Contamination of Home Loan

Hi all,

I initially have 2 IP loans with total balance of $500,000 each.

I've just had this refinanced/topped up with NAB with the following structure:

IP1: $630,000
IP2: $650,000

I intend to use the top-up from as a deposit for the next IP.

Previously, I was not aware of the difference between a top up and an equity release. I've been reading several posts on this forum which seems to suggest that this is a bad idea for tax deduction sake. There seems to be a lot of doom and gloom about contamination of loans.

Since the loans have now been settled, Are there any remedial actions that can still be taken from here?

Can I still create a separate equity release loan after a top-up?


Thanks,
Mu
 
Looks like the purpose is the same, so its not 'contaminated' between deductible and non deductible purposes.

Doing an equity release and putting the extra funds in a separate split may have been useful if you plan on turning one of those IP's into a PPOR down the track. This may have assisted record keeping and keeping track of deductible and non deductible portions.

Cheers,
Redom
 
Have you actually spent any money from the increase yet?

If not, simply split the loan in question into two parts and make sure the money from the increase moves onto the loan intended to be for investment use.

In this particular instance though, they're both IPs, so the purpose of all the funds is already investment. There probably isn't a problem here to begin with.
 
Doing an equity release and putting the extra funds in a separate split may have been useful if you plan on turning one of those IP's into a PPOR down the track. This may have assisted record keeping and keeping track of deductible and non deductible portions.

Thanks Redom.

I do have intentions to turning one of the IP's into PPOR in a few years time.

Can the loans still be restructured when the time comes?



Have you actually spent any money from the increase yet?

If not, simply split the loan in question into two parts and make sure the money from the increase moves onto the loan intended to be for investment use.

Thanks Peter,

I have not yet spent any of the top up yet. I have only been using my money from the offset account for personal day to day stuff.
 
Hi all,

I initially have 2 IP loans with total balance of $500,000 each.

I've just had this refinanced/topped up with NAB with the following structure:

IP1: $630,000
IP2: $650,000

I intend to use the top-up from as a deposit for the next IP.

Previously, I was not aware of the difference between a top up and an equity release. I've been reading several posts on this forum which seems to suggest that this is a bad idea for tax deduction sake. There seems to be a lot of doom and gloom about contamination of loans.

Since the loans have now been settled, Are there any remedial actions that can still be taken from here?

Can I still create a separate equity release loan after a top-up?


Thanks,
Mu

Mugen Zenji

Assuming none of the extra borrowed money was paid into an offset/savings account at any stage.

You have ended up with one big loan with no real mixing occurring yet. Mixing will occur when you borrow the extra money again but as long as you use the borrowed funds for investments in your name there will be no immediate tax problem as all the interest will be deductible.

However it may be a good idea to split the loan now, or after use, into the 2 respective loans so that each can be distinguished and when one property or shares are sold only the loan associated with this property/shares is paid off.
 
I do have intentions to turning one of the IP's into PPOR in a few years time.

Can the loans still be restructured when the time comes?

Technically you could leave it to later, but your behaviour in the meantime could have negative consequences in the future. Better to create the split on that IP loan now.

Split A: The original loan when you purchased the property.
Split B: Any equity you've released in the meantime.

I have not yet spent any of the top up yet. I have only been using my money from the offset account for personal day to day stuff.

Money earned via income (salary, rent, dividends) should be stored in the offset account. You're doing the right thing. :)
 
Nothing to stress here, you haven't caused any contamination issues *yet*. Split the loan to show the IP related debt vs deposit for other IP so that way when you move into the PPOR you can clearly show what is non deductible personal debt and what is investment.
 
Thanks for all the advice so far.

One concern is that after settlement, NAB deposited the surplus(top-up) into my offset account. From ATO's perspective, would they see this as a redraw for personal use despite I haven't touch a single cent of it?

I also have not yet deposited any money into the new NAB offset acct yet.

Cheers,
Mu
 
If the offset was your normal transaction account for eg, then most likely yes it will be contaminated. If it was a brand spanking new offset, you're okay.

However, if you split the loan now, so one split is for the original loan amount and the second split is the new funds now in offset, you should be able to then repay the offset funds into the new split, effectively repaying the total new split - balance $0 drawn.

You can then redraw it for IP use and the debt will be deductible.

I'm not an expert though so please get proper advice - wait for Terry to confirm. :)
 
Thanks for all the advice so far.

One concern is that after settlement, NAB deposited the surplus(top-up) into my offset account. From ATO's perspective, would they see this as a redraw for personal use despite I haven't touch a single cent of it?

I also have not yet deposited any money into the new NAB offset acct yet.

Cheers,
Mu

If the offset account has no other cash in it now or before you may be right. Seek tax advice.
 
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