Rental income and interest payments

[kamchatsky]

Hi all,

I have the following loans setup for my PPOR and 1 IP:

Loan 1: PPOR loan (450K) with Offset (150K) (secured by PPOR)
Loan 2: IP loan for 20% of value of IP (secured by PPOR)
Loan 3: IP loan for 80% of value (secured by IP)
Loan 4: IP loan (115K) with offset (115K) (secured by PPOR), ie no interest paid and is technically "unused".

Questions are:

- should I put all the Rental incomes into Offset for Loan 1, and have interest payments from offsets for loan 1? Or should I do it in offsets for Loan 4? Does it matter from tax deductibility purposes? or it is better to do it in Loan 1 because the rental income will offset the non-deductible debt anyway?

- My banker told me I can pay out and close loan 4, and open new LOC for 200K instead, due to increase in equity of our properties. Should I do this, or I should keep Loan 4, and open Loan 5 for 85K to draw out equity? I never used LOC before so no idea how LOC compares with IP loan with offset. Obviously these loans would be used for purchases of more properties ...

 

[MoneyFairy]

Keep Loan 4!

First question:- are all of your loans with the same lender????

From a risk perspective keeping your PPR and your IP's with separate lenders protects you.

E.G - For some reason you have something happen where you can't pay your PPR loan and get behind on repayments - because they hold security on ALL your properties - they can really stuff things up for you financially.

Your bank will never look at it from this perspective and most people don't realize the rights banks have over your property when they hold it as security.

Structure at a glance i would consider would be

Loan 1 PPR with Offset (Deposit rent and all funds into this to offset your personal debt)

Loan 2 - Term loan with redraw ability for any funds that are not used for IP purposes but maximise Tax deductibility. (For IP purpose but secured by PPR)

Loan 3 - NEW LENDER if with same as PPR
80% Term loan with redraw functionality - same set up as Loan 2

Loan 4 - Loan with full amount available for IP Purposes (Eg Deposit and costs associated with getting IP2) DO NOT CLOSE THIS if you do you will have to re-apply for these funds again when you need them and it will be another CRA enquiry which is unecessary. Bankers work for banks - Brokers work for customers. Well thats my Motto as a Money Fairy anyway!

Hope that helps - Holla with any questions

 

[kamchatsky]

Hi MoneyFairy, the loans are all with the same banker. The reason being is that we can get better interest rate that way. With separate bankers I am not sure if I can get the same interest rate.

 

[MoneyFairy]

Interest rate

Its leaving yourself open for possible issues. Are you 100% certain that the IP is not cross secured against your home? we find a lot of banks do this without even telling their clients that they have done this and when they go to sell it or draw equity the increase in one property is diminished by possible drop in another.

Interest rates while important shouldn't be the main motivation for selecting a lender. Depending on what your goal is long term and what servicing levels those lenders have and the products they can offer you are more important in the bigger picture of building a wealth portfolio.

I am not sure what your goals are but it sounds like you are looking to purchase a few IP's in the future and using lenders that fit the criteria before you reach their limits is something to be considered.

For example CBA's servicing level is MUCH higher than other lenders like Macquarie or Homeside - if you want 5 properties in the next 2 years and you reach your "servicing limit with CBA" and your banker tells you its declined - they won't tell you what reason it is for and so your property portfolio could stall until you came across someone who knew the in's and outs of each lender and how to make it work for you instead of against you.

If you remain with that lender i guarantee the bank will start cross securing the properties and you banker might not even be told about it. From my perspective its entrapment - but they can get away with it being the big guys.

One client my mentor and I have worked the above strategy with and he is 30 and I am about to process an application for his 12th IP!

8 of those properties have been in the past 12 months. (Positively geared and financial situation improving each time)

Ask your banker if they can help you do that!! LOL

I agree with my clients motto - you need to have the right team behind you to make investing work - you need a good broker, a good property manager who jumps on issues before they become big expensive ones, and a good property agent if you aren't experienced in the real estate side of things and of course a good solicitor who has your back when vendors try and pull the wool over your eyes.