Pay-off PPOR (slowly) or buy IP?

Hi everyone

I must say that this certainly is an interesting and informative forum for those of us who have an interest in property investment.

As a fairly new "home-owner", I'm wondering whether my interest in property investment may be a little premature though. Being a newbie I'd very much appreciate any helpful hints or advice on options I might have given my current situation which follows:

* PPOR bought for $270K and currently owe $240K after 18 months of higher-than-minimum repayments. However, current value is within $380-$400K range.
* Current after-tax income between my wife and I is $6800/month, however I'm expecting significant payrises in the next 2 years.

I know we could probably be paying off an awful lot more, however given our choice to spend quite a lot on our lifestyle, we're currently feeling comfortable with our repayments of $600/week.

My wife and I are quite happy in our current PPOR, however being a three bedder and given we’re looking at starting a family next year, we’d need to lift the house and build out underneath. More importantly we’d like to do some other renovations, including new windows, new kitchen, external paintjob, and garage out front to improve street appeal.

Possible options:
A. Continue paying off PPOR, increasing repayments in a few years and hopefully paying it off in about 10 years time. However, extra renovations might result in the loan taking several extra years to pay off.
B. Change current PI loan (fixed at 6.5% for another 18 mths) to IO loan and use extra money to fund an IP. Perhaps also going ahead with some of our renovations (say $40-$50K worth) and just adding that onto our PPOR loan, which we could later pay off by selling our IP which would’ve experienced significant CG by then.

My question is basically; is it better to pay off our PPOR before investing when it’s going to take another decade to pay off our PPOR? Being on the river, the CG on our property has been at least 37% in 18 months, which is better than average, however I cannot see the growth rates changing much in Townsville which just seems to be going ahead so fast. The other factor to consider is that median rental prices on a 3 bedder are $300/week and there has been virtually full occupancy for a while now, thus reducing rental risk. My LVR based on current value would be 65% at the very most.

Should I put a bigger dent in my PPOR loan, or should I put the extra money into an IP which will most likely experience huge CG which I could later use to pay off my PPOR and then finance other IPs? The IP would be on the bottom of the market at say $300K. It just seems that spending a decade paying off a house is so unexciting compared to seeing an IP as well as a PPOR riding the huge capital growth wave that is likely to continue.
 
What is your long term goal?

Even if it just to pay off your home then a portfolio of IP's can make that happen faster.

Once you own an IP you will find your attitude to debt will start to change. It becomes a tool instead of a curse. If your attitudes don't change then perhaps investing isn't for you :) :)

If you think you might upgrade your PPOR then stop paying down any extra and save the same amount in an offset account. This will be invaluable taxwise.

Ciao
 
Even if it just to pay off your home then a portfolio of IP's can make that happen faster.

Hi Simon,
As I knew home owner, I'm very interested ...Are you able to expand on that point?


The short answer is: GROSS assets. Assuming (over the long term, anyway) that you will get 7% growth p.a. on all your properties, the bigger your gross assets, the greater your gains.

That is, buying an IP and a PPOR, then in 20 years selling the IP to pay off the PPOR loan will be better financially than just buying a PPOR and paying it off after 20 years.

The difference is that with scneario one you get the growth on the IP AS WELL AS the growth on the PPOR.

My own situation, for example, is that I own more IP (value) than the value of the PPOR I plan to buy. So while I can sell my IPs and get the PPOR with little debt, I'd rather keep the IPs, pay more interest on the PPOR (not deductible) but I also get the growth on the IPs.
Alex
 
Think of it this way...

If you had 60k in your pocket you could
a) pay down your PPOR mortgage
b) use it as a deposit for an IP

If you choose a) you save yourself $4,500 in interest payments per year
If you choose b) AND assume capital growth is the same as interest rate for arguments sake, and you buy a 300k IP. After one year it is worth $322,500. So you have increased your equity by 22,500 but you still incur the interest you would have saved on your PPOR, so net gain would be 18k.

This is the power of leverage.

Of course, the gains compound over the years, and the growth rate can far exceed 7.5% if you choose wisely.
 
If you think you might upgrade your PPOR then stop paying down any extra and save the same amount in an offset account. This will be invaluable taxwise.

Ciao

Thanks for your response Simon. Could you please clarify what the advantage of putting the extra repayments into an offset account would be? Currently with my fixed term I cannot use an offset account. However I would have redraw facility available at the end of the fixed period. This isn't a problem at the moment as 6.5% is below the current cash rate!

My guess would be that there would be no extra repayments at least for a few years if we put that extra money into paying off a negatively geared IP. In fact, we'd probably have to have interest only repayments for both properties to be able to afford the negative gearing.
 
Thanks for your response Simon. Could you please clarify what the advantage of putting the extra repayments into an offset account would be? Currently with my fixed term I cannot use an offset account. However I would have redraw facility available at the end of the fixed period. This isn't a problem at the moment as 6.5% is below the current cash rate!

Simon's idea is this. Say you have a $500k PPOR, $500k loan, you have $100k extra cash.

1) Put 100k into the offset account. You pay interest on $400k. When you move PPOR, you use that offset 100k as a deposit for your new place. The old place converts to an IP, you have $500k deductible loan against it.

2) Put $100k into the loan. You pay interest on $400k. When you move PPOr, you refinance, get $100k out as a deposit for your new place. The old place coverts to an IP. You now have $400k deductible and $100k NOT deductible because it was used to buy your new PPOR.

The redraw facility doesn't let you avoid the situation with (2), because you're still paying off part of your loan and then redrawing. An offset is a totally separate account that essentially pays you the same interest as you are paying on your mortgage.
Alex
 
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