Thoughts on our specific situation

[The Falcon]

G'day Property Gurus

I'd be very grateful for some ideas and suggestions as to the next step as we want to seriously look at starting to grow our wealth over the long term.

Cliff notes :

- Household Income $190k gross PA. 2 incomes, 0 dependents.
- We are hoping to start a family in 2-3 years time. For a 12 month period, income will reduce to $150k gross. Then resume at $200-220k PA (forcast)
- We have around 320K equity in our PPOR. (new 2 bed apt, Botany NSW)
- Loan on PPOR 245k @ 6.66% current (variable)
- able to service $5600 month (this is the amount we are currently repaying)

We have been considering buying another place (detached house in inner west or south sydney) which will become our PPOR and Renting out our current PPOR. From what i have read, it would be beneficial to get a new mortgage on our current PPOR (which will then be rented) and transfer the equity to our new PPOR, as we cant tax deduct interest on our PPOR.

We think we could continue this on to our 3rd place in 4-5 years time, which would then be our PPOR and family home. The intention would be to hold on to the two former PPORs (and now rentals).

I am keen to hear thoughts and input on what i have suggested, but also for other suggestions and advice as to what we can do.

Thanks in advance

 

[The Falcon]

i have no relation to any other posters, moderators can check my IP. My enquiry is fair dinkum. 190k for a couple isnt "massive" imho either.

edit : oh, and thanks for the welcome Dazz

 

[WillG]

From what i have read, it would be beneficial to get a new mortgage on our current PPOR (which will then be rented) and transfer the equity to our new PPOR, as we cant tax deduct interest on our PPOR.

I'm not sure about the legitamency of making the interest on the old PPOR tax deductable by 'getting a new mortgage' against it

 

[The Falcon]

Thanks Will. What i was thinking was around taking some of my equity out of my PPOR to be used as a good sixed deposit on a new PPOR, thinking that i'd want to reduce my LVR on my PPOR compared to my IP (ex PPOR).

 

[alexlee]

Short answer: no. You can't transfer your equity like that. Deductibility is based on loan purpose, and you will be using it to buy another PPOR.

 

[Rolf Latham]

- Loan on PPOR 245k @ 6.66% current (variable)

Hiya

Welcome to the Forum

The current existing debt is what will be tax deductible against the rental income once you turn the place into an IP.

Any new borrowings secured to the current place to buy the new place wont be deductible because the purpose is to buy a PPOR.

There are some ways to massage this a little, but most involve some form ofactual spousal sale, or sale to a unit trust etc.

Short of that, if you must keep that property, there are debt recycle strategies that can be used to accelerate the PPOR repayments

Incidentally, how much deposit did you put into the place and did anyone ever ask you, what are you going to do with this property middle term ?

ta
rolf

 

[The Falcon]

@ alexlee & Rolf.

Thanks for the responses.

Maybe my question is around options to refinance the current PPOR (PPOR 1), which will turn in to an investment once we locate our new PPOR (PPOR 2). Is is not possible to access this equity without having to sell No. 1 ?

Rolf - 0% deposit. CBA loan with family equity as security. This is our first home, and hadnt given much thought to its value as an investment until recently.

 

[Rolf Latham]

Hi

What was the purchase price ?

Whats it worth now pls ?

ta
rolf

 

[The Y-man]

Maybe my question is around options to refinance the current PPOR (PPOR 1), which will turn in to an investment once we locate our new PPOR (PPOR 2). Is is not possible to access this equity without having to sell No. 1 ?
.

Yes you can access the money.

BUT you can't claim it as a tax deduction (as indicated in your first post) - because it is determined on the USE of the money. If you draw down and buy your new home, it's not income producing. If you STAY in your current home, draw down and buy an IP with the money (or ANY income producing thing) then the interest will be tax deductible.

The Y-man

 

[The Falcon]

@ Rolf. Purchase at 460k, current market 565k (based on identical sale 2 weeks ago).

@ Y-Man. How about taking an IO loan on 1. It will be producing rental income, and that interest will then be deductable?

 

[Rolf Latham]

@ Rolf. Purchase at 460k, current market 565k (based on identical sale 2 weeks ago).

k

so at 80 % you have a stand alone loan capacity 207 000 additional money for deposits and costs.

565 x .8 = 452 minus 245 owing = 207 000

I assume u have paid the loan down to 245 k from 460 k ?

ta
rolf

 

[The Falcon]

^ yes thats correct. Repaying at $5590/month currently.

 

[The Y-man]

@ Y-Man. How about taking an IO loan on 1. It will be producing rental income, and that interest will then be deductable?

Unfortunately no go.

Remember it is the purpose of the loan - if you take the loan (IO or not) - what are you going to use the money for?

If it's for your next home - not tax deductible
If it's for buying an IP, dividend paying shares, business, etc etc, then tax deductible.

It does not matter "where" the money comes from (whether it is from an IP, ppor, personal loan, etc) - it's what you use it for that matters.

 

[Rolf Latham]

^ yes thats correct. Repaying at $5590/month currently.

Nice repayment capacity ..............part of your challenge has been caused by insufficient "fluffy stuff questioning" by whomever put your loan together.

If you were a client of any broker on this forum, you would unlikley be in this position.

Was as simple as asking ...........will u die in this property ?

If you said no, then the loan should have been set up as IO with 100 % offset, and that big repayment should have gone into offset.

End equity position would be the same as now.............except youd have a 460 k deductible loan once the place was made an Ip, and 215 000 CASH sitting in ur offset.

Im not having a go, simply pointing this out for others reading this post in the future.

A loan is not a loan, thats the least of it most times

ta
rolf

 

[The Falcon]

ok, doesnt sound promising then

sounds like we'd be better of staying here as PPOR and buying an IP.

edit : i've just been doing some PPOR to IP searches and looks like im screwed here...dammit.

 

[The Y-man]

ok, doesnt sound promising then

sounds like we'd be better of staying here as PPOR and buying an IP.

edit : i've just been doing some PPOR to IP searches and looks like im screwed here...dammit.

Erko,

Keep in mind - selling your current PPOR is TAX FREE.....

So an option is selling it, buy your new PPOR AND an IP with the proceeds WITH a correctly structured finance.

Any reason you want to make the current PPOR an IP? It breaks most people's hearts to see a tenant trash their old home (with so many memories etc etc)

The Y-man

 

[The Falcon]

G'day Y-man,

We bought PPOR in July 08 OTP, settled in Dec 08 and have seen a 20%+ CG during that time. We feel that growth prospects for the property are good so like the idea of keeping it.

We arent worried about renting it out, its just a property, not the family home. I can imagine thinking that way if you'd raised kids in it though

 

[jane1111]

I don't know if this is an option
but if u want to build wealth fast possibly if it's viable
delay having kids a bit longer than u thought . Kids will slow u down alot . People who hav kids after building wealth first have it so much easier for all their life .

 

[The Falcon]

Gday Guys, just thought i'd update this thread.

- We have decided to remain in our PPOR for another 3-4 years.
- We have decided refinance our PPOR with a fully transactional offset loan, with a LOC behind that loan. LOC will finance deposits for IP and other acquisition costs. Individual loans will then be taken out for properties.
- We have appointed a BA to assist with the search for IP number 1.

The plan is to start slowly with the first IP and then go from there.

Browsing the forum has been very educational, and we look forward to learning a lot more. Thanks for the input folks.

 

[Indifference]

Erko, for what it is worth, I think you are now doing the right thing.

An offset account is definitely the way to go if you want 'wealth' portability without selling. Especially for younger folk with a high probability of PPOR turn-over. I have agonized over this many times myself in the past, and it is not an entirely uncommon problem.

Rolf's prior comments were spot on, as always

Good luck with it all