Equity Release & Loan structure for 2nd IP

[s0805]

Hi there,

Planning to buy 2nd IP in a year time.

As a first step I am thinking for arranging finance for 2nd IP deposit and structuring importantly?.I understand that I?ll have to do valuation to get the $ amount & this time around happy to pay LMI to borrow more?..

Current Situation
Loan 1 - PPOR (Loan $240K) -> Linked offset $150K
Loan 2 ? 90K -> 8K Redraw (Equity Loan - tipped in to PPOR equity and borrowed upto 80 % to avoid LMI)
Loan 3 ? 263K (Secured only against the IP1)

All three loans are IO and in my name only? Loan 2 & 3 are used only for investment purposes?..this is how I am planning to dip into available equity to fund the deposit for 2nd IP & making sure its tax deductibility?.

Release equity from Loan 1 and Loan 3 (hopefully up to 90% and Pay LMI) into Loan 4. Set this loan as IO only, open the new offset account attached to this loan only?..draw the loan and put the money in the attached offset until needed for investment purposes?.

I prefer to use IO with offset setup for equity release rather than LOC (avoid the higher Interest rate)..

Am doing cross collateralization here, should I setup separate loan for each equity release or something? (i.e. PPOR equity Loan 4, PI1 equity Loan 5)

What is the best way to use the 8K sitting in redraw against Loan 2, can I just use this money from redraw and pay for IP2 investment costs? (there was forum earlier where discussion was around redraw money should go to seller?s account directly i.e cheque or something?.in my case I?ve confirmed with bank that they don?t allow to write cheque from redraw?.I?ll have to park it somewhere before I write cheque from, is there any issue doing that?)

Is this the appropriate way to go about this?

Any comments/feedback will be helpful?.

Thanks

 

[Terry_w]

What is the best way to use the 8K sitting in redraw against Loan 2, can I just use this money from redraw and pay for IP2 investment costs? (there was forum earlier where discussion was around redraw money should go to seller?s account directly i.e cheque or something?.in my case I?ve confirmed with bank that they don?t allow to write cheque from redraw?.I?ll have to park it somewhere before I write cheque from, is there any issue doing that?)

Ther certainly is issues with parking the money somewhere to write a cheque. If you mix the borrowed money with unborrowed you will loose the full deductibility of interest. This is what happened in the Domjan case.

 

[Brady]

Ther certainly is issues with parking the money somewhere to write a cheque. If you mix the borrowed money with unborrowed you will loose the full deductibility of interest. This is what happened in the Domjan case.

Have had clients open a seperate account just for equity release to ensure no mix.

Very important to ensure no mix of funds, just like x-coll.

 

[Terry_w]

Have had clients open a seperate account just for equity release to ensure no mix.

Very important to ensure no mix of funds, just like x-coll.

Yes, definitely the way to go for the small equity releases.

 

[s0805]

Have had clients open a seperate account just for equity release to ensure no mix.

Very important to ensure no mix of funds, just like x-coll.

Brady/Terry,

Thanks for your reply.

i got your point as long as i don't mix the funds with non deductible account....but i guess i can trasfer it to offset account setup solely to park investment funds offseting investment loan ....am i right?

It would be great to get your feedback on overall structure...is it the right and common way to go.....

I a not sure should I setup separate loan for each equity release or something? (i.e. PPOR equity Loan 4, PI1 equity Loan 5)

Cheers

 

[Brady]

Different bankers / brokers have different approaches.

I don't see an issue with setting up a seperate offset account soley for the purpose of equity release funds, as long as they aren't mix with other funds.

I believe Terry prefers to set up a seperate LOC, again making sure no mix purposes. Then later changed to IO Home Loan w/offset.

 

[Terry_w]

Brady/Terry,

Thanks for your reply.

i got your point as long as i don't mix the funds with non deductible account....but i guess i can trasfer it to offset account setup solely to park investment funds offseting investment loan ....am i right?

It would be great to get your feedback on overall structure...is it the right and common way to go.....

I a not sure should I setup separate loan for each equity release or something? (i.e. PPOR equity Loan 4, PI1 equity Loan 5)

Cheers

I personally wouldn't set it up that way, but use a LOC. By borrowing and parking cash in an offset account, even an empty one, you are weakening the connection between borrowing and investing. As a tax lawyer I would recommend not to do this, but if you want to then apply for your own private ruling.

 

[s0805]

Different bankers / brokers have different approaches.

I don't see an issue with setting up a seperate offset account soley for the purpose of equity release funds, as long as they aren't mix with other funds.

I believe Terry prefers to set up a seperate LOC, again making sure no mix purposes. Then later changed to IO Home Loan w/offset.

Hi Brady,

thanks for that.

what about releasing equity. As a example if I've PPOR and IP equity should i setup the individual loans against each (i.e IP Equity ->Loan 1 & PPOR Equity ->Loan 2)
or common loan (i.e. IP Equity + PPOR Equity ->Loan 1). I am just wondering if i setup common loan to draw eqity from IP and PPOR will that be cross collateralization?

Also, from LMI point of view, if I borrow upto 90% of both PPOR and PI to gain access to equity, will the LMI on both PPOR and IP be tax deductible or just
the once? Logically reasoning behind to increase LMI on both loans and getting hold of maximum equity is for investment purposes....

cheers