Using equity - Effect on PPOR

[seano87]

Hi all,

I’m trying to get my head around how equity it used, and how it affects the property from which it is pulled from.

Let’s say I’ve purchased a PPOR for 400k (100k deposit, 300k loan), and for arguments sake ignore purchase costs and assume I have an IO loan and I’m not paying off any principle.
Three years later, the house is now worth 500k.

Equity in PPOR = 500k – 300k = 200k

From what I understand I can borrow 80% (closer to 90% if I’m willing to pay LMI) of the property from my available equity.

Max Borrowing (assuming 80%) = (500k * 0.80) – 300k = 100k

I can borrow this 100k to invest in an IP, by using it as the deposit for another property. The remaining value of the property will be a loan with a different institution/bank.

A few questions

1. What has happened to my PPOR loan? Do I now owe them 400k (300k loan + 100k borrowed from equity)? Will my interest repayments increase as a result?
2. How much equity SHOULD I be taking out? Is it best to take as little as possible (ie; 5-10% of the purchase price of the IP plus purchase costs), and increase the loan resulting in higher tax benefits.

Any help with this would be appreciated.

 

[starter]

Hi Sean

1. You now have 400k in borrowing secured by your PPOR and the interest repayments would obviously increase as a result. However, you should have a chat to a broker (plenty of good ones on this forum) as to how you can structure the refinance so that the extra 100k of borrowing that you are using for IP(s) is tax deductible.
2. There are a few different elements to this. Firstly, how much you borrow will depend on your risk appetite and how comfortable you are with debt. However, I take your question as asking whether the borrowing against the PPOR is tax deductible. As above, if you structure it right (i.e. can separate the borrowing for the IP from the borrowing for the PPOR) the loan secured against the PPOR is tax decductible if you're using it for investment purposes. The main thing to keep in mind is what the borrowed funds are going to be used for rather than what the security for those funds are.

 

[Rolf Latham]

[*]How much equity SHOULD I be taking out? Is it best to take as little as possible (ie; 5-10% of the purchase price of the IP plus purchase costs), and increase the loan resulting in higher tax benefits.
.

early and often : )

If you structure the equity loans in such a way that you only pay interest when you use them you will be well served by always having your equity position at the most utilised point that you can.

I like to call this "applying a lock nut under your valuations".

This means that when a challenge or oportunity comes along you have the cash ready to go there and then.

ta
rolf

 

[Terry_w]

Hi all,

I’m trying to get my head around how equity it used, and how it affects the property from which it is pulled from.

Let’s say I’ve purchased a PPOR for 400k (100k deposit, 300k loan), and for arguments sake ignore purchase costs and assume I have an IO loan and I’m not paying off any principle.
Three years later, the house is now worth 500k.

Equity in PPOR = 500k – 300k = 200k

From what I understand I can borrow 80% (closer to 90% if I’m willing to pay LMI) of the property from my available equity.

Max Borrowing (assuming 80%) = (500k * 0.80) – 300k = 100k

I can borrow this 100k to invest in an IP, by using it as the deposit for another property. The remaining value of the property will be a loan with a different institution/bank.

A few questions

1. What has happened to my PPOR loan? Do I now owe them 400k (300k loan + 100k borrowed from equity)? Will my interest repayments increase as a result?
2. How much equity SHOULD I be taking out? Is it best to take as little as possible (ie; 5-10% of the purchase price of the IP plus purchase costs), and increase the loan resulting in higher tax benefits.

Any help with this would be appreciated.

Your PPOR loan will still be $300,000
But you will have 2 investment loans,
$100,000 secured against the PPOR
and another investment loan secured on the investment property.

It is generally a good idea to borrow 105% of the value of the investment property so that you are no using any of your cash. Ideally increase the second loan on your investment property to 80% LVR on the PPOR (lvr calculated on total loans secured by that property).