Saving a deposit: PPOR Renos (extract equity) Vs. Salary savings

[rizzle]

All else being equal, for someone looking to get an IP under their belt in the next couple of years. What are the arguments for ploughing as much salary as possible into savings vs. doing more PPOR renos and tapping into the additional equity that is created as a result?

I'm faced with the two options. Tax considerations? Finance considerations?

Side note: spare room is rented (may have tax implications?)

 

[Paul@PFI]

Use an offset. If the market tanks it wont take your savings with it. That way you defer the decision point.

 

[Jess Peletier]

It depends on what you're hoping to achieve, but from a finance perspective, based on the way banks are treating debt atm my inclination would be to keep debt as low as possible for as long as possible, particularly if you're not on a particularly high income. There's also the possibility that the funds you use to reno the PPOR may not pay off - ie if the market softens, or you get a bad val. Then you're stuck.

Add to that the LVR restrictions some lenders are imposing, it could make accessing equity at higher LVR's limited for some.

 

[MIW]

As you suggested there are various ways to increase equity:
- Via savings preferably via offset account
- Adding renovation (as long as you know what you are doing, not spending more than the final valuation)
- Adding a tenant or by ways of increasing your income, thus towards savings
- Decreasing expenses thus leaving more for savings
- Increasing rents if you already own IPs

The are various ways, so as long as you have a STRONG DESIRE, you can use some strategies above to get ahead......

 

[Jamie M]

Use an offset. If the market tanks it wont take your savings with it. That way you defer the decision point.

Agreed - park funds in the offset. It will open up your options.....unless you're not disciplined with cash. In that instance - P&I will work best.

Cheers

Jamie

 

[rizzle]

Thanks all, savings it is. I already have an offset set up so will now focus on increasing income.

 

[mcarthur]

Agreed - park funds in the offset. It will open up your options.....unless you're not disciplined with cash. In that instance - P&I will work best.

Got that. But don't you need to move those offset funds into a split loan/LOC to make the interest deductible?

Are you saying build up the amount through offset - perhaps over months/years - and then move what's needed to a split loan/LOC just when you're about to buy?

 

[albanga]

Got that. But don't you need to move those offset funds into a split loan/LOC to make the interest deductible?

Are you saying build up the amount through offset - perhaps over months/years - and then move what's needed to a split loan/LOC just when you're about to buy?

If you have a PPOR which is non deductible debt then your savings should be placed into the offset of that. If you have no non deductible debt then in almost all cases you are better off sticking it into the offset of an IP with the highest interest rate.

To answer your second question then yes this can be done but again only if you have a PPOR or there is no benefit in doing this.

 

[Brady]

Reno v save will all depend on end result.

You could save example - $30k in offset or off the balance in the redraw, not going make too much difference now if the plan is to buy an IP as long as structured correctly for the IP purchase.

Or you could spend the same $30k on renovations, this could improve the value by $20k or $50k. You will need to look at comparable sales to determine what the end value will be. Keep in mind $50k extra equity doesn't mean $50k deposit, bank lends on % of the value of the property. 80% no LMI, say up to 90% with reasonable LMI.