Loan structure - advice

[snita]

Hi all

Just bought first investment property over the weekend, in addition to PPOR. Wondering how I should structure my repayments ie interest only or principal and interest.

PPOR valued at $975k by the bank, just remortgaged at $750k and had $230k equity.

Investment property purchased at $790k + ~$33k costs stamp duty etc, investment loan will be about $620k. Place is rented out for $680/week.

Interest only will work out at $540/week, principal and interest @ $730/week.

Already paying principal and interest on PPOR, so what would make most sense now, positive gear investment and pay down PPOR asap, or pay off principal on both? Loans are with different institutions if that makes a difference..

Cheers
Ben

 

[Ace in the Hole]

For best cash flow, go interest only.
Park all other available funds in PPOR offset.
Maximize loan on deductible IP debt.

 

[Peter_Tersteeg]

It always makes more sense to reduce your non deductible debt than to pay off investment lending. The only question is what's the way to go about it that suits you best? Given that you've paying P&I on your PPOR loan, this would suggest that you intend for this house to always be your PPOR, you don't anticipate it ever becoming an investment property.

I'm also kind of hoping that you didn't simply increase your PPOR loan to get the deposit together. Ideally you set up an interest only equity loan alongside your existing PPOR loan?

 

[Terry_w]

You would be throwing money away if you paid PI on an investment while you had non deductible debt.

 

[snita]

I'm also kind of hoping that you didn't simply increase your PPOR loan to get the deposit together. Ideally you set up an interest only equity loan alongside your existing PPOR loan?

Maybe

I actually remortgaged with a different institution to get a much better rate (.4% better) and borrowed up to 80%, thought that would make sense to then use as a deposit which I have done/am doing.. Prob too late to change now, but what should i have done?

So interest only it is then? Sorry for my rudimentary understanding, but if it's rented out for $680 and my payments are $540, will i not be paying tax on that income?

Ben

 

[Peter_Tersteeg]

The simple question is did you set up one single loan account, or did you set up two when you refinanced? One loan should have been to refinance your existing and a second loan to access the equity.

If you've set it up as two loans, you'll miss out on a lot of tax deductions, which may cost you a significant amount of money; possibly a lot more than the savings from a cheap interest rate.

 

[NPB]

G'day Ben,

Take comfort that you did one thing right ( not x securing).

The other decisions are enough to make the brokers on here cry, a 2 minute chat beforehand and your set up would have been very different.

You would have two loans on the home, both interest only.

One loan on the investment property interest only.

You need to contact one of the brokers on here asap, firstly to fix the mess and secondly to get some more knowledge on structure, tax and investing in general. That will be very valuable to you long term.

Good Luck

 

[snita]

Do you mean 2 loan accounts as in one for PPOR (refinanced) and one for Investment? In that case yes and they are with 2 different banks.

Or did you mean just the PPOR refinance, in which case it is one loan with offset account..

 

[snita]

G'day Ben,

Take comfort that you did one thing right ( not x securing).

The other decisions are enough to make the brokers on here cry, a 2 minute chat beforehand and your set up would have been very different.

You would have two loans on the home, both interest only.

One loan on the investment property interest only.

You need to contact one of the brokers on here asap, firstly to fix the mess and secondly to get some more knowledge on structure, tax and investing in general. That will be very valuable to you long term.

Good Luck

Would it make it better or worse if I said I went through a broker

or

Have to take in to consideration that I may not be explaining things properly here!

 

[Peter_Tersteeg]

Or did you mean just the PPOR refinance, in which case it is one loan with offset account..

I mean two loans against your PPOR.

If you've only got a single loan against your PPOR, you're probably missing out on tax deductions, which will probably cost you a lot more than the cheap rates are saving.

 

[Jess Peletier]

What it should look like -

PPOR - 2 loans, one for PPOR only, and one for the equity to use for IP.
IP - one loan.

If your structure doesn't look like that, I'd be looking for a new broker

 

[Rolf Latham]

sounds like the 750 k PI loan is mixed purpose - ie part PPOR non deductible and part IP deducible.

Not great when combined with a PI loan since you cant apportion the debt repayment ONLY to the PPOR debt.

id expect you actually have 2 loans secured to the home

a 520 k HOME loan and a

230 k investment loans


ta

rolf

 

[snita]

sounds like the 750 k PI loan is mixed purpose - ie part PPOR non deductible and part IP deducible.

Not great when combined with a PI loan since you cant apportion the debt repayment ONLY to the PPOR debt.

id expect you actually have 2 loans secured to the home

a 520 k HOME loan and a

230 k investment loans


ta

rolf

I'll mention this to my broker tomorrow, but as far as I'm aware it;s one loan for $750k with ~$230k sitting in the offset account of which I was going to use ~$190k for the IP.. and then a new loan with a different bank for $620k for the IP which will be interest only.

Not ideal?

 

[Terry_w]

I'll mention this to my broker tomorrow, but as far as I'm aware it;s one loan for $750k with ~$230k sitting in the offset account of which I was going to use ~$190k for the IP.. and then a new loan with a different bank for $620k for the IP which will be interest only.

Not ideal?

You had better seek tax advice. I can see at least 2 issues.

 

[Jess Peletier]

I'll mention this to my broker tomorrow, but as far as I'm aware it;s one loan for $750k with ~$230k sitting in the offset account of which I was going to use ~$190k for the IP.. and then a new loan with a different bank for $620k for the IP which will be interest only.

Not ideal?

Not ideal

Having the investment funds in the same loan as non-deductible debt is very messy and can make claiming deductions a nightmare.

If you haven't spent anything yet, you may be able to put all the borrowed funds that are currently sitting in the offset straight back into the loan, then split a new loan to use for investment.

All is not lost

But I would still rethink your broker - if they don't understand what they've done wrong they probably don't get investment lending and may not get what you mean when you tell them to fix it.

 

[Peter_Tersteeg]

I'll mention this to my broker tomorrow, but as far as I'm aware it;s one loan for $750k with ~$230k sitting in the offset account of which I was going to use ~$190k for the IP.. and then a new loan with a different bank for $620k for the IP which will be interest only.

Not ideal?

If that's what your broker is setting up, you're in real trouble. You'll loose all the tax deductions on the $230k.

If your broker isn't suggesting the structure that's already been outlined by myself and Rolf, walk away and use a broker who understands what they're doing.

 

[Terry_w]

Not ideal

If you haven't spent anything yet, you may be able to put all the borrowed funds that are currently sitting in the offset straight back into the loan, then split a new loan to use for investment.
.

Would need to split the loan first to segregate the contaminated portion and then eradicate it before starting again.

 

[Jess Peletier]

Thanks Terry - good news for the OP.

 

[snita]

Thanks for all your advice guys much appreciated.

Just to clarify, should it have been 2 separate loans, or one loan split in to 2 portions, 520k PPOR and 230k investment?

What should I be doing now, is it as simple as calling the bank and splitting the loan in to 2 parts?

 

[Rolf Latham]

Thanks for all your advice guys much appreciated.

Just to clarify, should it have been 2 separate loans, or one loan split in to 2 portions, 520k PPOR and 230k investment?

What should I be doing now, is it as simple as calling the bank and splitting the loan in to 2 parts?

you probably need separate loan statements with separate loan numbers

the 230 should be IO and the 520 can be either

depending on lender this may be simple

ask the broker to do the split

ta
rolf