Finacially Preparing PPOR to become future IP

Hi,

I have been reading threads about this & googling a fair bit on the subject.

My PPR is LOC 323K LOC with balance of say 312K leaving 11K excess available. I called westpac to ask about changing to I.O rocket repay loan with offset ( & it has redraw).

I assumed I could take the excess funds 11K- & drop them into the offset a/c leaving the I.O loan balance at 312K.

It was explained that that is not how it works. What happens is that the whole 323K LOC loan changes to I.O rocket repay with offset but the 11K stays in redraw.

From what I understand that would confuse things tax wise ,(once it becomes IP)if I was to redraw the 11K & put in the offset a/c then use for personal expenses (which I will need it for)

Im thinking a way around it could be to draw the 11K out now & "put it in my pocket"

Then set up the rocket repay loan owing 323K, then once set up put the 11K into the offset.

Then I only have interest payments to make & the loan will stay at 323K for when it becomes an IP. No confusion for the taxman.

Does the above scenario sound like the right way to do it?

I have an advantage package, so no fees for changing the loan & .25% discount.
 
Hiya TP

Possibly u already have a problem.

How long have u had the Equity Access loan and have you been placing salary or business income into it, and then "living" from that income ?

ta
rolf
 
Hiya TP

Possibly u already have a problem.

How long have u had the Equity Access loan and have you been placing salary or business income into it, and then "living" from that income ?

ta
rolf

Hi Rolfe,

I have had the loan for approx 15mths. It is my working account. All income in- all expenses out.
 
uh oh

better work out the total that went INTO the loan over those months.

If your redraws have been for non investment or non biz purposes, the total amount of wages or salary etc into the account may have reduced the deductible amount below 312.

If for example 100 k has gone into the loc,then only 312 - 100 = 212 would be deductible once the place becomes an ip. The balance would be regarded as a "new loan for living expenses" and personal and thus not deductible

ta
rolf
 
Rolf is right but it can get pretty complicated..

Depositing to the LOC originally will pay off the housing loan and drawing out is considered a new loan that would not be deductible (unless you used the money for renos on the house or something)

All deposits to the LOC pay out the loans in the proportions at the time. For a simple example:

Say the loan is $100k
You deposit $24k and then draw $4k back out for living expenses so the loan has a balance of $80k.
After this transaction, $76k is attached to the house and $4k is not, it is considered a new loan for personal expenses.

If you turn it into a investment at this point, only the proportion relating to the house (95%) of the interest will be deductible.

Say after that you deposit another $20k and then draw $10k back out, leaving a balance of $70k.
You are deemed to be paying it off proportionately, so 95% of the $20k ($19k) comes off the housing loan and $1k comes off the personal amount. When it's draw back out the $10k all goes onto the personal amount so the balances end up being $57k for the house and $13k personal.

At this point you could only deduct 81.4% of the interest (57/70)


The longer you use the LOC this way, the less interest you will be able to deduct when it becomes a rental as part of the housing debt is paid off each time you make a deposit.
You or your accountant should go through your statements to work out what your current proportions are. A spreadsheet would help.

The ATO doesn't impose the same rules if you keep your savings in a seperate offset account (so you can deposit and withdraw as much as you want without effecting the proportions. If it's in a different account it isn't considered to be reducing the original debt). Switching to a loan with offset (and not using the redraw) could be better but please look into it yourself and don't take this as personal advice.
 
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