interest only on PPOR?

[natedog]

Hey guys, i am interested in getting some opinions here. i am new to the forum and property investing as we have our own PPOR and we are now looking to turn this into an IP and purchase a new PPOR, its a learning process (finance, tenants,etc...).Anyway, reading through a few of the threads it seems to be the general consensus that paying extra off your PPOR mortgage is a good idea so that you then have extra equity to invest with as the property increases in value. Why not just have an interest only loan for your PPOR with a 100% offset account attached to it so that your REQUIRED interest payments are lower, but any extra cash you have is also reducing the ammount you have to pay back each month? Wouldnt this also help your servicabilty for another property as your loan repayments would be lower. i know on our 330k mortgage the difference between paying P&I and IO is about $225 per month assuming our offset balance is zero. as time goes by and you build up your offset your IO payments decrese and you have readily available funds aswell as growing equity. does anyone want to agree or shoot some holes in this idea for me???

PS i love this forum, it is a wealth of info

 

[WillG]

Hi natedog,

IO with 10% offset is an ideal situation. Should make the transition from PPOR to IP smooth and keep the tax simple.

Not many banks offer this kind of loan & associated account.

Good luck

 

[quiggles]

The prob I see is this:

Situation 1:

PPOR value: 300,000
Amount Owing: 300,000
Offset account $60,000

You go shopping and use $30,000 as a deposit on IP.

You've paid cash on the IP deposit, and increased the NONDEDUCTIBLE interest on the PPOR.

Situation 2

ppor value: 300,000
Amount owing: 240,000

You redraw on the loan and the extra interest is tax deductible. One thing to consider anyway. take it into account as your overall figures will move around depending on your exact circumstances.

 

[natedog]

hey quiggles, the ammount still owing on the first property is still 300,000. assuming this is used as an ip then it is fully tax deductible, isnt it?

 

[Robert B.]

Quiggles,

Your situation 1 theory is flawed. The $30,000 is deductible. It is the PURPOSE of the funds that determines the deductibility, not where they are secured or where they come from.

 

[shazza]

We have this set up on our PPOR. As far a I can figure its like a defacto Line of Credit but with a cheaper interest rate.

This strategy was discussed a couple of weeks ago on this forum actually in a thread called 'Now the time to pay down PPOR debt?' (sorry dont know how to link but search on this question.)

We are doing this to save for a deposit for another IP as fast as possible.

But like a LOC you have to be disciplined and not spend the extra.

Where is the deposit for your new PPOR coming from?

But the best thing to do would be take the info learned from the forum and find a good mortgage broker who should be able to come with the best option for your circumstances and future plans.

cheers Sharyn

 

[abcdiamond]

A quick point on converting a current PPOR into an IP at the moment, with regard to CGTax.

If you bought the property say, 4 years ago for say $200k, and it is now worth $400k, but with reduced growth only goes up to $480k in the next 4 years.

Your actual IP profit will be $80,000

But, will the tax office calculate as follows:
$480k - cost $200k = $280k profit divided by 8 years owned, then multiplied by 4 years as an IP = $140k profit, and not the $80k ?

Any ways around this ?

 

[natedog]

hey shazza and everyone, we actually do have it set up as IO on our PPOR basically for all the reasons that shazza has stated.Shazza we have revalued and will refinance to cover our costs of purchasing a new IP, Then we will take out a loan from different lender to fund full cost of new property. But back to the IO on PPOR, can anyone give me a reason why its not a good strategy?

 

[shazza]

My thoughts are by not reducing the principle on your PPOR loan you're not getting rid of your non-deductible debt, which is not a great long-term investing strategy.

Our loan will revert to I&P after 5 years.

cheers Sharyn

 

[Ausprop]

A quick point on converting a current PPOR into an IP at the moment, with regard to CGTax.

If you bought the property say, 4 years ago for say $200k, and it is now worth $400k, but with reduced growth only goes up to $480k in the next 4 years.

Your actual IP profit will be $80,000

But, will the tax office calculate as follows:
$480k - cost $200k = $280k profit divided by 8 years owned, then multiplied by 4 years as an IP = $140k profit, and not the $80k ?

Any ways around this ?

yes there is a very effective way around this - as I believe the laws have changed now and it is based upon the valuation of the property at the changed date. I was quite surprised to see this change. see www.ato.gov.au - a minefield of information and useless facts!

 

[abcdiamond]

yes there is a very effective way around this - as I believe the laws have changed now and it is based upon the valuation of the property at the changed date. I was quite surprised to see this change. see www.ato.gov.au - a minefield of information and useless facts!

Any idea where in that "minefield of info" ?

 

[pfsfinance]

I have converted a couple of my own ppors to IP's over the years.

This is how I did it.

Have the ppor loan at interest only with a offset account and deposit all excess funds into the offset account to lower you interest factor whilst it is still a ppor. If you are converting it to an IP in the near future you do not want to decrease your debt level as it will become tax deductable when you convert it.

Save the deposit you need to purchase a new ppor in the offset account or use your existing equity that you have in your existing property.

There are heaps of lenders that have IO Loans with 100% offset accounts.

 

[quiggles]

Quiggles,

Your situation 1 theory is flawed. The $30,000 is deductible. It is the PURPOSE of the funds that determines the deductibility, not where they are secured or where they come from.

No, 'cos the $30,000 is cold hard cash. It lowers the debt on the IP, not on the PPOR. As natedog points out, if you are PLANNING to turn your ppor into an IP, the strategy is sound. If you are planning to live in your PPOR for the foreseeable future, you want to lower the debt on your PPOR as much as possible. That was why capaitalisation of the interest on the IP, while paying down the principal of the PPOR was so good until it was banned.

 

[quintets]

No, 'cos the $30,000 is cold hard cash.

That sounds about right. If it's cash in an offset, then it wasn't a interest-bearing debt instrument.

The way I've had it explained to me is that if you have money that you want to use in an investment, pay it INTO your PPOR, not in an offset AGAINST it. Then redraw it out. The interest is then deductible.

Disclaimer-I'm not a mortgage broker.

Jireh

 

[Robert B.]

No, 'cos the $30,000 is cold hard cash. It lowers the debt on the IP, not on the PPOR. As natedog points out, if you are PLANNING to turn your ppor into an IP, the strategy is sound. If you are planning to live in your PPOR for the foreseeable future, you want to lower the debt on your PPOR as much as possible. That was why capaitalisation of the interest on the IP, while paying down the principal of the PPOR was so good until it was banned.

Get a new accountant. You are missing out BIG TIME!

I have nothing more to say on this.

 

[Rolf Latham]

Hiya

In the end, all ideas are correct.

What it comes down to in my view is "foreseeable" future.

The future is unpredictable................, and what you foresee this morning may no longer apply this afternoon.

Im of the opinion that if you are going to pay tax paid savings into a PPOR loan, your intent would want to be live forever in that house.

That being the case , in the example above ?, id pay the 30 k down, and then create a SEPARATE facility for the 30 k to separate the mixed purposes of the loans.

The issue with taking the 30 k out of the offset for another IP is that its TAX paid money, you arent borrowing it and therefore, you are sacrificing reducing your PPOR loan by 30 k

ta

rolf

 

[Twitch]

That was why capaitalisation of the interest on the IP, while paying down the principal of the PPOR was so good until it was banned.

I disagree, it wasn't banned, although the ATO may want you to think this. The ruling against the Harts was not about the blanket legality of capitalising IP interest; it was about a certain finance company, their specific loan structure (PPOR and IP in same LOC) and how that product was marketted. It is easy to achieve IP interest capitalisation (hint: using separate LOCs).

 

[ArJay]

Hey Folks.

Great thread so far....

Can someone explain "capaitalisation of the interest on the IP" in laymans terms

(Think I brain my damaged)
ArJay

 

[Twitch]

Hey Folks.

Great thread so far....

Can someone explain "capaitalisation of the interest on the IP" in laymans terms

(Think I brain my damaged)
ArJay

Pure capitalisation is where all interest is simply added onto the loan amount, so the loan amount grows over time. The good thing is it costs nothing to service. The danger is if the growth of the underlying asset doesn't better the growth in the loan amount.

A variation is where you have two loans. One for the purchase price + costs, the other to fund the negative gearing shortfall. So at the end of each month, whatever shortfall there is between rent and expenses (including interest), loan 2 is used as a top up to meet the short fall. Therefore loan 2 grows over time whilst loan 1 stays constant. Loan 2 interest can (should?) be paid out of your own pocket, but this amount is far less than funding the whole negative gearing shortfall. The reduction in the IP holding cost can (should!) be put into your non-deducable PPOR if you have one.

Warning: not everyone agrees with this approach, anyone wanting to use it would need to take advice from an accountant.

Warning2: if the out of pocket savings are not directed into reducing other debt, and in an environment of rising interest rates and falling asset prices, this is a great strategy to go bankrupt.

 

[quiggles]

Get a new accountant. You are missing out BIG TIME!

I have nothing more to say on this.

You are free to speak your mind on this forum - politely - and if you have value to add, it may be worth doing so.

As for both myself and my accountant, we are comfortable with my structures as I have no nondeductible debt whatsoever.