Advice on redraw from IP loan please

[JASA]

I have an IP that I purchased in 2003 for $280,000. It is now valued at $380,000.. In 2008 I foolishly locked in a loan on this property at 8% for 5 years (which has been a financial struggle). I have been paying principle down in lump sum payments on this loan each year.The loan on the IP is now $210,000. In March 2013 the fixed rate expires.

I have 4 IP's in total, 3 cover themselves pretty much. The 4th... the IP in question has always been negatively geared but once the fixed loan expires it will probably almost cover itself too.

I don't plan to claim any of the IP properties as PPOR, my plan is to hold the IP's until retirement and then sell one off each year when my taxable income would be reduced and CGT would be less of an issue.

I have been renting but I now really feel a need for a place I can call home. I want to buy a PPOR that I can renovate and add value to and would like to fund this using equity from the 4th I.P. Also my income is about to increase so I need to find a tax reduction.

Things I don't want to do:

• Buy another IP at this point.
• Salary sacrifice a large amt of my income to super. (I like to be in control of my own investing and retirement is too far off.)
• I will only invest in real-estate.. shares are a definite no go zone for me.
• I don't even want to go to SMSF in my head.

I am looking for an uncomplicated way to fund my PPOR. If necessary I will just have to borrow the full amount and live frugally for a while. ( have pre approval to borrow up to $420K)

My question is...If I redraw/ refinance and increase the loan on the 4th IP, what percentage of the new loan can I negatively gear for tax purposes ?

1. Only on the $210K still owing?
2. Up to the original IP loan of $300K?
2. Up to the current valuation of $380K?

I hope my question makes sense? I would really appreciate some advice/ suggestions.

I'm guessing the answer to my question is number 1. but hoping someone knows of a loop hole?

Thanks in Advance.

JASA

 

[The Y-man]

I have an IP that I purchased in 2003 for $280,000. It is now valued at $380,000.. In 2008 I foolishly locked in a loan on this property at 8% for 5 years (which has been a financial struggle). I have been paying principle down in lump sum payments on this loan each year.The loan on the IP is now $210,000. In March 2013 the fixed rate expires.

...

My question is...If I redraw/ refinance and increase the loan on the 4th IP, what percentage of the new loan can I negatively gear for tax purposes ?

1. Only on the $210K still owing?
2. Up to the original IP loan of $300K?
2. Up to the current valuation of $380K?

I hope my question makes sense? I would really appreciate some advice/ suggestions.

I'm guessing the answer to my question is number 1. but hoping someone knows of a loop hole?

Thanks in Advance.

JASA

1 - but it gets worse.... If the loan is P/I, the principle repayment needs to be apportoned - i.e. the claimable portion keeps getting lower as well - you can't "pay off" the non-deductible protion of the loan.

The Y-man

 

[Terry_w]

I have an IP that I purchased in 2003 for $280,000. It is now valued at $380,000.. In 2008 I foolishly locked in a loan on this property at 8% for 5 years (which has been a financial struggle). I have been paying principle down in lump sum payments on this loan each year.The loan on the IP is now $210,000. In March 2013 the fixed rate expires.

I have 4 IP's in total, 3 cover themselves pretty much. The 4th... the IP in question has always been negatively geared but once the fixed loan expires it will probably almost cover itself too.

I don't plan to claim any of the IP properties as PPOR, my plan is to hold the IP's until retirement and then sell one off each year when my taxable income would be reduced and CGT would be less of an issue.

I have been renting but I now really feel a need for a place I can call home. I want to buy a PPOR that I can renovate and add value to and would like to fund this using equity from the 4th I.P. Also my income is about to increase so I need to find a tax reduction.

Things I don't want to do:

• Buy another IP at this point.
• Salary sacrifice a large amt of my income to super. (I like to be in control of my own investing and retirement is too far off.)
• I will only invest in real-estate.. shares are a definite no go zone for me.
• I don't even want to go to SMSF in my head.

I am looking for an uncomplicated way to fund my PPOR. If necessary I will just have to borrow the full amount and live frugally for a while. ( have pre approval to borrow up to $420K)

My question is...If I redraw/ refinance and increase the loan on the 4th IP, what percentage of the new loan can I negatively gear for tax purposes ?

1. Only on the $210K still owing?
2. Up to the original IP loan of $300K?
2. Up to the current valuation of $380K?

I hope my question makes sense? I would really appreciate some advice/ suggestions.

I'm guessing the answer to my question is number 1. but hoping someone knows of a loop hole?

Thanks in Advance.

JASA

$210k, assuming you have never redrawn from this loan or never increased it.

If you do want to use the equity, make sure you set up a separate split for what Y man describes.

 

[JASA]

Thanks Terry and Y-man for your responses. I take on board that I can not get any tax benefit from redrawing principle paid off that IP loan. What I don't really understand is how using equity from that property would benefit me. If I use the equity doesn't that just increase the non deductible portion of the IP? Is benefit purely that the bank is more likely to give me more money another purchase? If that's the case, I may as well just take out a larger loan for my PPR. Or am I missing something? Apologies for my naivety.

 

[Rolf Latham]

I am looking for an uncomplicated way to fund my PPOR. If necessary I will just have to borrow the full amount and live frugally for a while. ( have pre approval to borrow up to $420K)

My question is...If I redraw/ refinance and increase the loan on the 4th IP, what percentage of the new loan can I negatively gear for tax purposes ?

1. Only on the $210K still owing?
2. Up to the original IP loan of $300K?
2. Up to the current valuation of $380K?

I hope my question makes sense? I would really appreciate some advice/ suggestions.

Uncomplicated usually translates to "convenient".

Sometimes the level of convenience determines the level of tears when it all goes pear shaped for reasons we NEVER foresaw, but those with knowledge of the "law of the path" knowthat intention doesnt matter, direction does.

None of the new loan would be deductible

Im assuming the total cost for the IP is 420 k

So

On the IP valued at 380 take a SEPARATE loan of 84 000 to fund the 20 % deposit, and get a separate loan of 336 secured only to the new PPOR.

Im assuming that all ( or the majority) of your loans are with one lender, and you have cash for the Stamps etc , otherwise the numbers change little

ta
rolf

 

[Terry_w]

Thanks Terry and Y-man for your responses. I take on board that I can not get any tax benefit from redrawing principle paid off that IP loan. What I don't really understand is how using equity from that property would benefit me. If I use the equity doesn't that just increase the non deductible portion of the IP? Is benefit purely that the bank is more likely to give me more money another purchase? If that's the case, I may as well just take out a larger loan for my PPR. Or am I missing something? Apologies for my naivety.

No tax benefits, just the potential benefits of needing less cash.

 

[JASA]

Thanks Rolf ....You are quite correct about the convenience factor.....I really am a lazy investor. All current loans are with same lender..CBA..I am Looking at doer uppers for up to $400K for my PPOR.
Formulating a plan based on above advice..... As Rolf suggests, I could take out loan for 20% deposit secured against IP.......Take out new loan for remainder of purchase. I have only have $20K in cash for other buying costs......spent $70K on holidays in past 12 months...... worth every penny .

Would it be worth going to a different bank for the loan on PPOR? My loans at present are all with CBA (I think all cross collateralized) and together total equity for all properties is only around $350K...... Not doing too well in this game am I?

 

[Rolf Latham]

Would it be worth going to a different bank for the loan on PPOR? My loans at present are all with CBA (I think all cross collateralized) and together total equity for all properties is only around $350K...... Not doing too well in this game am I?

You are doing fine !

the job of a decent non aligned to a specific lender credit adviser ( cant use independent anymore) is to ensure we manage RISK to the client.

Often, clients dont see that risk, but its important for our financial benefit to ensure the client doesnt get into trouble, because that affects our trailing comms, so we are on the same page.

In general, remember that the Bank employee or mono product mobile is the agent of the lender, whereas a broker is the agent of the Borrower.

if you were my client, I would likely separate not only the xcoll ( unless there is a negative to the borrower) but also use a second/separate lender for the PPOR.

A good broker can foresee things that bankers and borrowers may have trouble to, simply because an experienced broker has a more "global" view.

ta

rolf

 

[Aaron_C]

I would uncross the loans first if you are able to like rolf said. Either through an internal uncross with CBA or with a new lender. It's just no point having substantial equity if the bank holds and controls all of it.

 

[JASA]

Thanks I will work up the energy to do uncross my loans. I think Rolf gave me advice to do so over a year ago but i have been too lazy to follow through. Cheers everyone for all of your help

 

[DaveM]

together total equity for all properties is only around $350K...... Not doing too well in this game am I?

You are doing better than the majority of property investors who buy one and give up, or those who have thier money in a term deposit trying to second guess the market get analysis paralysis and never do anything at all.