Want to buy equity with IP4… but how?

[auror]

I am running at 66% LVR ($1m loans to $1.5m value) and want to withdraw some equity for the next IP deposit so that I can keep my offset savings ($30k) as a buffer.

We have $3k per month to service our next IP.
I want to buy a $300k IP which would mean accessing $60k of equity (assuming 80% LVR), or I could reduce that to $30k and pay LMI.

To give a bit of background, we have bought 3 Ips in recent years which are all CF+, however they haven't gone up in value that much. There might be $100k of equity but across all 3 Ips.

The bulk of the accessible equity is in our PPOR ($120k).

The way I see it, I have a few options:
1) Take out $60k of equity from PPOR
2) Take out $60k of equity from 2 Ips (not sure if my bank will allow this if it comes from 2 Ips? Can any brokers shed light please?)
3) Take out $30k of equity from 1 IP and pay LMI

For tax deductible reasons it is better to take the equity out from IP over PPOR, right?
Just wondering what others would do in my situation.
I'm probably thinking of option 3) but would be interested to know if I've missed anything.

Cheers
Auror

PS Incidentally it is interesting to read back on my old thread from 2 years ago.
Most SS'ers advised me to go with 90% LVR.
If I had taken your advice then I wouldn't be having this problem.
http://somersoft.com/forums/showthread.php?t=59635
Time to eat my hat methinks: always, always, always go with 90% LVR even if you think you have stacks of savings!

 

[Aaron_C]

Hi auror,

Some people aren't comfortable with paying LMI, plus in some cases you will be ineligible for LMI so you can't always say a 90% LVR lend must be undertaken.

It is the purpose of the funds which dictates deductibility, not the security. So whether you take the loan using the PPOR or another IP, the loan will still be tax deductible.

Which bank are you with now? Are your loans cross collateralised? It smells like it...

 

[auror]

I'm with Westpac and no, the loans are all standalone. I just summed up the loans and value to avoid boring people with too much information sharing.

Thanks for letting me know about the PPOR vs IP thing. I didn't know that. Looks like I can just take $60k from the PPOR then. Or I guess I could do $30k + LMI... if i do that I have to get used to paying LMI, never done it before.

 

[auror]

Hang on - I just realised that I still don't completely understand the process of withdrawing equity and maintaining tax deductibility under the 'purpose' rule.

My PPOR has a loan of $480k and value of $750k.

If I get the bank to revalue the PPOR to $700k (which should be no problem as the $700k figure is under market value), they will give me a loan of $560k against the PPOR.

That is $80k of accessible equity. If I use all of this equity as a deposit for the $400k IP that I am about to buy, do I have a tax deductible loan of $400k or $320k against the IP?

Sorry, now I am confused more than ever!

 

[Aaron_C]

The $80,000 portion of the loan against the PPOR will be tax deductible but the remaining amount of $480,000 would not be because it is used for your home. For the IP the $320,000 loan will be tax deductible so the new total tax deductible debt is $400,000 ($80,000 + $320,000).

 

[The Y-man]

My PPOR has a loan of $480k and value of $750k.

If I get the bank to revalue the PPOR to $700k

Now I am confused... why wouldn't they value it to $750k?

The Y-man

 

[auror]

Thanks Aaron. That is extremely super helpful. In that case I think I messed up with the 3 IPs that I have already bought. Should have used equity to buy them, not our savings! Lesson learnt for the future.

Now I am confused... why wouldn't they value it to $750k?

The Y-man

Because we don't need all the available equity.... I see what you are saying, we should just get the banks to revalue it to market value. I guess that is what they would do anyway. Sorry never gone through a reval process before.

 

[Rolf Latham]

Most SS'ers advised me to go with 90% LVR.
If I had taken your advice then I wouldn't be having this problem.
http://somersoft.com/forums/showthread.php?t=59635
Time to eat my hat methinks: always, always, always go with 90% LVR even if you think you have stacks of savings!

yeah, not always though : )

tastes better with sauce


Perhaps have chat with a structured financing broker this time round........one that has the guts and persistence to push your buttons


ta
rolf

 

[Terry_w]

Thanks Aaron. That is extremely super helpful. In that case I think I messed up with the 3 IPs that I have already bought. Should have used equity to buy them, not our savings! Lesson learnt for the future.
.

Wow, that would be an expensive mistake. Say you used $90,000 in savings, that would mean you could have reduced your PPOR loan by $90,000 instead.

At 6% that is $36,000 per year in extra tax deductions that you could have been claiming.

 

[auror]

It was $130k of savings...!!!

At 6.5% pa interest that's $8500 per year.

All IPs are in my name 99% (and spouse 1%). My marginal tax rate is 30% so this year I could've been better off by $2.5k.... aah!

All is not lost, though.
We are going to pull out the PPOR equity to buy a negatively geared metro property as we have enough CF+ ones (diversifying). Looking to buy one with solid CG prospects but lower yields, 4-5%.

My partner is on 37% marginal tax rate so it makes sense for him to buy the IP in his name (or 99%). At least the negatively geared property would have a 100% tax deductability loan against it.........

Can't undo what has been done though

Also, Should I be finding a new broker?

 

[jrc77]

Also, Should I be finding a new broker?

If your existing structure was setup through a broker - then yes find a new one!

Jason

 

[Aaron_C]

Also, Should I be finding a new broker?

I am a little surprised that your broker didn't advise on this properly...quite a basic thing really.