Welcome to my third property post where I’ll be touching on mortgages.
Primary Place of Residence versus Investment Property
Both PPOR and IP have their own unique advantages and disadvantages which you need to take in consideration in your investment plan. For a newbie looking to get started, here is a cheat sheet outlining some of the schemes you can take advantage of as a first home buyer:
PPOR:
- First Home Loan Deposit Scheme : Eligible first home buyers can purchase a modest home with a deposit with as little as 5 per cent (lenders criteria also apply) without the need to purchase Lenders Mortgage Insurance (which can be ~$20k).
Note that this only applies to new builds.
- First Home Super Saver Scheme : The FHSS scheme allows you to save money for your first home inside your super fund. This will help first home buyers save faster with the concessional tax treatment of superannuation.
Conditions: You can apply to have a maximum of $15,000 of your voluntary contributions from any one financial year included in your eligible contributions to be released under the FHSS scheme, up to a total of $50,000 contributions across all years. You will also receive an amount of earnings that relate to those contributions. - Use Guarantor for small deposit without LMI (Lender’s Morgage insurance) – Lender’s Mortgage Insurance is the additional insurance you pay if your downpayment is less than 20%. This is because in the eyes of a lender, you will be seen as a more ‘risky’ borrower. So, the guarantor loan assists first home buyers to get their foot in the door and get into the property market even if they don’t have the necessary downpayment for the property. The guarantor, usually family member, would offer equity in their home as additional security for your loan. So this essentially eliminates the lender’s mortgage insurance as the guarantor’s asset will be what’s taken if you default on your payments.
Now, let’s get into more detail in the differences between these loans. Here is a high level overview:
PPOR
- Lower interest rate than IP loan
- Can have higher LVR compared to IP loan – Banks should be more lenient with giving you a higher Loan-to-Value Ration (LVR), meaning you can generally put a smaller downpayment.
IP:
- Higher Interest Rate than PPOR
- Negative gearing – this means that the expenses on your property are tax deductible.
If it is your first time purchasing an investment property or home, it is important understand the implications behind going with a PPOR loan vs an IP loan, and see which best fits your overall strategy.
