Moving equity from Investment to Residence thought

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From: Anonymous


The following occurred to me last night as we look at the exercise of refinancing our investment portfolio.

We have most of our debt locked in at 3yrs, with around 18months to go, at 7.5%

The honeymoon rate offered by another institution will offset the break costs

The break costs are tax deductible

We will have a large rent excess due to the much lower payment (5.4% rather than 7.5%)

The excess rent could be used to reduce our own home mortgage for the 12month period

The net effect will be a lower home mortgage and higher investment property debt.

Have I just tax effectively moved equity from our investment properties into our own home? :)

Gilbert.
 
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Reply: 1
From: Rolf Latham


Hi Gilbert

I feel perhaps the net difference that you are talking about is mainly due to difference in interest payments rather than equity.

Remember too that while break costs are deductible/debreciable, your intial cashflow situation will be worse, and will take several months to recover the difference, but then you will be racing ahead if you keep paying the same amount of money as b4 as long as rates dont move up.

Ta

Rolf
 
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Reply: 1.1
From: Les .



G'day Gilbert,

And take a bow for "thinking outside the square". Your thought is certainly worthy of consideration.

What I would do first would be to check what YOU think the break costs will be, then check the figure with your lender. Sorry to say it, but you might be in for a nasty shock!!

However, I ran with a PAFOOTA number (pluck a figure out of the air ;^) of $400k to see what the results were:-

Calculated break cost = 400k x 1.5% x 1.5 = $9000 By my calculations, you would retrieve $8.4k of this in the first year on honeymoon rate. So, it sounds good. And we haven't yet considered the Tax relief on the initial $9000 either.

But, as one who has "broken" a Fixed Rate loan, your calculated figure may bear NO RESEMBLANCE to the figure they quote you. And it won't be lower than yours (for sure).

As an example, my "break" was 6 months into a 12 month Fixed Rate for an amount around $150k. The Fixed Rate was 7.9%, and Interest Rates at the time of the break were around 6.8% My calculation for break cost was:-
150k x 1.1% x 0.5 = $825

WRONG!! The actual turned out to be nearer $2000 - go figure !! So, check with the lenders first.

Second, get out Jan's "Story by Story" book and check up story #75 "The penalty" - where a bloke on a fixed rate approached his lender and sorted it out.

I like the way you think, Gilbert. Good luck with it. I'd certainly be interested in the outcome, too - so do keep in touch,

Regards,

Les


- "Eschew Obfuscation" - ;^)
 
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Reply: 1.1.1
From: Les .



G'day Gilbert,

You certainly stirred up my grey matter with your question!! After "sleeping on it", here are some more thoughts:-

Running with my PAFOOTA figure of $400k, and an assumed Rental Income of $400 per week, (and assuming likely Break Costs of $20k!!!!) I reached the conclusion you could be paying $20k to save $11,400.

Now, that doesn't sound good, BUT this doesn't take into account any Tax relief on the Break Cost - so it may not be so bad.

Other things to consider:-
1. The Break Cost can be borrowed (LOC loan against IP?) and the costs of this could be Tax deductible (check with your accountant = CWYA).

2. You are reducing your equity by $20k (or adding to your mortgage - whichever way you like to consider it...)

3. After 18 months the extra $20k loan will be costing you $1200 / year ongoing that you wouldn't be paying if you hadn't "Broken".

4. It is possible (likely?) that Interest Rates will go lower again in December. Of course, this "expected" lowering might be already factored into the Break Cost....

5. It might be preferable to try the "other way" (i.e. Jan's story #75 - where the investor "won" by preparing his case, then asking his lender "What can you do about waiving the penalty to keep me as a customer?" Do read the WHOLE STORY first though ... There are some great ideas in there).

You need to use your figures - and CWYA too!!! And let us know the outcome, won't you,

Regards,

Les


- "Eschew Obfuscation" - ;^)
 
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Reply: 1.1.1.1
From: Anonymous


>You certainly stirred up my
>grey matter with your
>question!! After "sleeping
>on it", here are some more
>thoughts:-

Thanks, its been running around in my head for days as well, I have a started a behemoth Excel exercise to validate the assumptions and I will let you now the results.

I dont have much time, I have two approvals in place for our next IP which settles on Dec 7, one from our existing Lender and one from the Lender who wants to refinance the lot..

Alas the new Lenders valuation's aren't that much greater than our existing Lender, had they been higher the exercise would have been a no-brainer.

Factoring in the interest saved on making a large deposit on our Home Mortgage in the next 12months will probably sway me towards making the move, incuring the break costs, upping our IP debt and lowering our personal home debt..

Nice to find someone who understands the point I'm making, I couldnt work out if I was completely missing some major point or not..

Regards,

Gilbert.
 
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