Drawing borrowed funds through 'clean' offset

[Europa]

Sounds like a standard strategy, just wanted to run it past a few of you to see if there are any holes.

Living in PPOR, looking to buy IP.

Lender has advised that they can reval and top-up the PPOR to 80%LVR and create a split loan (existing loan with offset and new loan with an offset) with the balance in the split to use for paying deposit and costs on IP/s. So once I'm ready to buy I can draw the split to pay deposit and then mortgage the balance against the IP.

Only issue I could see is the lender has stated that to write cheques for the deposit or costs the money has to be drawn from the split into the offset account (fresh account, no existing other funds in there) and the cheque can then be written. I'm well aware of issues surrounding contaminating borrowed funds by mixing with non-borrowed but what about the borrowed funds pass through a clean offset. Apparrently this the only way they can do it and cheques cannot be written directly from the loan account??

 

[BMan]

if its a clean bank account with no funds in there previously then it shouldnt be a problem

 

[Brady]

Sounds good to me. Clean offset long as purpose isn't mixed happy days

 

[Terry_w]

Get a LOC set up instead. Or get a private ruling.

 

[Europa]

Get a LOC set up instead. Or get a private ruling.

Hi Terry, I guess from your answer you could see some issues with this? Initial purpose of draw-down was not investment as money went into a 'savings' account to draw cheque?? Other than a LOC how else can this be done? Do other lenders allow cheques to be drawn straight from the loan?

If the purpose was to say buy shares and money had to be transferred from the lender to the broker account prior to settlement would this also mean the 'purpose' is lost??? Surely this stuff happens every day??

 

[Terry_w]

Hi Terry, I guess from your answer you could see some issues with this? Initial purpose of draw-down was not investment as money went into a 'savings' account to draw cheque?? Other than a LOC how else can this be done? Do other lenders allow cheques to be drawn straight from the loan?

If the purpose was to say buy shares and money had to be transferred from the lender to the broker account prior to settlement would this also mean the 'purpose' is lost??? Surely this stuff happens every day??

Yes, happens every day and is not an issue until it becomes an issue. Once money hits a savings account it is no longer borrowed money. It may probably be ok if you can trace the funds without there having been any mixing. And there is a private ruling to say this, but this ruling only applies to the person who applied for it. To be safe I urge my clients to use LOCs, where this is not possible or practical I explain the risks (as a lawyer) and they decide.

Some lenders allow the money to be paid back into the loan and then the funds can be borrowed and paid directly to the share broker or to pay bills.

 

[Paul@PFI]

Terry I dont believe a ruling would be required. This happens each and every day when banks finance properties. The owners borrowed deposit and even drawn LOC funds often hit a solicitors trust account and then they pay the vendor. The solicitors trust is a savings type account. No issue. How is that different ?? Interposing accounts can be an issue. It doesnt mean it is an issue.

I'm of the view you must be able to trace to evidence that the loan proceeds were used to acquire income prodcing property. How it gets there doesnt matter. The loan funds may be drawn and used to buy a bank cheque through the banks own accounts. No issue. . If the drawn funds dont touch a existing LOAN account (to then become a new redraw and blend deductible & non-deductible) its OK. The existing loan is what taints it. This is often a key feature of issues with blended loans and split loan facilities.

The reference to "clean" seems to sufficient explain the original post understands the concern. Draw down and deposit to a Nil offset then drawn same value and pay the solicitor - fine. Many lenders impose that stupid requirement as they dont want a trickle draw-down. (They make more $ from interest from day one - I'm cynical)

 

[Terry_w]

Yes you are probably right that a ruling is going overboard. But the difference with transferring via solicitors etc is that these are third parties (albeit a trustee for the transferor).

I am worried about 2 things:
1. Borrowed funds intermingling with non borrowed - tracing is not possible. See the Domjan case where interest was required to be apportioned when Domjan transferred loan funds into a savings account to write a cheque.

2. Once the funds hit a savings account they are no longer borrowed funds but cash. This may be of a lessor worry if the account is empty

But both can be overcome by using a LOC account. Once drawn this can later be converted to a term loan - as LOCs tend to have a higher interest rate and terms which are not so favourable.

 

[Greg Reid]

Europa,
Like Terry I would prefer the use of a LOC facility. Some lenders still have the LOC at the same rate as a term loan and you simply transfer funds directly from the LOC.

Other lenders do not have as many restrictions on term loan accounts, use a split facility, keep one for investing purposes only, when the investing loan is set up, the funds go back into it available for redraw. The funds can then be accessed via internet and direct debits without the requirement for an additional offset.

It mostly comes back to how the lenders back office and IT systems work or what flexibility they can or cannot provide. Get a lender that suits your needs, not you trying to adapt to their limitations.

 

[Europa]

Europa,
Like Terry I would prefer the use of a LOC facility. Some lenders still have the LOC at the same rate as a term loan and you simply transfer funds directly from the LOC.

Other lenders do not have as many restrictions on term loan accounts, use a split facility, keep one for investing purposes only, when the investing loan is set up, the funds go back into it available for redraw. The funds can then be accessed via internet and direct debits without the requirement for an additional offset.

It mostly comes back to how the lenders back office and IT systems work or what flexibility they can or cannot provide. Get a lender that suits your needs, not you trying to adapt to their limitations.

Hi, yes my lender can set up like this and an internet redraw can be made directly from the investment loan however there are daily limits ($15k?). To write a cheque for a deposit they advise the money must be redrawn into an offset hence creating my complication.

 

[Terry_w]

Hi, yes my lender can set up like this and an internet redraw can be made directly from the investment loan however there are daily limits ($15k?). To write a cheque for a deposit they advise the money must be redrawn into an offset hence creating my complication.

Sometimes the lenders can temporarily increase these limits for these sorts of occaisions. Another option is a bank cheque.

Who is the lender?

 

[Paul@PFI]

A LOC is best -that is clear and not in dispute.

The lenders often do that draw down upfront as daily limits etc and cashing counter limits can pose a concern. It may be well worth opening a temporary savings "settlement account" linked to a temp mastercard / visa debitcard (ie no daily limits apply) and using it ONLY to disburse every cent then close it. No mixed funds and tracing is as clear as glass.

 

[Europa]

Sometimes the lenders can temporarily increase these limits for these sorts of occaisions. Another option is a bank cheque.

Who is the lender?

Lender is Bankwest.

 

[Rolf Latham]

Lender is Bankwest.

enjoy

they have their place

ta
rolf

 

[Terry_w]

Lender is Bankwest.

Ah.........

 

[Europa]

Ah.........

mmmk, anything else I should be aware of with them??