account and know it can't be taken away or reduced due to a policy change by the lender.

I think you may need to read your loan agreement as I suspect that you will find that the bank can apply any monies, whether in offset account or any other account in that bank, to your loan if they so dem it in their interest.

Cheers
 
I think you may need to read your loan agreement as I suspect that you will find that the bank can apply any monies, whether in offset account or any other account in that bank, to your loan if they so dem it in their interest.

You beat me to it! Absolutely - in all my loan docs, even without x-coll, the Bank can recover any money they wish, by any means they wish, for whichever loan they wish, for whatever reason they wish. They don't even have to go through a process of letters / demands etc - they can just grab whatever money is in your offset account at any time as a first action if they so wish. All options are available to them at any moment.

There are strategic benefits in having that cash sitting earning interest with another institution! Particularly if you are offsetting deductible debt. Of course you have to read all the documents in great detail to work out they have this power! And of course you also have to weigh up how likely all this is...

Food for thought...
 
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