releasing equity from PPOR for IP

[Housechopper]

My current PPOR was financed with a 20% deposit, I/O loan with surplus funds deposited into a 100% offset account.

The house value has increased by $150k since I purchased it, and I would like to use this new equity to fund a negatively geared investment property worth $800k.

What is the best loan structure for the investment property to access this equity without 1)paying LMI and 2) paying more money into the PPOR loan?

My bank manager encouraged me to pay more money into the PPOR loan to keep borrowings at 80% to avoid LMI, but I do not want to loose the flexibility of using the PPOR as an investment property in the future.

 

[Peter_Tersteeg]

It's great that your property value has increased by $150k, but that doesn't mean you've got access to $150k.

Without paying LMI, you can borrow up to 80% of the property value. The difference between this and what you currently owe is the equity you can access (without LMI).

Equity available = (Property value x 80%) - Amount owing.

You can access the Amount owing in a good tax structure by setting up a separate loan alongside your existing loan. By using a separate loan account you're keeping money for investment separate from the original non-deductible debt. This makes it clear what money has been used for what purpose when it comes time to figure out the tax implications.


One way to create equity it to pay off the existing loan, I think this is what the bank manager is trying to suggest. If the equity you've currently got isn't enough, it's a reasonable suggestion to accelerate the equity building process. It is in conflict with your desired aim of making the PPOR into an IP at some point.

You could access more equity by leveraging up to 90% and paying LMI (change the 80% to 90% in the equation above). Otherwise there probably isn't an ideal solution to meet every goal, a compromise need to be made somewhere.

 

[Jess Peletier]

I guess it depends on what's more important to you - the tax breaks now on the new IP, or the tax breaks later on the PPOR that might become an IP.

If you want tax breaks now, to maximise the neg gearing on the new IP you would pay as much as necessary into the PPOR loan, and redraw it with a new split. This should cover 20% of the new IP if possible, plus costs (stampduty, legals etc).

Whether you need to pay LMI or not depends on if you have enough to cover 15-20% depending on lender - work with 20% to be safe.

The effect of this is that the new IP is 100% + costs borrowed money.

The other option is to pay for the IP using part equity, part offset funds. Depending how much you have in offset, you may or may not have to pay LMI.

This isn't as tax effective now, but depending on the value/debt on your PPOR it may work out better later, depending how many years until PPOR becomes an IP - get your accountant to run the numbers for you.

 

[Terry_w]

Depends on the numbers.

ideally borrow 103% of the purchase price of the new IP with 23% coming from a new split secured on the PPOR ad 80% secured on the new IP. No cross security. Borrowed money should not be parked in an offset account or any other account where possible.

Existing PPOR should be IO with 100% offset and this loan not paid down.

However the ideal is not always possible. You may have to go 90% LVR on the investment property for example.

 

[Rolf Latham]

Moderate lmi all the way

It won't be so easy to get at locked up cash in the future

The law of surviveability says hold back as much cash as you can unless it's not commercially viable to do so

For some that comm viability means saying no to a monthly fee of say 10 bucks for a particular product feature, yet others are ok to plough in 50 k because it's a cost of business

Ta

Rolf

 

[Housechopper]

Thanks everyone for your help.

So will the bank (CBA) let me borrow the costs of stamp duty also?

I ask the above question because when I bought my ppor, I had to pay the stamp duty in cash plus come up with the 20% deposit to avoid LMI.

I like your proposal Terry, and I do think I have enough cash in our offset account to cover any shortfall in equity from the ppor revaluation.

Depends on the numbers.

ideally borrow 103% of the purchase price of the new IP with 23% coming from a new split secured on the PPOR ad 80% secured on the new IP. No cross security. Borrowed money should not be parked in an offset account or any other account where possible.

Existing PPOR should be IO with 100% offset and this loan not paid down.

However the ideal is not always possible. You may have to go 90% LVR on the investment property for example.

 

[Mick C]

1. Take out the full equity as a split loan - i/o with offset ( CBA allows for muti offset)

This money is ur deposit + stamp duty...


2. It def won't be enough for 20% depsoit ( ie to avoid LMI) but payin LMI on a IP is ok....i rather do that than use my own cash that's sitting in my PPOR ( Bad debt VS good debt)

If it's close and your eligible apply for the LMI waiver at 85-90%...else paying the LMI is ok as well, as long as you dont need to use your own cash!

 

[Terry_w]

So will the bank (CBA) let me borrow the costs of stamp duty also?

I ask the above question because when I bought my ppor, I had to pay the stamp duty in cash plus come up with the 20% deposit to avoid LMI.

I like your proposal Terry, and I do think I have enough cash in our offset account to cover any shortfall in equity from the ppor revaluation.

Yes, they would as long as you meet the serviceability and LVR requirements.