How Best to turn PPOR to IP, to fund new PPOR

Hi,

I need some help in determining the best way to turn my PPOR into an IP so that I can move and have a new (2ndhand) PPOR. Otherwise hubbie will make me sell PPOR to Buy new PPOR. Which is not my plan.

My situation is that I currently have a loan for $110K (Paid down to 75k) with 20K in redraw available, the PPOR is valued at 390K, but up to 420K+ if we tart up the yard and clear our kids toys and stuff out to make it more appealing.

My aim is to buy a house (or land and then house) no more than $350K. My hubbies salary is $65K and we will use this to borrow for the loan, but I would like repayment to the new PPOR of no more than $450/wk. The less the better, because who know what may arise. Also for spare cash/savings where should this money go?

If we rent out the PPOR/IP then we will get at least $300/wk.

We have a very good cash flow week to week and rarely spend more than we make, because our mortgage is low I make double repayments.

Any advise or help would be greatly appreciated.

Also once I know what we want to do do i go to a property account, loans adviser (will the loans be through the same company?), financial planner?

Cheers
 
What sort of time frame are we talking about?

First thing I'd do, is stop making extra payments into the loan, instead, setup an offset account and put as much money as possible into it.

When you do buy the new PPR, move the offset account to the loan for it

(Loans for money-producing activities are tax deductible, PPR loans are not - you want the largest possible loan on the IP, and the lowest possible for the PPR).

Other that that, I'll leave it to the experts :)
 
Hi Thann,

Thanks for your advice. I plan to move in the next 6 - 12 months. What type of expert do you recommend that i talk to.

Cheers Leah
 
My situation is that I currently have a loan for $110K (Paid down to 75k) with 20K in redraw available, the PPOR is valued at 390K, but up to 420K+ if we tart up the yard and clear our kids toys and stuff out to make it more appealing.

Just be aware, I believe if you draw down the $20k to buy your new PPOR, you will NOT be able to claim the interest on that portion as a tax deduction (unless you mean you have it in an offset account, which is a different matter). That equity is "trapped" unless you use it to buy another investement property, or some other income generating asset (or sell the property of course).

Hence Thann's comment about not paying off any more.

Cheers,

The Y-man
 
. Also for spare cash/savings where should this money go?
...

Also once I know what we want to do do i go to a property account, loans adviser (will the loans be through the same company?), financial planner?

Into an offset account for your new PPOR.

Discuss with a good mortgage broker

Cheers,

The Y-man
 
Hi leah

You might like to read the response i have written to a similar post from Chris_Qld.

Depending on the numbers you maybe able to have your cake and eat it.
 
Hi Qlds007,

Thanks I read your other post. And I will look into trusts.

So here is another scenario, can I refinance my current PPOR for say $300k, giving me $220k to spend, live here for a few more months. Using the $220k to by the majority of land and a house, taking out a smaller loan of $150k ei. for the new soon to be PPOR.

Then change my loan for $300k over to a loan geared for investment properties, say a IO with offset account. Move to the new property ( I am looking at getting a house relocated onto the land so it only takes a couple of months for the permits through council.) Rent out the old PPOR making it now my IP.

Is this possible?

Thanks for all your help.

Cheers Leah
 
... can I refinance my current PPOR for say $300k, giving me $220k to spend, live here for a few more months. Using the $220k to by the majority of land and a house, taking out a smaller loan of $150k ei. for the new soon to be PPOR.

Leah,

The key thing is this: you can only claim interest on money borrowed to buy an investment property (or other investment assets).

Now here's the bit I think is confusing you. As far as the ATO is concerned, when you REFINANCE or even just REDRAW is a NEW LOAN .

So with what you have described, you have USED the loan created by refinancing (and specifically drawing down the cash) to buy a new PPOR. Therefore, it's not deductible.

Hoping this makes sense

The Y-man
 
Last edited:
Leah

As Y Man sets out the crux is in the "purpose test" of the actual funds not the security it is taken upon.

If you could convince a lender to take security over a moped with the funds being used to purchase an IP then the interest would still be deductible.
 
If you have other IPs and huge monthly expenses then the task to re-cycle that equity is easy, just capitalise expenses and interest payments from the draw down and watch your cash balance grow again in the form of rent coming in. If you only owned one or two IPs, this process will take a while.
 
Into an offset account for your new PPOR.

Discuss with a good mortgage broker

Cheers,

The Y-man

I think its best you discuss with an accountant instead.

Good mortgage brokers who their stuff are hard to find. More often then not you'll end up with a mortgage broker who doesnt know anything about tax deductibility and say what you want to hear to get your business.

Ive been burnt a lender of a big 4 bank who told me redraw and offset were the same thing for tax deductibility purposes several years ago. This particular lender had over 20 years lending experience, so i trusted them.

Wish I had done a bit more research myself instead of just believing in them because they had been doing it for long time.

Anyways, to answer your question, you've paid down your PPOR, ie actually put cash into the LOAN account not an offset account. Therefore there is not really anything you can do about tax deductibility because if you draw that money back out (or even refinance the equity) and use it for anything other than fixing that existing house, it is deemed to be a NON DEDUCTIBLE.

What happens in this case is that you will end up paying tax on the rent, you will have minimal tax deductions on the interest and a massive NON DEDUCTIBLE loan.

What may be worse is that you set up your loan account so that you income is paid directly into the loan and you have a facility whereby you take the money back out of the loan as you need it. As a result you actually paid off your home loan, while the loan that now remains is a loan for personal use.

To illustrate in numbers

Purchase PPOR in 2000 for $300,000.
Loan to purchase PPR in 2000 was $250,000

To start off here, if you ever made the PPOR into an IP, the maximum you could claim is $250k.

However over the last 9 years, you have been putting money to pay down the loan.

As a result your loan is now down to $50k.

There is $200k in redraw (not talking refinance here - just redraw the money you've put in)

Unfortunately the $200k you redraw, unless its being used for investment purposes is NOT tax deductible in any way.

This is also the main difference in using an offset account. Had that $200k been paid into offset account, the interest charges on your loan would have remained the same. What has happened here is that your loan never actually reduced, only the interest the bank charged you.

Therefore when you take the $200k from your offset account, the bank just charges you higher interest (because there is nothing to offset the loan anymore), however the whole $250k is tax deductible, as opposed the first example where only $50k is tax deductible.

One of the ways around it is to sell the property and buy it back, but that would incur unnecessary costs is probably is not worthwhile.

Oh and the Financial Planner is going to bugger for you except recommend you use your equity and gear into a portfolio of managed funds and direct shares.
 
Last edited:
Top