Using PPOR equity, best options?

[cannonloose]

Hi, Got a query regarding loan structure. I currently have a $490k PPOR loan, on which I'm currently paying IO, and accumulating funds in my offset.

Potentially looking to purchase some shares (not a lot, like 20k) in the next six months with a view to purchase another property within 12-18 months. It would most likely be an IP initially with a view to becoming a PPOR later.

I had a reval on my PPOR recently, and have about 80k extra equity I could draw on (to keep my loan at 80%). Not sure how best to utilise it. I was thinking of a loan split and purchasing the shares using some of that, but then when I want to buy the next property - would most likely be using a combination of offset funds as well as PPOR equity to make the initial purchase. Not sure how I can set up the loan now to make sure there's no contamination issues.

Any suggestions?

 

[Redom]

Sounds like you've set it up pretty well so far! Its good that your paying down your current PPOR loan via an offset - it will help with maintaing maximum tax deductibility down the track if it ever turns into an IP.

Regarding your next moves, set up a new separate loan split against your PPOR for the 'usable' equity you have. If you've made 80k in equity gains, only 64k of it will be 'usable' at an 80% LVR. By creating a separate loan split and using those funds specifically for investment use, you avoid contamination. The purpose of funds in this loan split should remain 'for investment use'.

Then when your ready to go, use these funds as the deposit for your next property.

This way you avoid Cross X - ensure maximum tax deductibility - and keep your loans uncontaminated, i.e. you have a clear distinction between personal and investment use.

Cheers,
Redom

 

[Jamie M]

Hey cannon

You could set up a new $20k loan split against the current PPOR and use for your investments - that way, it will be deductible.

Cheers

Jamie

 

[Rolf Latham]

Speak with a decent broker like Redom or Jamie so that you manage the offset cash the right way.

Let's say you have 50 k to put toward the new ip from the offset

A good broker banker would suggest that you lower your por loan by 50 k then take a new separate split to to 50 k

Voila you have just converted 50 k of non ded deductible debt to deductible . Worth about 1000 bucks per year in cash to the average taxpayer in today's low rate environment.

You can probably do all that now if you hVe the cash in the offset at the same time a the other stuff

Generally, mixing funds for investment purposes is more a book keeping issue than a contamination one, unless you want to cap interest on the shares loan -seek tax advice

In al of this I'm expecting that you haven't paid lmi on your existing loans, for if you have then there is likely a diff process that can draw more equity

Ta
Rolf

 

[Terry_w]

Never use cash to buy investments such as shares as this will cost you lost interest which won't be deductible. Set up a new split and keep the shares separate and claim the interest.

 

[Bradsdad]

The OP did mention that the proposed new purchase would be an IP but with the intention of turning it into a PPOR.
I'm a bit confused as why people are so keen to suggest paying down current PPOR by say $50k when one would assume it would become an IP down the track.
The OP seems to have it correct in using partial funds from offset for new acquisition should in fact turn out to be non-deductible debt,

 

[Terry_w]

The OP did mention that the proposed new purchase would be an IP but with the intention of turning it into a PPOR.
I'm a bit confused as why people are so keen to suggest paying down current PPOR by say $50k when one would assume it would become an IP down the track.
The OP seems to have it correct in using partial funds from offset for new acquisition should in fact turn out to be non-deductible debt,

Yes, it wouldn't be a good idea to pay down the PPOR loan if it might become an investment. But also not a good idea to use cash if case the new property never becomes a main residence.

 

[albanga]

Correct me if I'm wrong brokers but would it not be best to create 2 new loans with the 80k useable equity.
Loan 1 - 20k of which can be used to purchase shares
Loan 2 - 60k of which to purchase IP1.

Reason for the split is because OP said the IP will likely become a PPOR down the track meaning the loan would be contaminated with investment shares if not split?

 

[Terry_w]

Correct me if I'm wrong brokers but would it not be best to create 2 new loans with the 80k useable equity.
Loan 1 - 20k of which can be used to purchase shares
Loan 2 - 60k of which to purchase IP1.

Reason for the split is because OP said the IP will likely become a PPOR down the track meaning the loan would be contaminated with investment shares if not split?

Yes that would be a good idea.

 

[jpcashflow]

I think the first thing you should do is get a valuation on your property. Hopefully the property has increased and you might have more equity to access .

 

[cannonloose]

Thanks for the input everyone. The new val was ~100k higher (hence the 80k available equity to maintain 80%), and no LMI has been paid. I would say the chances of IP becoming PPOR are fairly high.

Still having a few discussions with my wife about whether it is all necessary atm. If we split twice (which I think sounds like the best option) - how do offsets work with all that?

I suspect I'll be in touch with a better broker at some point. Just going through the bank atm.

 

[Shahin_Afarin]

Always try and borrow as much as you can whenever you can and park the funds in an offset (unless you are not disciplined with money).

You just never know when your situation may change (say your income drops because you are in between jobs, maternity leave, etc) or the banks change their policies.

You may kick yourself later for not pulling out the money earlier and parking it.

 

[TMNT]

Always try and borrow as much as you can whenever you can and park the funds in an offset (unless you are not disciplined with money).

You just never know when your situation may change (say your income drops because you are in between jobs, maternity leave, etc) or the banks change their policies.

You may kick yourself later for not pulling out the money earlier and parking it.

even with LMI??????

 

[Jamie M]

even with LMI??????

Not usually.

It can be tough getting large cashouts when LMI is involved too.

Cheers

Jamie

 

[J_aco]

Hi all,

Newbie Qn: Shahin mentioned about borrowing as much as you can and park the funds in offset.

I thought it's not advisable to park borrowed funds in offset?
Can someone please explain the concept to me?

Thanks!

 

[Shahin_Afarin]

even with LMI??????

For some investors yes absolutely.

It's a no brainer to do it at 80% but some investors (particularly with the rising markets in the past 12 months) are super aggressive and they are in their accumulation and growth stages so they will do equity release even in LMI territory.

You do need to be careful when in LMI territory as:

1. Multiple hits on your credit file isn't awesome
2. Need to choose a lender that caters for this type of an investor and has good cash out policy to back it up which is why I hate lenders like ING.
3. Even if you stay within your LMI credit - you still need to pay a minimum LMI fee.

 

[Rolf Latham]

The OP did mention that the proposed new purchase would be an IP but with the intention of turning it into a PPOR.
I'm a bit confused as why people are so keen to suggest paying down current PPOR by say $50k when one would assume it would become an IP down the track.
The OP seems to have it correct in using partial funds from offset for new acquisition should in fact turn out to be non-deductible debt,

this be a good point.


ta
rolf

 

[Redom]

For some investors yes absolutely.

It's a no brainer to do it at 80% but some investors (particularly with the rising markets in the past 12 months) are super aggressive and they are in their accumulation and growth stages so they will do equity release even in LMI territory.

You do need to be careful when in LMI territory as:

1. Multiple hits on your credit file isn't awesome
2. Need to choose a lender that caters for this type of an investor and has good cash out policy to back it up which is why I hate lenders like ING.
3. Even if you stay within your LMI credit - you still need to pay a minimum LMI fee.

With Shahin on this - if your strategy is to go all guns blazing early, take the equity and pay the premium. Sit on it until your ready to go again.

You have to consider your next few moves before doing it (and have plans in place) but most aggressive property investors have this in mind.

For this strategy, I'd strongly recommend this in this climate. APRA are holding guns and are threatning to start shooting.

Take a look at Macquaries recent policy change with cash outs above 80% - this no doubt is APRA giving them a slap on the wrist and telling them to get their house in order.

Cheers,
Redom

 

[Rolf Latham]

Take a look at Macquaries recent policy change with cash outs above 80% - this no doubt is APRA giving them a slap on the wrist and telling them to get their house in order.

Cheers,
Redom

Id expect this has more immediacy around their LMI provider and their in house balance sheet risk management.

ta
rolf

 

[Redom]

Id expect this has more immediacy around their LMI provider and their in house balance sheet risk management.

ta
rolf

Hmm maybe - although it comes at the same time as APRA starting to 'coach' lenders...

NABs recent $1000 rebate for P&I loan...APRA talking too?

Cheers,
Redom