How should i structure my loan? First IP.

Hello!

First and foremost, i'd like to thank all of you folk for all the extremely helpful info you have posted. I'm about to settle on my first investment property(with the FHOG). I started with no knowledge whatsoever on property investment but through this forum and a few other articles on the web, was able to get a firm grasp of some of the strategies one should take. I now know how IPs can be a good investment choice. Seems like I have made some bad choices in the past (blowing 30k+ on a car in my early 20s). Oops.

Anyway, I have decided on St George's Advantage package because it has the offset ability and a decent introductory discount along with a discount for the remainder of the loan.

I have subsequently created a monster spreadsheet where I can plug in all my variables - deposit, forecasted expenses, etc.

The point where I am stuck is choosing how much to put in as a deposit and how much should I put into the offset account initially? Looking at my spreadsheet, depending on the figures I plug into the deposit/offset account, I can make my monthly repayments go up and down. Should I get this as neutral as possible or positive (thus putting in more deposit)?

I guess my goal is to purchase another investment property in 5-7 years time and was wondering if either way makes a big difference on that goal?

I have my spreadsheet if anyone wants a look/scrutinize or needs it for their own experimentation.

Thank you in advance!

Cheers,
Gordon.
 
Hi geepee321,

Welcome to Somersoft.

These are very important Questions !! I'll tell you how we started, but before I do, you must remember that ALL of what you read here on the forum should be taken as interesting only. Always follow up on your research. What you here on the forums can be the same as,
" I heard I something down at the pub last night" !!

My opion is to start at entry levels, a tidy Townhouse for example.
We started with opening a line of Credit secured against our house. It gave us the oppertunity to buy what ever we wanted. All rents and out goings went into and out of the same LOC. It was piece of cake.

However geepee321, get some real advise from the big boys. Metropole, Destiny, Somersoft, there's quite a few that have offices in each state.
 
Hi geepee,

Good on you and well done.

Can I ask whether you have told St George the loan is for a PPOR or Investment? I read you have used the FHOG and I assume PPOR.

I hope you understand this:

A St George Offset account against a PPOR does not work the same way as other OA's.

Example:

Borrow: $300k.
Offset: $100k

Interest is calculated at 300k= $1500/month. (6%)
ACTUAL interest charged is on 200k = $1000.

So what St George does is make you pay the set $1500/month and they actually deduct the difference of $500 off the debt balance of 200k.

So, the amount of money in your Offset Account will NOT affect your repayments. It WILL affect how much you pay in interest to your bank and how much St George will then pay down on your PPOR loan.

It takes a little bit of understanding.:cool:

A normal Offset account and a St George Unregulated loan for an IP will work in the "traditional" sense and you will not be forced to pay down your loan with the money saved on interest.

I would like to answer your question but thought I had better be clear on the purpose of your loan.

Investment or PPOR?:)

Regards JO
 
Thank you for your quick responses!

I am planning to live in the apartment for 6 to 12 months initially to secure the FHOG. I will then move back into my parents place after and rent it out. I think in this situation, I take out the loan as a PPOR? Please correct me if I am wrong.

I'm not home at the moment so I cant upload my spreadsheet. I "think" this is calculated as Jo described. I will upload it when I get home.

Cheers,
Gordon
 
Here is a spreadsheet I put together, which I have tried to capture all the variables that go into a loan with an offset functionality. Hopefully someone with knowledge could take a look at it for me, because it seems like i'm saving a bit TOO much using this offset account.

Also, I would like to know the answer to my previous question. How much should I put in as a deposit rather than leaving it in my offset account if I were to buy a 2nd property say 5-7 years down the line?

Cheers!


Edit: I couldn't upload here cos it was too big. So here it is:
http://www.megaupload.com/?d=1MQ03PDQ
 
How much should I put in as a deposit rather than leaving it in my offset account if I were to buy a 2nd property say 5-7 years down the line?

http://www.megaupload.com/?d=1MQ03PDQ

I would think that you should not put more than 20% deposit down for this place. anything extra that you have, stick it in the offset account. Then after a 20% deposit you avoid LMI. Alternatively you could stick in only 10% deposit and have some extra $$$ available to redraw to use later, at the cost of LMI. I'm in a similar situation and think i'll go with the straight out 20% deposit to make it clean & see immediate benefits, as there's always a chance this place i'm looking at buying won't be turned into an IP in the future anyway!

after looking at the spreadsheet for all but 10seconds, the only question i have is why pay monthly (12 payments per year, cell B26) when you're better off paying fortnightly (26 payments/yr)?
 
If you are going to use as an IP after 6 or 12 months, do it as an interest only loan now with a proper offset account (not the St George one) from someone like Westpac, ANZ etc. For deposit use 10%, or upto 20% and put the rest in the offset account. The less you use for the deposit the better later on, but you have to be comfortable paying some LMI.
 
Hi guys,

I have changed it to fortnightly and yes it makes a huge difference! So much so that it makes the total interest repayment look really (too) small and incorrect.

If i put down 20% or more as a deposit, the repayments become quite big which puts me into a negatively geared position. That's why I put in more as a deposit to put me as close to neutral as possible. Isn't that the aim? To get IPs which are neutral or positively geared? Or am I missing something here?

I want to pay off both the principle and interest on this one because I will potentially live there later on as I like the area. Not sure if this is a good reason though.
 
Hi geepee,

Ok, here I thought I was pretty good technically:eek: - Where has the download gone to. It's not on my desktop?

I would also have to agree with barry and bawatkins and would have chosen Interest Only. You can always make your repayments as if they were P&I. Choosing an Interest only gives you further options down the track when you acquire more IP's.

Your serviceability will tighten up and you may not be able to convert to IO when you have a few IP's to service. It is also a good measure against tough times when interest rates will rise. :)

NG depends on your strategy and income. If you are in a situation where you have a great cash flow and are in a higher income tax bracket, then NG can really work well for you, maybe even dropping you down into the next tax-bracket.

There are so many variables, I find it hard to give you a direct answer to your question.

Genereally speaking though, if you are in an accumulation phase of Property Investing - the less you use for a deposit of your own cash...the better and the more you can save with an Offset...the better.

In otherwords, use the banks money while you can still get it!:)

Thus my question in regards to St George Offset account. The money St George will be squirrelling away to pay off your PPOR, I personally would prefer to be me in my own pocket for ready access.

This is only my opinion and you really should seek the advice of a good
property accountant.:)

PS: Try and read thorugh this thread on Offset Accounts.

http://www.somersoft.com/forums/showthread.php?t=54962&page=4

Regards JO
 
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Hi guys,

I have changed it to fortnightly and yes it makes a huge difference! So much so that it makes the total interest repayment look really (too) small and incorrect.

If i put down 20% or more as a deposit, the repayments become quite big which puts me into a negatively geared position. That's why I put in more as a deposit to put me as close to neutral as possible. Isn't that the aim? To get IPs which are neutral or positively geared? Or am I missing something here?

I want to pay off both the principle and interest on this one because I will potentially live there later on as I like the area. Not sure if this is a good reason though.

Are you aware of the tax benefits of owning a negatively geared IP? Talk to your tax agent but this can be more beneficial than positively gearing something, but there are many variables involved.

Instead of paying off your loan by P&I, I would go for an IO loan but put the extra money you WOULD have been putting in as P (in the P&I) into the offset account. Then these funds become available in the future - you can pull them out to use as a deposit for a new PPoR or another IP!
 
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