My Situation... Opinions Please

[Reality Cheque]

Hi All,

I'm a bit stuck as to what to do next, was hoping to maybe get a few ideas.

This is my situation.

PPOR value $315,000 (owe $280,000)
Block of land value $150,000 (own outright)
Block of land value $180,000 (own outright)
$80,000 cash

The loan on my PPOR is fixed at 7.99% for another 6 years so I can only pay a max of $10,000/yr in extra repayments. Ideally I'd like to break it, pay the $80,000 off it and then pay the rest of the PPOR loan out in about 4 years.

I'm paying rates on the vacant blocks and would like to build IP's on them once the PPOR debt was paid off.

Only problem is it is going to cost $35,000 to break the loan.

Not all that keen on borrowing more money at this stage but I'm not all that keen on the $35,000 break fee either.


I could borrow to build and then throw my money at paying this off but then I'm left with a fully paid off IP and all my debt on a PPOR.

My servicability is good so I've got plenty of money to throw at something but nothing ideal to throw it at.


Suggestions or idea's anyone?

Thanks

RC

 

[Aaron_C]

You're pretty stuck. If you don't want to pay break fees then just ignore the PPOR loan and concentrate on your IPs.

 

[Reality Cheque]

You're pretty stuck. If you don't want to pay break fees then just ignore the PPOR loan and concentrate on your IPs.

That's the other thing. Am I better off breaking the loan seeing as I could pay it off relatively quickly. I'd have to work it out I suppose but the break fee might be less than the interest I'd end up paying.

RC

 

[savoys]

how about turning your PPOR into IP, and keep the loan as is?

 

[Propertunity]

If I were you, I'd forget about breaking the fixed loan. It was presumably done at a time as a risk management strategy. OK so you called it wrong and IRs fell. No biggie. It is only 0.6% above standard variable anyway.

I'd sell the blocks of land. They are not producing rental income. It is cheaper to buy established at the moment than build.

Cheers.

 

[Rolf Latham]

build something on the blocks that make an income.......

would be +ve geared ??

ta
rolf

 

[Graemsay]

For a one-off payment, breaking the mortgage doesn't make sense. Borrowing $80K over six years at 7.99% costs you around $38K, which is only slightly more than penalty the bank's levying.

If you fed in $10K at the start of every year then the borrowing costs of that $80K falls to $22K over six years. So that's a saving of $13K over breaking the mortgage.

I haven't done any calculations on interest costs of the other $200K on the mortgage. You probably need to set up a spread sheet for that, but the options strike me as being:

• Pay off an extra $50K per year over the next four years, and clear the mortgage in that time.
• Save $200K over four years using term deposits, overpay by $10K a year, and make a single payment to clear the mortgage in year four. The penalty is likely to decrease over time, as it's there to make up a shortfall due to the bank losing income from interest payments.
• Overpay the mortgage (as above), but save the excess in term deposits, and repay the whole lot in six years time when the penalty expires.

Term deposits offer up to 6% interest, though you'd be losing a chunk of that to tax. But it would offset some of the costs of holding a mortgage for longer.

My suspicion is that the first option might work out the cheapest overall, due to what you'll be paying as interest for the next four to six years. But I don't think that there'd be much in it.

I'd be inclined to look at the second or third options. That would give you a large cash buffer if the economy sours, or a source of funds if an opportunity came up.

 

[Reality Cheque]

If I were you, I'd forget about breaking the fixed loan. It was presumably done at a time as a risk management strategy. OK so you called it wrong and IRs fell. No biggie. It is only 0.6% above standard variable anyway.

I'd sell the blocks of land. They are not producing rental income. It is cheaper to buy established at the moment than build.

Cheers.

Selling the blocks was my preferred option but it hasn't worked out. They are the cheapest of their kind and have sat on the market for 18 months with not one offer unfortunately.

Agree about buying established, might have to forget about the blocks for now and go and find another deal.

RC

 

[Reality Cheque]

For a one-off payment, breaking the mortgage doesn't make sense. Borrowing $80K over six years at 7.99% costs you around $38K, which is only slightly more than penalty the bank's levying.

If you fed in $10K at the start of every year then the borrowing costs of that $80K falls to $22K over six years. So that's a saving of $13K over breaking the mortgage.

I haven't done any calculations on interest costs of the other $200K on the mortgage. You probably need to set up a spread sheet for that, but the options strike me as being:

• Pay off an extra $50K per year over the next four years, and clear the mortgage in that time.
• Save $200K over four years using term deposits, overpay by $10K a year, and make a single payment to clear the mortgage in year four. The penalty is likely to decrease over time, as it's there to make up a shortfall due to the bank losing income from interest payments.
• Overpay the mortgage (as above), but save the excess in term deposits, and repay the whole lot in six years time when the penalty expires.

Term deposits offer up to 6% interest, though you'd be losing a chunk of that to tax. But it would offset some of the costs of holding a mortgage for longer.

My suspicion is that the first option might work out the cheapest overall, due to what you'll be paying as interest for the next four to six years. But I don't think that there'd be much in it.

I'd be inclined to look at the second or third options. That would give you a large cash buffer if the economy sours, or a source of funds if an opportunity came up.

Thanks Graemsay,

Accumulating a large cash buffer wouldn't be a bad idea at the moment.

If there was ever a time when cash is king I think this is it.

RC

 

[Edge7]

I reckon you have the time to build on atleast one of those blocks, make it cf pos and still have the money saved to pay off your ppor in six years time.

 

[Terryw]

Whats the long term plans?

What about making the PPOR an IP, break the loan and claim the fee as a deduction.

Where are the blocks which state?

I would be looking at selling one or both bocks. Possibly do your spouse or a discretionary trust. Funds released could pay off non deductible debt and then you can start investing again more tax effective and in appropriate structure.

You should do some spreadsheets with the costs v benefits of different scenarios.

 

[Rolf Latham]

Possibly do your spouse or a discretionary trust.

know one I clearly understand.........the other I am confused about ?

ta

rolf

 

[Terryw]

Didn't understand what you meant for a min there Rolf.

Should be: To your spouse.
Doing your spouse is not deductible.

 

[Reality Cheque]

I reckon you have the time to build on atleast one of those blocks, make it cf pos and still have the money saved to pay off your ppor in six years time.

Yes that could be an option. Will have to start looking into building costs to see how it would work out.

Thanks

RC

 

[Reality Cheque]

Whats the long term plans?

What about making the PPOR an IP, break the loan and claim the fee as a deduction.

Where are the blocks which state?

I would be looking at selling one or both bocks. Possibly do your spouse or a discretionary trust. Funds released could pay off non deductible debt and then you can start investing again more tax effective and in appropriate structure.

You should do some spreadsheets with the costs v benefits of different scenarios.

Long term plan is to build a portfolio of Cf+ IP's.

The blocks are in NSW.

Didn't realise you could sell to a spouse or discretionary trust to change the structure. Don't even know what a discretionary trust is. Would you mind going into this in more detail?

Thanks

RC

 

[Rolf Latham]

Long term plan is to build a portfolio of Cf+ IP's.

The blocks are in NSW.

Didn't realise you could sell to a spouse or discretionary trust to change the structure. Don't even know what a discretionary trust is. Would you mind going into this in more detail?

Thanks

RC

I will Terry get into the specifics.

Its a common strategy to REGEAR where tax deductability has been contaminated or wiped out due to poor structure OR a change in circumstances

ta
rolf

 

[Terryw]

Long term plan is to build a portfolio of Cf+ IP's.

The blocks are in NSW.

Didn't realise you could sell to a spouse or discretionary trust to change the structure. Don't even know what a discretionary trust is. Would you mind going into this in more detail?

Thanks

RC

I was more after your long term plans regarding the PPOR. Do you think you will stay or sell or rent out?

What state are the properties in?

If you owned one with a spouse 50/50 then either of you could borrow to buy out the other. This would release money which could be paid into the PPOR loan. New borrowings may be deductible as the purpose could be investment.

Or you could sell on the open market.

Do a google to find out what a trust is. I was thinking more along the lines of you could sell both and pay off the house then you would free up the cashflow and be tax effective. You could then set up a discretionary trust and then plough all spare cash into this to purchase further properties. Any problems with negative gearing will be short lived as you will be injecting cash into the trust and buying cashflow +ve properties anyway.

 

[Reality Cheque]

I was more after your long term plans regarding the PPOR. Do you think you will stay or sell or rent out?

What state are the properties in?

If you owned one with a spouse 50/50 then either of you could borrow to buy out the other. This would release money which could be paid into the PPOR loan. New borrowings may be deductible as the purpose could be investment.

Or you could sell on the open market.

Do a google to find out what a trust is. I was thinking more along the lines of you could sell both and pay off the house then you would free up the cashflow and be tax effective. You could then set up a discretionary trust and then plough all spare cash into this to purchase further properties. Any problems with negative gearing will be short lived as you will be injecting cash into the trust and buying cashflow +ve properties anyway.

Long term plan is to stay in the PPOR. Everything is owned 50/50 with spouse.

Thanks for introducing the idea of a discretionary trust. Sounds like that may be the way to acheive the structure that I'm after.

rgds

RC

 

[Terryw]

Long term plan is to stay in the PPOR. Everything is owned 50/50 with spouse.

Thanks for introducing the idea of a discretionary trust. Sounds like that may be the way to acheive the structure that I'm after.

rgds

RC

If the land is in VIC it could be possible for one spouse to buy out the other without stamp duty. CGT may apply still though.