LOC V/S topping up loan to fund IP Purchase

Hi Guys
I am interested in knowing what are the pros and cons of setting up LOC on my existing loan and topping up my existing loan ((to take the total borrowings on this security up to 80% LVR)

My current situation is:

Loan Amt left on my PPOR - $193,000
Lender for my Current property - My Rate
Current valuation of existing property as per Residex Report - $325,000

Investment property purchase price - $320,000
Possible Weekly Rent return - $370.00

I would like to use equity ($130,000) build up in existing property to take on 100% investment loan with CBA. CBA is advising me I would have to pay 10% deposit as they cannot use equity on existing property as it is with another lender.

Workaround:

I have been suggested I can structure my loan in one of these 2 way:

1. Setup LOC on existing loan and use equity to pay for deposit on IP.

2. Top up my loan to max 80% LVR and use that amount to fund my IP 10% deposit.

Please confirm which option would allow loan deductions to be used as 100% of the purchase price and which is the best way to go for.

Thanks
 
NEITHER

Set up a SEPARATE facility to 80 % lvr. Doesnt matter a whole lot of LOC or term loan.

Otherwise u risk comtamination of investment and PPOR debt. Both an accounting mess now and much worse in the future

At the same time convert your PPOR loan to an IO term loan with an offset account for future proofing the remainder debt on the PPOR, in cease u move out and convrt that into a PPOR

having said that, i am not surprised that you have been provided those suggestions from a lender. Send them a raspberrry and a note to get their NCCP training up :). I have made an assumption here, but often a fair one when clients have used "drive thru" lender.

While these guys are often fine for ma an pa home loan that you will just pay off and live there for the rest of ur days, oftern their advice and sometimes their products dont suit ones next move.

Taking this one setep further, you could look at setting up a debt recycle strategy, which ( if suitable) and properly implemented may reduce your non deductible debt much more quickly than the traditional means

taa
rolf
 
Thanks for your reply, Rolf. Can you please eloborate on this. What do you mean when you say "Setup a SEPARATE facility to 80% lvr" As this will be my first IP, I am new to all this.

I understand the second part, converting PPOR loan to IO loan with offset to keep principal higher in case converting PPOR to IP.

YOu are pretty right on your view towards lenders. They really dont think out of the box and provide a geninue solution to help the client but yeah they do sound like they are working for you ;)
 
Hi

using ur numbers

325 value means you can borrow to 260 k without lenders mortgage insurance agianst your PPOR. This model only applis if you did NOT use lmi when u took the loan out to start with.

U currently have a loan limit of 193. ASsuming you have some BUFFER money elsewhere, 260 -193 = 67 000 as a SEPARATE loan to the 193 u currently have.

U can then use that 67 for the deposit and costs for the CBA loan, with a littl bit ofmoney left over,

Please note this is a SIMPLISTIC model which could be much improved upon depending on ur goals, risk profile, tax bracket and investment horizon.

ta
rolf
 
ok got it rolf.

So basically it is same as topping up my loan to maximum 80% LVR (260K) but making sure I keep 67K as Separate Loan account to 193K So that things dont become messy.

"U can then use that 67 for the deposit and costs for the CBA loan" - Big question is Can I use interest charged on this 67K Separate account with first lender for tax deduction as this is being used to fund IP?

If above is true that means I am able to use 100% purchase cost for tax deduction (253K loan with CBA and 67K separate loan with existing lender)

If this is how I can get 100% purchase cost deductions, it would be awesome. :) I will definately speak to my cba lender and work out slight modifications to this model to suit my requirements as you suggested.
 
Hi

using ur numbers

325 value means you can borrow to 260 k without lenders mortgage insurance agianst your PPOR. This model only applis if you did NOT use lmi when u took the loan out to start with.

rolf

Hi Rolf,

Just on your comment above. Assuming LMI was used to get the finance for the PPOR in the first place - can you then borrow (or top up) up 90% and not pay LMI again?

Thanks
 
Sorry to bother you again Rolf. Can I still put my extra cash in offset of my existing home loan of 193K. Wont ATO tell me to put my money in 67K separate loan as I am claiming deduction on interest on that portion inspite of having extra cash.

I know these are small questions but I want to be 100% sure.
 
Hi Cross

In MOST but not all circumstances, if LMI to 90 % has been paid, then you only need to pay a top up premium...........which is usually ( but not always smallish)

ta
rolf
 
Hi AMS

If the SPARE cash is YOUR tax paid money, and not borrowings, the ATO has no right as to where that should be parked, and wont affect your dedns

ta
rolf
 
Rolf, Another question mate. Sorry for the trouble.

If I currently withdraw 42K to pay for 10% deposit and stamp duty to fund my CBA new loan and at the same time request existing lender for top up of 42K with IO loan. Will that be still allright. As time is short rather than waiting for top up of 42K to go through, I want to settle new loan first and dont want things to fall off due to delay with my existing lender.

If I do this how will I justify ATO that top up was to fund IP for deductions. They might ask you already funded IP with your own money and top up was done later on so it was not used directly to fund IP.

Please advise. Thanks a lot
 
Rolf, Another question mate. Sorry for the trouble.

If I currently withdraw 42K to pay for 10% deposit and stamp duty to fund my CBA new loan and at the same time request existing lender for top up of 42K with IO loan. Will that be still allright.

No. You'll then have part of the original loan for your new home, and part of the same loan going towards your IP. Mixing non deductible and deductible stuff together is bad news.

You'll have 3 loans basically. One that you have on your existing place which doesn't change. A 2nd/new one which is secured to your existing place, and funds within it are ONLY used for investment purposes (EG IP desposit, shares, etc). And a 3rd loan for buying the new IP with.
 
nah

Wont fly because we have lost the nexus of the funds

If they cant do the top up per se in time, maybe they can split the 42 off as a separate facility ?

ta
rolf
 
Rolf, Even if they divide my existing loan into 2 with 151K and 42K IO loan as separate, question ATO would ask is "you already paid 42K yourself. So why are you claiming tax deduction on a loan that was set up after the settlement".

Becoz in above case once top up gets done, I would be withdrawing that 42K to put it back into existing PI loan for my PPOR (from where I would be withdrawing 42K to pay for IP intially).

Can I justify I had to pay 42K myself becoz top up was getting delayed. Is the explaination reasonable enough to get away?
 
K_Raheja@ - Mate, You would understand the anxiety for the 1st timers like me. I really appreciate the effort Rolf has put in to answer my enquiries. I have got good understanding of things now but got struck on this problem.
 
.

Can I justify I had to pay 42K myself becoz top up was getting delayed. Is the explaination reasonable enough to get away?


My clients experience is no...........but then, maybe, its worth challenging the ATO on issues why should I be penalised because my lenders are slow etc

On to realities

when is settlement fot the IP ?

ta
rolf
 
Rolf, I just signed contract yesterday. So probably I do have 35-42 days.That's enough time for organising all. But yesterday I realized I have to pay 10% (on request can be 5%) in 10 days from signing the contract. I can ask for some extension but still.

I have called Myrate (existing lender ) on friday but they have advised they will get back to me in 48-72 hrs which makes me think they are pretty slow in their work. I am realizing these non-bank lenders are only good if you are never calling them and will pay off your loan in 30 yrs time only.

Somebody told me abt deposit bonds? Will that work for me in this situation? Is that smthing my solicitor has organize for me?
 
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