Hi Everyone,
I was sitting on the couch earlier this evening looking at our home loan for our IP and suddenly had a feeling that something was wrong..
We have an IP and the loan balance when the PPOR became an IP was $377K. Since then we have been claiming the interest paid on the $377K loan (interest only).
The property is slightly cash flow positive based on a $377K loan balance.
Earlier last year we refinanced our loans (PPOR and 2 IPs) to UBank to get a better rate and take advantage of a gift card promotion. UBank don?t offer offset accounts but I didn?t think about this too much at the time as a redraw facility is available instead.
Mid last year we sold one of our IPs and have put the funds onto the PPOR home loan (now close to $0 owing) and the remainder onto the remaining IP mortgage, reducing the IP loan balance to about $160K. I thought that this was a sensible idea to use the excess funds to reduce the interest payable on the IP.
I have been transferring as much as possible into the IP mortgage but also have made many redraws. The loan balance has been decreasing steadily but the balance has been fluctuating with the deposits and redraws. The redraws have been used for day to day (non-deductible) expenses.
I have just realised that this was a serious mistake. I think that what I have done now is to make the maximum interest claimable for the IP to be interest charged on a $160K balance. I had incorrectly assumed that if we redrawed from the mortgage back to a $377K balance in the future we could then claim interest on $377K again. Ie I assumed that an offset account and a redraw facility behave the same way.
It just so happens we have been in discussions with our Financial Advisor this week and he has recommended setting up a Discretionary Family Trust. The Trust will buy shares and we will distribute the income generated to the family member with the lowest income for the year.
Can I please ask what people might suggest as a fix for my mistake?
Eg.. If we redrawed from $160K to $377K (ie $217K) and sent this to the Trust (that we are about to set up) to be invested in shares would that restore deductibility up to $377K again?
Would transferring the IP into the Trust be a sensible way to fix my mistake? I have not considered this just yet but as it?s now cash flow positive with a low loan balance perhaps it?s a good idea?
I am kicking myself but am also a bit confused as although we will lose about $4000 in additional income tax payable ($10000 interest difference between $377K loan and $160K loan) we would save $10000 in interest payments, ie we?ll be $6000ish better off each year.
I will of course send this email on to my Accountant and Financial Adviser but I would very much appreciate any thoughts from the brains on this site. Feel free to give me a kick in the butt too for being a goose!
Thanks for your time!
I was sitting on the couch earlier this evening looking at our home loan for our IP and suddenly had a feeling that something was wrong..
We have an IP and the loan balance when the PPOR became an IP was $377K. Since then we have been claiming the interest paid on the $377K loan (interest only).
The property is slightly cash flow positive based on a $377K loan balance.
Earlier last year we refinanced our loans (PPOR and 2 IPs) to UBank to get a better rate and take advantage of a gift card promotion. UBank don?t offer offset accounts but I didn?t think about this too much at the time as a redraw facility is available instead.
Mid last year we sold one of our IPs and have put the funds onto the PPOR home loan (now close to $0 owing) and the remainder onto the remaining IP mortgage, reducing the IP loan balance to about $160K. I thought that this was a sensible idea to use the excess funds to reduce the interest payable on the IP.
I have been transferring as much as possible into the IP mortgage but also have made many redraws. The loan balance has been decreasing steadily but the balance has been fluctuating with the deposits and redraws. The redraws have been used for day to day (non-deductible) expenses.
I have just realised that this was a serious mistake. I think that what I have done now is to make the maximum interest claimable for the IP to be interest charged on a $160K balance. I had incorrectly assumed that if we redrawed from the mortgage back to a $377K balance in the future we could then claim interest on $377K again. Ie I assumed that an offset account and a redraw facility behave the same way.
It just so happens we have been in discussions with our Financial Advisor this week and he has recommended setting up a Discretionary Family Trust. The Trust will buy shares and we will distribute the income generated to the family member with the lowest income for the year.
Can I please ask what people might suggest as a fix for my mistake?
Eg.. If we redrawed from $160K to $377K (ie $217K) and sent this to the Trust (that we are about to set up) to be invested in shares would that restore deductibility up to $377K again?
Would transferring the IP into the Trust be a sensible way to fix my mistake? I have not considered this just yet but as it?s now cash flow positive with a low loan balance perhaps it?s a good idea?
I am kicking myself but am also a bit confused as although we will lose about $4000 in additional income tax payable ($10000 interest difference between $377K loan and $160K loan) we would save $10000 in interest payments, ie we?ll be $6000ish better off each year.
I will of course send this email on to my Accountant and Financial Adviser but I would very much appreciate any thoughts from the brains on this site. Feel free to give me a kick in the butt too for being a goose!
Thanks for your time!