Release of Equity

[Fadz]

Hi

Hopefully a simple question. It has been 18months since my Partner and myself bought our PPOR and things have been fine but time has come where we are considering an investment property towards to end of this year.

Is there any advantage/disadvantage is getting our place valued to release equity, so if a investment opportunity presents itself we are able to move on it quickly rather than risk the potential of missing out. The funds would remain dormant unless required

Thanks in advance

Brendan

 

[Jess Peletier]

I can't think of any disadvantage, I would say it's wise.

Although if you're going to buy toward the end of the year, and you are confident your home won't go down in value dramatically, you could always wait another 6 months or so and potentially make use of any gains that happen in that time.

Regardless, it's always good to be prepared - you never know when the perfect opportunity will pop up!

 

[Redom]

Hi

Hopefully a simple question. It has been 18months since my Partner and myself bought our PPOR and things have been fine but time has come where we are considering an investment property towards to end of this year.

Is there any advantage/disadvantage is getting our place valued to release equity, so if a investment opportunity presents itself we are able to move on it quickly rather than risk the potential of missing out. The funds would remain dormant unless required

Thanks in advance

Brendan

Hey Brendan,

Its a great way to buy investments because:

1) The debt you release is deductible. Therefore your new investments interest expense could be 105% deductible.

2) Doesn't require cash from you. You can borrow the closing costs for the transaction.

Most investors I know grow their portfolios by releasing equity. To do so, its important to have a finance strategy in place, so your with the right lender that allows equity releases in the most convenient/hassle free way. SOme of the online providers fall short in this space.

It could also be a good idea to have a think about how you'd like to invest. Is this one IP a one shot game, or part of an accumulation phase? If its the latter, its definitely very valuable to be three steps ahead and map out how you'll get the funds to achieve your goals, which lender(s) to use and when to release equity.

Cheers,
Redom

 

[Corey Batt]

It's good to see you're thinking about this already. Definitely is a prudent move to take out the funds now and have them ready to snap up a good deal.

One of the primary means of getting a great property purchase is being able to commit and FAST - having those funds available means you can offer shorter settlement terms, larger deposits etc which can be used as a negotiating tool.

 

[Ace in the Hole]

1) The debt you release is deductible. Therefore your new investments interest expense could be 105% deductible.

Cheers,
Redom

This is something I never really looked into, but can you confirm it to be true?
I always thought deductibility was for the purpose of the loan.

So if one were to refinance their PPOR to cash out 100k and let it sit for a special need.
Then they decide they want to buy a boat because they are crazy, obviously the extra interest for the cash out is not deductible.
But then they wake up to themselves and sell the boat for 50k.
Then use this 50k as a deposit on a 250k IP.

Does this then mean that the interest for 50k of their PPOR loan is now deductible debt?

Not sure if this makes sense.

 

[Peter_Tersteeg]

Make sure you get the valuation done by your broker or lender. There's not much point in getting a valuation done that your lender won't accept.

About the only disadvantage of doing it now is that many lenders won't accept another valuation for anywhere between 3 to 12 months. Getting the increase done now, may block you for doing it again later. Policies on this vary significantly from one lender to another.

 

[albanga]

This is something I never really looked into, but can you confirm it to be true?
I always thought deductibility was for the purpose of the loan.

So if one were to refinance their PPOR to cash out 100k and let it sit for a special need.
Then they decide they want to buy a boat because they are crazy, obviously the extra interest for the cash out is not deductible.
But then they wake up to themselves and sell the boat for 50k.
Then use this 50k as a deposit on a 250k IP.

Does this then mean that the interest for 50k of their PPOR loan is now deductible debt?

Not sure if this makes sense.

Very interesting question. So you sell it for 50k and then put that back onto the loan and then redraw it for an IP.
hmm keen to see what the tax experts say about this one.

 

[Redom]

This is something I never really looked into, but can you confirm it to be true?
I always thought deductibility was for the purpose of the loan.

So if one were to refinance their PPOR to cash out 100k and let it sit for a special need.
Then they decide they want to buy a boat because they are crazy, obviously the extra interest for the cash out is not deductible.
But then they wake up to themselves and sell the boat for 50k.
Then use this 50k as a deposit on a 250k IP.

Does this then mean that the interest for 50k of their PPOR loan is now deductible debt?

Not sure if this makes sense.

I don't think so, as the connection is loose. I'm pretty sure the taxman won't like this, but best to leave it to the tax experts to comment.

Perhaps I should've been clearer in my original post, was just stating that if funds are released to purchase an IP that those funds are deductible.

 

[Jess Peletier]

Very interesting question. So you sell it for 50k and then put that back onto the loan and then redraw it for an IP.
hmm keen to see what the tax experts say about this one.

If you put the $50k back into the loan so it zeros out, THEN redraw to buy your IP the funds will be fully deductible.

If you don't put the money back in the loan but use the $50k cash as your deposit the interest won't be deductible add the loan was for the boat.

BUT I'm not a tax guy. Girl.

 

[Terry_w]

This is something I never really looked into, but can you confirm it to be true?
I always thought deductibility was for the purpose of the loan.

So if one were to refinance their PPOR to cash out 100k and let it sit for a special need.
Then they decide they want to buy a boat because they are crazy, obviously the extra interest for the cash out is not deductible.
But then they wake up to themselves and sell the boat for 50k.
Then use this 50k as a deposit on a 250k IP.

Does this then mean that the interest for 50k of their PPOR loan is now deductible debt?

Not sure if this makes sense.

If not only purpose but use that determines deductibility.

In this situation you have borrowed $100k to buy a boat. No interest deductible (in most cases) if they sell the boat at a loss this doesn't change the purpose or the use of the outstanding $50k. It still relates to the purchase of a boat - which is no longer around.

So not deductible.

 

[albanga]

Hey Terry,
I think everyone understands that but what about if you then put the 50k back onto the loan and redraw it again for the purchase of an IP?
I would assume this would make it deductible again?

 

[Choc]

Hey Terry,
I think everyone understands that but what about if you then put the 50k back onto the loan and redraw it again for the purchase of an IP?
I would assume this would make it deductible again?

Wouldn't you ask the bank to separate this 50k so that it is clear that this loan is specifically for the purposes of buying an IP?

What I have done previously was to valuate my PPOR upfront and request a size-able loan and have it funded into an offset account. I then got the bank to divert/slice up this amount to fund separate IPs or for personal use; when required.

Makes your accountant's life a lot easier this way by not contaminating your loans with personal/ip-related expenses.

 

[Jess Peletier]

Hey Terry,
I think everyone understands that but what about if you then put the 50k back onto the loan and redraw it again for the purchase of an IP?
I would assume this would make it deductible again?

In that case, it's fine.

Eg - $100k loan

$50k out to buy boat

Sell boat

$50k back in so balance is fully undrawn

Buy IP

All deductible.

As Choc says, if you want to spend anything on non-deductible things it's best to split it off first to keep things easy for the taxman.

 

[Terry_w]

Hey Terry,
I think everyone understands that but what about if you then put the 50k back onto the loan and redraw it again for the purchase of an IP?
I would assume this would make it deductible again?

When you pull it out of the loan it is new borrowings so it will depend on the use it is put to.

 

[Terry_w]

In that case, it's fine.

Eg - $100k loan

$50k out to buy boat

Sell boat

$50k back in so balance is fully undrawn

Buy IP

All deductible.

As Choc says, if you want to spend anything on non-deductible things it's best to split it off first to keep things easy for the taxman.

I thought the boat cost $100k?

If so it would be all deductible except the interest on the $50k lost on the boat. That would still be outstanding.

 

[Jess Peletier]

In my example the boat was $50k - I misread. I'll edit they post so is not confusing.

 

[Jess Peletier]

In that case, it's fine.

Eg - $100k loan

$100k out to buy boat

Sell boat

$100k back in so balance is fully undrawn

Buy IP

All deductible.

As Choc says, if you want to spend anything on non-deductible things it's best to split it off first to keep things easy for the taxman.

That's better

 

[Jamie_]

 

[Jess Peletier]

Haha! It's a Hot Chip thread.

 

[Fadz]

Thanks Everyone for the replies. This forum is a great resource for Newbies like ourselves

Further to this I am just seeking clarification

We are going to be able to release some equity and have it there in case we need to use so that we are able to move on something if the opportunity presents itself. Valuation came back better than expected which was nice

We have fixed loan of 200k and variable of $165k of which 30k will be in an offset account which will be kept completely separate from main account so will be clear (I hope) for what the funds are/will be used for which is investment purposes. We may choose to make a small investment in some shares TBA. If the funds from the offset is used correctly (being invested) have we got the structure correct???

We were required to have a loan of at least 150k to take advantage of a good interest rate and therefore seems unable to have a completely separate loan. Yet to sign anything but have we done the wrong thing bearing in mind it is only interest on 30k we might not be able to claim for tax purposes

Regards

Brendan