Wait for equity to increase, or use offset funds

[seano87]

Hi all,

I'm looking at buying my first IP next year.
I purchased my first PPOR in 2012 for $423,000 (around the median for the area) with a 20% deposit leaving a debt of $338,000. The median house price for the area has increased to $470,000.

Assuming the house actually is valued at this, and I can use 80% of my equity for the IP, I should have $38,000 ([470,000 * 0.80] - 338,000) available for the new deposit (not a whole lot).

I have an IO loan on my house, and have saved up $80,000 in my 100% offset account.

My question is, when looking at financing the first IP, would I be better off waiting for the equity to increase, or should I just use the funds in my offset account.

Fairly new to this, appreciate any help

Thanks

 

[Terry_w]

No 3. Pay down the loan and reborrow the money. This will decrease non deductible debt and increase deductions.

No 4. Increase the loan to 90%.

I would favour No 3 myself. Just make sure you get the splits right.

 

[seano87]

No 3. Pay down the loan and reborrow the money. This will decrease non deductible debt and increase deductions.

No 4. Increase the loan to 90%.

I would favour No 3 myself. Just make sure you get the splits right.

Hi Terry,

Thanks for that, though I'm unsure what you mean by No 3.
For example:
If I had a $100k debt, with $10k in an offset account.
I paid down the loan with that $10k leaving a debt of $90k.
I then re-borrow that $10k for an IP, bringing my debt back to $100k, but now part of the debt ($10k) is for investment purposes and is deductible?
....is that right?

 

[Terry_w]

Hi Terry,

Thanks for that, though I'm unsure what you mean by No 3.
For example:
If I had a $100k debt, with $10k in an offset account.
I paid down the loan with that $10k leaving a debt of $90k.
I then re-borrow that $10k for an IP, bringing my debt back to $100k, but now part of the debt ($10k) is for investment purposes and is deductible?
....is that right?

Yes.

if you are talking about say $100,000 in savings in the offset this would give you around $5000 extra in deductions each year.

If you used the $100k to invest you would pay $5000 more interest on the home loan and this would not be deductible.

But if you paid the $100k off the home loan and reborrowed it then the $5000 interest on this $100k would be deductible.

 

[SK Investments]

Hi Seano,

I think the suggestion is to use the money in your offset to pay down your PPOR loan, then take out a new loan (or maybe a LOC) not just redraw the money, so that for tax purposes the loans are clearly separate.

 

[Terry_w]

Hi Seano,

I think the suggestion is to use the money in your offset to pay down your PPOR loan, then take out a new loan (or maybe a LOC) not just redraw the money, so that for tax purposes the loans are clearly separate.

Exactly! well put

 

[Redom]

Hi all,

I'm looking at buying my first IP next year.
I purchased my first PPOR in 2012 for $423,000 (around the median for the area) with a 20% deposit leaving a debt of $338,000. The median house price for the area has increased to $470,000.

Assuming the house actually is valued at this, and I can use 80% of my equity for the IP, I should have $38,000 ([470,000 * 0.80] - 338,000) available for the new deposit (not a whole lot).

I have an IO loan on my house, and have saved up $80,000 in my 100% offset account.

My question is, when looking at financing the first IP, would I be better off waiting for the equity to increase, or should I just use the funds in my offset account.

Fairly new to this, appreciate any help

Thanks

Yep, playing it out for you:

Step 1: Pay down your PPOR loan. The aim here is to and reap the tax benefits of turning $80,000+ into deductible debt. This should increase your deductions on your next property by ~$4000 per year.

Step 2: Get 2-3 valuations done on your PPOR with lenders that suit (and definitely one with your current lender, easiest to stay with them). Can get 10%+ swings in variations in valuations of the same property - so best to get a few.

Step 3: Then refinance back up to 80% LVR with the highest valuation/best suited lender. Make sure you set up a separate loan for the equity you've withdrawn. Therefore, if your PPOR debt is $258k, set it up as follows:
Loan A: 258K PPOR refi.
Loan B: Remaining funds to 80% LVR - INVESTMENT DEBT.

Be sure to avoid cross collateralising your loans.

Step 4: Buy your new IP with the investment debt.

Haha Dave - i think i know what you mean.

Cheers,
Redom

 

[unloadmymind]

Avoid cross collateralised loans as much as possible.

 

[Jamie M]

Hey Seano

How much "cash" do you need to have available to manage risk and sleep comfortably at night?

I agree with the general consensus of injecting cash from offset into the loan principal and reborrowing. However - the amount to inject is dependent on your risk profile and I'd also arrange an upfront valuation on your PPOR first.

Cheers

Jamie