Should I Pay off Mortgage or Buy IP or Buy PPOR

kkoc3 on 14/07/2015 - 23:01

Hi guys need some input from the masses on my financial situation. I am completely aware that financial advisors are the way to go however it doesn’t hurt to get opinion from other people also who might be or have gone through similar situation.
Bought a home in 2013 for $345K, older house but very liveable. Lived in it for about a year then had to change city for work. Rented the property out and it’s getting $420 a week. I don’t get much tax advantage etc. as property is pretty much break even.
Currently, I am renting and paying about $2K a month on rent. Have about $60K deposit and both wife and I are working, bring in above $100K combined. Here are the options I am considering

  1. Save till we reach $100K deposit and buy another IP. Rational behind this is we can’t afford to buy a place where we would like to live therefore invest and grow until we can afford.

  2. Save till we reach $100K deposit and pay off mortgage with that money. This is based on rational that our cash flow will be much better enabling us to save more + equity = larger deposit for next property

  3. Save till we reach $100K deposit and buy place to live in. This is based on rational that we buy something smaller for now , live in it for couple of years , save on rent and then possibly rent it out or sell it etc.

Financial

Comments

  • sagax on 15/07/2015 - 05:14
    +3

    Sort of a mix between 2 and 3 - does your Investment Loan have an Offset facility. I know the ATO doesn't take kindly to making extra payments and then redrawing them on Investment Loans, however they're less fussy about Offset accounts. Maybe it'd be worth putting your $60-100k in there, thereby reducing the interest you pay and allowing you to get more equity in your investment property whilst you prepare for buying a PPOR. You'll lose some of your tax deductibility for your interest payments, but you'll only ever get your tax rate back on that interest any-ways.

    • kkoc3 on 15/07/2015 - 08:46

      thanks altonius

      Unfortunately offset account is not an option as i am on fixed rate loan

  • mistermr6 on 15/07/2015 - 09:01

    I'm in almost the same situation so keen to hear people thoughts! My IP is worth a little less though and has a smaller yield (tho loan is offest atm with 60k I could use as deposit). Advice I got from family accountant was actually #4 sell the IP and use the bigger deposit to get somewhere to live in for the longer term, although he admitted his wife would give different advice and say not to sell anything you are comfortably repaying it.

  • TopCat on 15/07/2015 - 09:03

    My financial contact is my mortgage broker.
    There are two kinds of debt according to him (generally speaking): good debt, and bad debt.
    Good debt = the money you owe that is being paid off by someone else.
    Bad debt is owner-occupied debt.

    Depending on your goals, you would aim to maximise your good debt and minimise bad debt. Paying off your mortgage might not be the best financial move even though it seems like less debt = better.
    I do not work in finance but highly recommend chatting to a broker who will not charge you. Explain your long term goals to them and they should be able to steer you on to the correct path.

    • kkoc3 on 15/07/2015 - 18:33

      thanks

    • Bmann999 on 27/07/2015 - 22:01
      +1

      Just so you know, your mortgage broker makes a commission based on how much you borrow and they don't have to work in your best interest. They also don't have to work in your best interest. I am not sure which is the best choice, but a broker will almost always advise you to take the option that results in you borrowing the most.

      Also, they don't actually get you the best deal as discount banks like Ubank won't pay them commission. I spoke to a broker once and he said he could get me a great rate due to RBA rate cuts. His rate was almost a full 1% greater than Ubank. It goes without saying that I didn't give him business in the end.

  • DealzEddy123 on 15/07/2015 - 09:34

    yeh your break-even property is great. you mean break even paying both principal and interest?

    you don't need a "tax advantage"… not having to pay additional costs on top of rental income is a GREAT advantage… it means you can sell the property anytime and pocket any capital gains. or move back into your first "cheapy" house in case anything goes wrong and you have to fall back onto it

    so leave it as it is (unless u anticipate rental or property prices to fall)

    then continue to save till you got $100k and decide whether it should be IP or home once you've saved that much… :P
    your life and the market may be in different places by then

    • kkoc3 on 15/07/2015 - 18:34

      yup break even with interest and principle

  • chazfg on 15/07/2015 - 10:19

    You can service $500k loan with the $2k you are paying a month on rent. More if you are paying interest only for IP.
    Buy a house that you can afford to live in and buy another IP at the same time. Move the remainder of your savings to offset account on your PPoR and have the two IP on interest only loans.
    Don't pay off the mortgage on your house that is currently rented out, do it if you are planning on moving back for the 6-year PPoR rule.
    All financial planners I met were just trying to sell me insurances and managed funds. Go see a good mortgage broker instead, but educate yourself on the matter before you do.

  • megamilinda on 15/07/2015 - 14:06
    +1

    Personally I would sell the IP and buy a house that you won't need to move out of in a couple of years. You'll have the growth in the property and save on having to pay rent (to someone else's mortgage). You can always save up and buy another property later on and have the interest be deductible. Plus it you'll be able to claim main residence exemption on capital gains on your IP (if sold within 6 years of renting it out).

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