Using IP to purchase PPOR

Hi all, here's our situation:

We have our IP (former PPOR in another town) currently tennented at $350 pw. We have moved and have been self employed for a year. IP was valued at $300,000 2 1/2 yrs ago, currently owe $216,000 on mortgage. Mortgage consists of $170,000 fixed at 7.74 % til Oct 2010 and $50,000 variable at 5.89%. The mortgage is P&I. We are partners in a Small Business with another couple, as of June 2010, the Business will be 20 months old and have completed 2 Tax Returns. Income as follows:$47,000 (husbands drawings)
$18,200 (gross rent from IP)
$26,000 (tax free Centrelink FTB and Carers)
$91,200 Annual income
We are currently renting for $330 pw but want to buy a PPOR under $400,000 here. We've been looking at properties around $370,000-$380,000. We are obviously not ready to buy just yet but I have a couple of questions;
1. Would we be restricted to Low Doc only due to being self employed?
2. Should we have our IP valued again to check for equity etc?
3. How do you think the Bank are going to view our finances given the GFC?
4. Should we go IO on our mortgage considering we need to pay it down to raise our equity?
5. Where should we aim to be equity/deposit wise (and avoiding LMI) before applying (need $400,000)?

I apologize if I haven't included everything or haven't been clear enough. We are also with One Direct Home Loans, they are being phazed out and we would have to switch to ANZ once our Fixed term is up I think? They aren't taking on any new loans, only existing ones but we don't want to stay with them once the fixed term is finished anyway. Anything else I have forgotten?

Thankyou for your time!
 
The first thing you should do is to change your IP load to IO. Put all savings (for the time being) into an offset account attached to the mortgage. Loans for IPs are tax deductable. They are not for a PPOR, so you should be conserving funds for the up comming new purchase.

I will allow the Mortage Brokers to answer the questions regarding your serviceability.
 
Thanks Skater! One Direct don't offer offset savings accounts etc, they are pretty inflexible but the payoff is that rates are always cheaper thank the Banks. So we should be trying to build our own deposit rather than redraw our equity on the IP as a deposit? I suppose that's because any portion of redraw used for a PPOR isn't tax deductable, is this correct?
 
I suppose that's because any portion of redraw used for a PPOR isn't tax deductable, is this correct?

Spot on!

You could refinance elsewhere and draw some equity for the new purchase, but that won't be tax deductable. If you go down that route, then get a split loan. One for the amount outstanding amount (deductable) and the rest in a separate facility (non-deductable), as trying to apportion percentages for what is deductable and what is not could get quite messy.

Keep investment loans IO to maximise the amount you can pay off your PPOR, or, if not planning on staying in your PPOR, then do IO on that loan too and have an offset attached. This way when you move on, the full amount will once again be deductable.
 
Wow, the prospect of trying to raise $80,000 to avoid LMI on a PPOR is leading me back to just selling the IP and starting again with just one mortgage for PPOR? It will take us years to save that amount and prices will have increased on property as well of course. Would selling to buy be a bad move? We are paying out $775.00 pw on mortgage/rent and business loan, in the next few months I will receive some compo ($30-$50,000, amount not decided yet) We want to pay out our Personal Loan of $20,000 ($18,000 owing) as it's the highest interest rate we are paying. Should we try to pay down our current mortgage to borrow again on equity or sell, pool all our money into PPOR mortgage and work towards IP later? We want to live in our own home and not have to pay someone elses mortgage off with all this dead rent! How do we achieve this in the next year or two?
 
Wow, the prospect of trying to raise $80,000 to avoid LMI on a PPOR is leading me back to just selling the IP and starting again with just one mortgage for PPOR? It will take us years to save that amount and prices will have increased on property as well of course. Would selling to buy be a bad move? We are paying out $775.00 pw on mortgage/rent and business loan, in the next few months I will receive some compo ($30-$50,000, amount not decided yet) We want to pay out our Personal Loan of $20,000 ($18,000 owing) as it's the highest interest rate we are paying. Should we try to pay down our current mortgage to borrow again on equity or sell, pool all our money into PPOR mortgage and work towards IP later? We want to live in our own home and not have to pay someone elses mortgage off with all this dead rent! How do we achieve this in the next year or two?

I am really surprised that none of the Mortgage Brokers have come on-line to help you with this.

You may not need LMI on your PPOR, if you do an equity draw from the existing home, however, like I mentioned in previous posts, you need to make sure that it is split from the investment portion.

Paying out the personal loan could be a sound strategy, or that could be paid out with some of the equity, making for a lower interest rate. If it was for investment purposes it will be deductable.

If you are keeping the IP, then do not pay down the mortgage. Pay down the PPOR instead.
 
Thanks so much Skater for your replies, I appreciate it. RE the brokers, I was wondering the same thing myself, I guess they may be still ringing in the New Year! Yes will definitely separate loans etc and our accountant says the interest is good to go for deductions. I'm still considering sucking it up financially and just paying LMI to get into our own home sooner? That way we get to keep our IP which know is better for us long term. I just can't see us saving 20% for several years to come. We live in Mudgee which has higher capital growth than where IP is (Dubbo).
 
No definately not ringing in the New Year.

To be honest the period between Xmas and NY was the busiest we have ever had which bodes well for 2010.

Certainly if you have 2 Years Tax returns come June Anz will look at the deal although bear in mind will only take your husbands Tax Net income and not his drawings into consideration as far as income.

Also as far as the rent is concerned Anz take 75% of this and do take your Centrelink FTB (depending on the age of the children) as well as Carers Pension.

I think you will need to wait until the June Tax return is complete before you look further as even on Lodoc lenders in the main will want you to have had your ABN for 2 years +.
 
Furthermore yes i would look to split the loans and take out an equity loan to raise sufficient funds to cover the deposit and acqusition costs and then take out a separate standalone loan secured against the property itself.

Depending on the LVR and overall loan amounts might want to use a separate lender to reduce the LMI costs. LMI is an opportunity cost and depending on other factors could be worth paying if it gets you into your new PPOR soon rather than later.

Definately at the time look to convert your existing loan from P & I to IO.
 
Thanks Richard, good to see you've had a positive start to 2010, hope this trend continues! We're definitely going to wait until we as many ducks in a row as possible before presenting our case to a bank. So is Lo Doc our ONLY option due to self employment? The ABN was effective Oct 1 2008, my husband and I have only been parties to that ABN since Nov 13 2009 although we had introduced capital into the business Jan 2009 and physically worked in the business since March 2009. Not sure if that would change our position? My husbands' 'wage' is less than half of his total 'drawings', our accountant said that not to panic as a bank would look at both figures as income? Our everyday banking (personal and business) are with the NAB, our personal loan for the business is with StGeorge, are their rules all as strict as the ANZ too? So if our Loan for deposit/aquisition costs is with a separate lender, will the 'actual mortgage' NOT take the deposit Loan into it's calcs for LMI? It's going to get very $$$ if we have to pay LMI over 60% LVR!

Cheers!
 
Hate to say Yes both NAB and SGB require 2 Years ABN.

The Dragon will in addition requires last 2 BAS and possibly your Trading statements as well.

In saying this SGB are fairly particular about the areas in which they lend so this could be an additional problem.

Lodoc 60 would be an option but doesnt leave you much scope.

Without actually seeing the Tax return information it is difficult to comment too much further but i am sure there would be a way of going full doc.
 
Well I thought as much, funny how they still call it lo doc when they ring that much info out of you! I have all the documents they would need (I do the books and BAS, then we pay the accountant to 'prepare' the BAS I have done so it's spot on) I have no idea if all our figures would look good to a bank or not, we did have a profit in our first year and our P&L's continue to show profits, but hpw sound is 'sound' when a bank is looking at it? Hmmm...guess I'll find out eventually! The possibility of full doc being an option sounds encouraging!
 
Hi Petsy

Yes hate to say there is not much difference between full doc and lodoc these days with the majors where the lvr is over 60%.
 
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