Does buying investment property using savings is considered good idea?
Most of the people I have seen use equity for down payment/deposit.
The way I understand, equity can put your PPOR on risk in case things go wrong.
Investment Property Using Savings Vs Equity
Comments
If done properly, borrowing against your current property to purchase another means you can claim the interest portion on the loan for the investment property in your tax return (some splitting of loans may be appropriate etc).
If you use savings you will have no interest to claim.
Better to have no interest to claim, then you're not losing money…
You can still not 'lose money' in the short term. Say you can get equity of 400k to buy an investment property, and you also have 400k in cash.
You borrow the 400k for the investment property with an offset, then park your 400k cash in the offset so as you say, you are 'not losing money'.When you have a need for the 400k, you can take the funds out of the offset, and the interest on the investment property is now fully deductible.
But you do whatever.
My point was that if you have something to claim, then you're losing money. You don't take on an investment property just because it gives you something to claim, you take it on because you're expecting to make money eventually and the claiming just makes it hurt a little less in the mean time. Having something to claim, on its own, is a bad thing.
@Quantumcat: Yes.. And my point is that structuring it so that it can never be deductible is foolish. That's what will happen if you pay with savings and then require funds for other non-deductible loans in the future. Eg if you want to sell your PPOR and buy a more expensive one with borrowed funds.
@Quantumcat: You pay so much tax to the government. Negative gearing when done with low debt can work for you. You want capital growth over the IP. It's a long term strategy. Mind you with the GFC it can all go wrong. If you have to sell in a down market due to financial difficulties.
Where it's possible without increasing the interest rate you're being charged too much, when investing, borrow as much of the value as possible. Use an offset for security if required. Try and have as much debt deductible as possible. (Eg, offset your PPOR before you put money in an offset against your investment)
At the end of the day, given we don't have limited recourse loans for property typically, your PPOR is at risk if you can't pay your debts no matter what, it's just harder for banks to get if it's not security for the loan.
your PPOR is at risk if you can't pay your debts no matter what
If worst comes to worst, your PPOR is usually safe even in cases of bankruptcy. Unless it's been given as security for a loan.
Legally it can be. For a variety of reasons, practically in a lot of cases it's not. Not giving a 100% complete answer here either way though.
Thanks all for your time and response.
If you just refinance your PPOR for money to buy the IP, then no, your PPOR is still fine.
Apologies for noob question, how does this work?How can this get me deposit amount?
So say your PPOR is worth $800,000 and your mortgage is only $400,000. You can refinance to another bank or even the same bank, borrow say 80% (don't get your hopes up, for a refi it can be less), and you then get $640,000. You use $400,000 to pay out your old mortgage, and you now have $240,000 in the bank in cash. You can basically use that cash however you want, and it's not tied to your PPOR, it's just cash like any other savings.
What's the point in refinancing to pay out your existing mortgage when you just end up with another mortgage?
You get cash out.
@HighAndDry: Yeah but before I had a $400k mortgage, now I have $800K mortgage that I'm paying interest on.
@chumlee: Yes, but you can use that money to buy another property whereas before you might not have enough cash saved up. And you'd have a mortgage on that anyway too.
@HighAndDry: Yeah but now you have a bigger mortgage and used most of the funds on a non tax deductible property (PPOR) & your accountant needs to sort through the crap to determine what's tax deductible.
@chumlee: Firstly you would only refinance to take cash out with the purpose of investing the money for higher gains, so the reason was already clear, its a matter of how to do it to best benefit your position. There are many ways of course but what H&D was referring to would allow the addition funds to be at PPOR rates. You can also easily split the interest paid for the investment portion, and this becomes tax deductible as you are using it for investment purposes. (before people jump in to say lenders will split loan and charge investment rates etc, each lender has different policies, and there are lenders, if loan is predominantly PPOR e.g. 60/40, then you get PPOR rates)
Of course you can also securitize the new debt entirely against the new property, your overall debt position is the same when you consider it, sometimes it just depends on which way works out better in terms of convenience, interest saved, how much equity etc
Truth is there is no ONE way to structure a loan, and what might be right for someone may not be right for you.
@chumlee: No in his scenario you have a 640k loan which you paid out your 400k mortgage with, leaving you with 240k in cash.
But I think your point might be why do this when you can just redraw on the current loan? The answer would be to extend tenor back out to 25-30 years and change the purpose of the loan (although I'd be interested to know if you could get home loan rates and still really use that cash for "anything").
@serpserpserp: I was under the impression that you can't just take a loan/mortgage out as cash or money that you can just spend on what you want. Usually you would require a purpose, ie get the loan to buy a second house or buy/start a business. so I agree with your query about "(although I'd be interested to know if you could get home loan rates and still really use that cash for "anything")"
No region in Australia is seeing any capital appreciation at the moment, in fact we have seen huge drops in house prices which are currently ongoing(down half a percent in Feb already). Coupled with that, we have record low rental yields….
But yes borrow against your family home to buy another.
Best to have two depreciating assets than one…
I can’t believe how dumb the general population is in this country.
Tassie and some regional areas have had increases over the last 12 months.
Plenty of regional areas have gone up.
Also just because a market if falling doesn't mean every house has depreciated. look carefully at which quartiles (by price) of the market are actually dropping as it's not evenly distributed. many markets have not depreciated for houses that are below median price, but the higher end have.
Also those that have depreciated over the last year are still higher than 2 or 3 years ago
It depends. There are different ways of using equity to begin with:
In addition, even if you use your PPOR as security for the IP, if you had that amount of savings anyway and you keep that amount of savings in a liquid form, then that would serve as a buffer even if "things go wrong", giving you time to divest the IP if you need to.