returning expat financing options.

[Gerg]

Hi. I have been reading the forum over the past year or so, and I realize now that I perhaps did not structure my loan repayments in the most flexible way and I am now looking to fix this.

I have been living overseas for past 10 years, and will be returning to Adelaide. I will not live in IP1, so have the option to purchase a PPOR or Rent PPOR and buy IP2.

Current situation:
IP1 value: $480k in Adelaide
Loan: $175k no LMI
Redraw: $75k
Loan repayments: $1660 per month (P+I)
Interest rate: 5.27%
Rental: $480 per week
Cash: $100k (partly in offset and partly to be repatriated)

I am leaning toward purchasing an IP (IP2) but live in it and renovate over a few years to add value, and then rent it out and purchase a more longer term PPOR. Therefore I am working out how to structure my loans to maximize the flexibility and minimize the tax implications. I am thinking to purchase at around 400k or less on large block in metro Adelaide.

I do not want to overextend on our borrowings. I will initially be the only wage earner in the house and I want to settle in both my new job and our location before taking on further debt beyond the 400k. 80% loan only for IP2 to avoid LMI, new PPOR in few years and maybe IP3.

From what I have learnt, I should convert my current IP1 to an IO loan.
For IP2 (initially a PPOR) can I use the redraw of 75k and use this towards the 20% + costs of a new property or should I look to take a equity loan for this. Does an equity loan take into account the redraw $? Or do I need to refinance the IP1 completely. The new property would also be IO to preserve the tax advantage when it later becomes a rental, and cash to be in offset.

I imagine you will all tell me to use a broker, and I will, but I want to understand what my best options are first. How do I best use the equity in my existing IP, and if I live in IP2, will this affect my options?

Thanks

 

[jonmardell]

I would not go along the path of redraw as this could get messy for tax purposes. I would look to set it up this way.

IP1
Loan one 175K (current Loan) (interest only)
Loan two 209K (equity release for 20% plus costs against new purchase) (interest only)

IP2
Loan one 80% against the purchase price (interest only)

If the 209K is more than the 20% plus costs for IP2 purchase than you can split the loan further. This way the properties are not crossed and there is no grey area about what funds are used for what purpose. If you keep the loans on variable then an offset account can be setup against each loan to park excess cash.

 

[Aaron_C]

Using the redraw is fine as long as you properly account for it. Borrow the remaining amount against the new property and leave the balance of cash (if any) in offset.

 

[Shahin_Afarin]

One of the big variables missing from your equation is land tax. Factor this in when deciding on which option to take.

 

[Terry_w]

I would suggest you not use redraw as this will create a mixed loan. Best to set u a new split.

 

[Gerg]

I would not go along the path of redraw as this could get messy for tax purposes. I would look to set it up this way.

IP1
Loan one 175K (current Loan) (interest only)
Loan two 209K (equity release for 20% plus costs against new purchase) (interest only)

IP2
Loan one 80% against the purchase price (interest only)

If the 209K is more than the 20% plus costs for IP2 purchase than you can split the loan further. This way the properties are not crossed and there is no grey area about what funds are used for what purpose. If you keep the loans on variable then an offset account can be setup against each loan to park excess cash.

Thanks for your replies.

Assuming the 20% + costs of IP2 is 100k, then that leaves me 109k. Can this 109k be left in the IP2 offset account as this will initially be PPOR and would make it more tax efficient. or can I only use this in IP1 offset or for a IP3 later.

 

[Peter_Tersteeg]

Thanks for your replies.

Assuming the 20% + costs of IP2 is 100k, then that leaves me 109k. Can this 109k be left in the IP2 offset account as this will initially be PPOR and would make it more tax efficient. or can I only use this in IP1 offset or for a IP3 later.

That's okay, but make sure that the $100k is accessed via a second split loan to be used solely for this purpose and that loan is used for non-deductable purposes. The best place to put the money would be into an offset account against the new PPOR.

Don't try simply increase your existing loan. Whilst you can keep a ledger of how much is for personal and investment use, it will still create a tax nightmare later.

$100k will give you a purchase price price of approximately $400k.

 

[Gerg]

One of the big variables missing from your equation is land tax. Factor this in when deciding on which option to take.

OK, I see I will start having to pay land tax if I have 2 IP as it will push me over the threhold. I had not taken this into consideration. I can see this cost will be considerable as an IP portfolio grows.

 

[Rolf Latham]

I imagine you will all tell me to use a broker, and I will, but I want to understand what my best options are first. How do I best use the equity in my existing IP, and if I live in IP2, will this affect my options?

Thanks

the guys have answered the hard bits

for a good Adelaide based broker that posts here have a chat with CJAY

Corey Batt|XL Financial | Ph: (08) 7200 3898 | [email protected]
Mortgage Broker

ta

rolf

 

[Shahin_Afarin]

OK, I see I will start having to pay land tax if I have 2 IP as it will push me over the threhold. I had not taken this into consideration. I can see this cost will be considerable as an IP portfolio grows.

Yes which is one of the many reasons people buy interstate. I have many people on my books who have purposefully (and strategically) bought in multiple states. Just step back look at your longer term strategy and work backwards. Make sure you factor EVERYTHING - i.e. land tax, CGT, neg gearing, cashflow, CG, etc.