105% loan by moving PPOR debt to IP

[softmonkey]

Somehow in all my reading of this forum I completely missed this scenario!

I was surprised when the bank's mobile lender (franchisee) said that I could move a part of the PPOR debt to a new IP loan to bring it up to 105% LVR, while keeping all properties with the bank under 80% LVR.

Here's a simplified 2-property scenario:

PPOR value $350k, loan of $150k. Offset has say, $40k.
New IP purchase, value $400k.
New loan, 105% IO, ie. $420k to cover purchase + costs.
The PPOR loan reduces by $100k to $50k, with offset still at $40k.

In other words, the new $420k loan is secured by multiple properties: $320k (80%) of the new IP, and $100k of security from existing PPOR.

The existing PPOR loan does NOT get refinanced or modified in any way. I really made sure of this! It simply gets reduced by $100k.

(my actual scenario is a little more complex - some of the offset goes towards the purchase, and there are more properties involved, but the principle is the same.)

I particularly like the way this maximises good debt, reduces bad debt and still retains an offset balance for emergencies.

Are there any pitfalls to look out for? I must be overlooking something but I can't find any. The bank already has security over all the properties involved so it's not like I'm signing away any extra leverage. There's no refinancing or other fees except on the single new mortgage.

I asked whether this involved cross-collateralisation. His response was that since the abolition of stamp duty in SA, "cross-collateralisation" as a concept doesn't really apply any more. Is this correct?

 

[WillG]

You cannot claim the interest on the $100k part of the new mortgage as it is a part of the loan against your PPOR

 

[softmonkey]

I had thought along those lines but he certainly indicated that it could be claimed... said "why wouldn't you maximise your tax benefits and do it this way". And the loan is for investment purposes which is the criteria, isn't it?

 

[ILoveProperty]

Something is wrong with your scenario.

How can you reduce your PPOR loan by $100k - where does the $100k come from?

Are you saying the the new loan against your new IP will come to $520k? i.e. $420k towards IP and $100k towards existing PPOR loan?

And it has been said many times on here that the use of the loan determines whether you can claim interest or not.

 

[Thrawn]

How do you get the PPOR loan to reduce by $100k ?

The way I see it, you borrow extra $420k.. which is ALL used to pay for new IP and expenses.

Where does the $100k reduction of existing PPOR loan come from ?

 

[rugrat]

Generally speaking bankers know jack about tax.

 

[softmonkey]

Ugh, sorry, I messed up the figures. Thanks to those who pointed out my blunder! The offset does decrease by the same amount as the PPOR loan.

PPOR value $350k, loan of $150k. Offset has say, $90k.
New IP purchase, value $400k.
New loan, 105% IO, ie. $420k to cover purchase + costs.
The PPOR loan reduces by $50k to $100k, with offset also reducing to $40k.

I'm still trying to get my head around it but $50k from the offset goes towards the purchase costs of $420k, the remaining $370k is secured against the existing properties, but somehow I end up with a fully claimable $420k loan because the total LVR across the board is still below 80%.

Hmm.. it seems odd now that I type it up. Made perfect sense the other day but now I think I better give him another call!

 

[ILoveProperty]

Of course the $420k is fully claimable. It is all going towards the new IP.
You're just cross-securitising the new IP against you PPOR, hence the need to bring the PPOR loan down a bit by paying some of your offset into the loan.

 

[softmonkey]

hence the need to bring the PPOR loan down a bit by paying some of your offset into the loan.

AH you've nailed it. Makes sense when you look at it from the bank's point of view. Thanks for the clarity!

 

[Rolf Latham]

urghhhhhhhhhhhh

I cant see any real benefit for the borrower on this set up

Seems like the bank is the winner on this puppy

ta
rolf

 

[Thrawn]

Just be very careful about where you put the new loan money. It must go DIRECTLY from the bank that generated the loan directly into the new IP (or IP purchase costs).

If you store/mix any part of the $420k into your offset or any other account/loan at any time, you will most likely affect the tax deductability of that $420k.

 

[softmonkey]

Thanks Thrawn. If the costs end up being $419213 at settlement, do they drop the extra $787 in a savings account, or do they literally drawn up the loan for the exact amount of $419213?

 

[josko]

AH you've nailed it. Makes sense when you look at it from the bank's point of view. Thanks for the clarity!

This scenario will always make sense from a bank's point of view because the bank not only has hold of all of your assets but can refrain from releasing equity in one property, if the other falls short.

Have you researched Cross-Collateralisation?

If you have been approved to 420k - your borrowing will be 420k and the costs will be extracted accordingly. (Assuming vals/LVRS are correct.)

Regards JO