Buying 2nd Apartment (to Live in) - Keep Mortgages Seperate or Bundle Together?

• 

  oscargamer on 08/02/2021 - 21:17

  +4

  KEEP SEPARATE

  If you need to ask why, just google it. That and 'depreciation schedule'

  Get an accountant NOW. Before you buy the second place. A small cost upfront talking to one, will save you thousands/ tens of thousands down the track

  • 

    nickyd84 on 08/02/2021 - 21:41

    thanks mate, we have an accountant but so far out EOFY has always been very simple. I guess it will soon get a bit more complicated!

    I'm certainly preferring to keep separate from what I've read so far. Cheers.

• 

  Meho2026 on 08/02/2021 - 21:19

  +3

  Before you buy the next property make sure your existing loan is set up with the lowest amount of equity and any other cash against it in an offset account.
  That way when you buy the next property you can withdraw all the offset and apply it against your new loan.
  Your PPR is non deductible debt so you want all your money against that loan and as much debt as you can against the investment property.
  If you can avoid cross collatoralising the loans, keep them separate.

  • 

    nickyd84 on 08/02/2021 - 21:45

    We're just finishing a fixed rate, so in March we can go variable and then have an offset account (which we've never had). I like the look of putting savings in there to reduce the interest repayments, but I'm still in the early stages of research here.

    We would put our savings in the offset, and then bring back out to help towards deposit and financing the second. As you mention, we will certainly try to get as much debt against the investment property as possible (release as much equity as we can), to then get the best LVR we can afford (and consequently the best rate too).

    Thanks for your advice.

  • 

    [Deactivated] on 09/02/2021 - 00:01

    Before you buy the next property make sure your existing loan is set up with the lowest amount of equity and any other cash against it in an offset account.
    That way when you buy the next property you can withdraw all the offset and apply it against your new loan.

    You really need to do this before buying the first property if possible, as if you've put extra money into the mortgage you cannot redraw it and make it deductible, but you can take it out of an offset and make it deductible as the ATO treats redraws as a 'new loan' and looks at the purpose of the redraw, not what it's secured against. The collateral isn't really relevant to deductibility at all.

    • 

      nickyd84 on 09/02/2021 - 13:55

      we haven't made extra installments, just 4yrs of Principle and Interest. Never had an offset due to fixing.

• 

  CheapskateQueen on 08/02/2021 - 21:44

  +1

  you shouldn't have one loan for your home and investment property. you can have "one loan" with separate splits but they should never mix into one account.

  if you have one mixed loan, you'll be creating a massive headache working out your interest deductions for the investment portion, and every repayment of principal will be paying off part of your home loan portion, and part of the investment loan portion. this isn't optional, it's the rule. you can't say "i intend this $1000 to repay only my home loan portion", it must be split between both.

  so, never mix them.

  • 

    nickyd84 on 08/02/2021 - 21:46

    it seems that way, thank you. It's strange, the call with CBA this morning started off with them recommending bundling together, but after a few more questions it became apparent that is far from ideal.

    • 

      conan2000 on 08/02/2021 - 23:28

      +1

      The people at the CBA call centre don't necessarily know anything about tax and why you'd want to keep things separate. Definitely questions for an accountant/financial advisor (or Ozbargain).

• 

  Smulder on 08/02/2021 - 21:46

  +1

  Not just because it is easier.
  The interest on the loan relating to the rental property will be tax deductible.
  The interest on the property you are living in is not.
  If you bundle the loans together, you risk diluting the tax-deductible portion of the interest, which could cost you thousands.
  You also make your tax affairs much more complicated.
  100% keep them separate.

  • 

    nickyd84 on 08/02/2021 - 21:47

    I thought so, thanks mate.

• 

  TheMindsetTraveller on 08/02/2021 - 21:52

  +2

  1. Go to your accountant now to get proper advice for your circumstances.

  2. In the meantime, my layman's opinion, it sounds your current apartment will treated to be your PPOR and have a 6 year CGT exemption (unless you have previously rented it out when you first aquired the property). That's great, rent and sell before 6 years to avoid CGT.

  3. Your current apartment's loan. If possible, you want this loan to be as big as possible before you rent, because you pay more interest on this 'investment' property meaning a bigger deduction against any rental income. Once this loan is as big as possible, if there is any excess funds - put that towards your new apartment as you will be living in this and have zero tax benefit for you.

  4. Must get a depreciation report for the existing apartment. You may get some good capital / plant depreciation on the property each year.

  5. Get a valuation of the current apartment today, just for tax purposes (in case of CGT calculations one day).

  • 

    [Deactivated] on 09/02/2021 - 00:03

    Your current apartment's loan. If possible, you want this loan to be as big as possible before you rent, because you pay more interest on this 'investment' property meaning a bigger deduction against any rental income. Once this loan is as big as possible, if there is any excess funds - put that towards your new apartment as you will be living in this and have zero tax benefit for you.

    Keep in mind that redraws are considered by the ATO to be new loans, so any money already paid off the loan is 'lost' to deductibility, you want to use an offset instead to 'keep' the loan as big as possible, but you cannot redraw to 'make' it as big as possible.

    • 

      TheMindsetTraveller on 09/02/2021 - 06:32

      +1

      Good clarification, thanks.

  • 

    Meho2026 on 09/02/2021 - 02:25

    +3

    Point 2 above is incorrect.
    You can only have one PPOR. When you buy the second property and move into it, that becomes your PPOR therefore the first property can not also be declared a PPOR.
    The 6 year rule only applies if you do not move into another property you own.

    • 

      TheMindsetTraveller on 09/02/2021 - 06:32

      +1

      Good pick up on the mistake.

      I'll learn from this mistake and never post in haste / or late at night moving forward.

    • 

      nickyd84 on 09/02/2021 - 14:05

      Out of interest, what's to stop me getting a variable rate now with CBA for my existing apartment (at say 2.85%), and then taking out a new loan for the new apartment either with them or another bank, and then not changing my loan when I move out?

      I guess in theory when I move out of here I would be expected to tell the bank so they could switch it from 'live in' to 'investment', which obviously has negative rate implications (2.8% live in vs 3.2% investment). Is it correct that I couldn't get the tax benefits of an 'investment' if it isn't on an investment rate?

  • 

    Quantumcat on 09/02/2021 - 07:34

    5.

    Everyone always says this but I am fairly sure it is just straight sell value minus buy value times the percentage of time you didn't live there. Eg if you bought at 200k sold at 400k ten years later and you lived there for 5 years you would pay CGT on (400k - 200k)X1/2 = 100k

    • 

      TheMindsetTraveller on 09/02/2021 - 07:55

      It is much more complex than that ..

      More info
      https://www.ato.gov.au/general/capital-gains-tax/your-home-a…

      • 

        Quantumcat on 09/02/2021 - 09:01

        It is more complicated expenses that you've either claimed already or not etc, but that article doesn't say that you can use a valuation at any point

  • 

    nickyd84 on 09/02/2021 - 14:01

    Thanks for the detailed response!

    1 - will do!

    2 - Not a factor, do not plan to sell our current apartment

    3 - Good tip, we will soon go variable and get an offset and keep all savings in there.

    4 - Interesting, did not think about this at all. Will look in to.

    5 - Did get a valuation last week, but by a real estate agent. I assume only relevant if we wanted to sell?

• 

  jellykingdom on 09/02/2021 - 07:24

  …can you even DO a single big loan…??? I've certainly never been offered that option before, and we own 3 places. Each of them is a separate loan. The bank considers the sum total obviously, but they don't just say "here is $1m to buy 1,2,3,4 houses with"

  • 

    dust on 09/02/2021 - 09:14

    You can consolidate it into one loan. But as has been said above it is not generally a good idea.

    • 

      jellykingdom on 09/02/2021 - 09:16

      i had absolutely no idea that was possible! I have never been offered that before

      • 

        nickyd84 on 09/02/2021 - 13:59

        yeah they really lead with that, and told us 70% of people roll them in to one for ease!