Financing deposits

[mgs4]

There's an interesting section in the latest Australian Property magazine on property investment tax bloopers, page 78. One of the points is on "paying cash deposits" whereby the writer recommends borrowing for deposits because interest on debt for investment properties is tax deductible.

I was just considering how would you structure this, it is unlikely you could borrow 100% from a new borrower (bank) without providing other collateral, which may involve cross collateralization. So how would you likely structure borrowing the deposit?

 

[alexlee]

I was just considering how would you structure this, it is unlikely you could borrow 100% from a new borrower (bank) without providing other collateral, which may involve cross collateralization. So how would you likely structure borrowing the deposit?

Increase the loan on an existing property. Use that as the deposit.

e.g. you have a property worth $400k, you owe $200k. You increase the loan to $320k. You now have $120k to use as deposits.

 

[mgs4]

Increase the loan on an existing property. Use that as the deposit.

e.g. you have a property worth $400k, you owe $200k. You increase the loan to $320k. You now have $120k to use as deposits.

But if the existing property is PPOR the debt there is not tax deductible, this is the purpose of the authors point, to maximise tax deductible debt, hence 100% borrowing on new IP.

 

[Corey Batt]

But if the existing property is PPOR the debt there is not tax deductible, this is the purpose of the authors point, to maximise tax deductible debt, hence 100% borrowing on new IP.

If you set up a new loan against the PPOR and it is used to purchase an investment property, the purpose is for investment usage so tax deductible.

The security is not relevant in this particular test.

 

[alexlee]

But if the existing property is PPOR the debt there is not tax deductible, this is the purpose of the authors point, to maximise tax deductible debt, hence 100% borrowing on new IP.

Incorrect. Deductability depends on usage, not security.

Using the same example. PPOR worth 400k. Existing 200k loan (not deductible). Take a second loan on the PPOR for 120k. If used for IP deposits, interest on the 120k is deductible.

Either the author is wrong, or you misunderstood.

 

[Peter_Tersteeg]

But if the existing property is PPOR the debt there is not tax deductible, this is the purpose of the authors point, to maximise tax deductible debt, hence 100% borrowing on new IP.

You borrow via a separate loan, specifically for the purposes of buying an investment property. This loan would be secured against your PPOR, but it's purpose is for investment and this it is tax deductable.

This is a very commonly used technique for people to start investing in property.

 

[Terry_w]

But if the existing property is PPOR the debt there is not tax deductible, this is the purpose of the authors point, to maximise tax deductible debt, hence 100% borrowing on new IP.

A trap for young players! s8-1 ITAA97. Interest on Money borrowed to invest is deductible

 

[mgs4]

Incorrect. Deductability depends on usage, not security.

Using the same example. PPOR worth 400k. Existing 200k loan (not deductible). Take a second loan on the PPOR for 120k. If used for IP deposits, interest on the 120k is deductible.

Either the author is wrong, or you misunderstood.

Right so this would be two separate loans on PPOR, and then a third loan as the main mortgage. This may for example make it harder to unlock for equity out of the PPOR because of two loans on it, possibly from different banks. Is this the best way to structure it?

Also what if say you don't have any additional equity available in PPOR, but you have excess cash in an offset account?

 

[Mick C]

Right so this would be two separate loans on PPOR, and then a third loan as the main mortgage. This may for example make it harder to unlock for equity out of the PPOR because of two loans on it, possibly from different banks. Is this the best way to structure it?

Also what if say you don't have any additional equity available in PPOR, but you have excess cash in an offset account?

Yep 3 loans,
- 1 PPOR loan
- 1 deposit loan ( equity) PPOR security but can still claim the tax deduction as it's a purpose test.
- 1 new loan ( NO CROSSING)

Can all be with the one bank if you like, just make sure they dont cross..or 2 seperate banks.

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if you dont have equity - the above won't work.

Using money in your offset is no diff as using cash.

 

[HD_ACE]

Right so this would be two separate loans on PPOR, and then a third loan as the main mortgage. This may for example make it harder to unlock for equity out of the PPOR because of two loans on it, possibly from different banks. Is this the best way to structure it?

Also what if say you don't have any additional equity available in PPOR, but you have excess cash in an offset account?

One option could be to pay down ppor loan with the cash and then reborrow for investment. Turning non deductible debt into deductible debt.

Cheers

 

[Corey Batt]

Right so this would be two separate loans on PPOR, and then a third loan as the main mortgage. This may for example make it harder to unlock for equity out of the PPOR because of two loans on it, possibly from different banks. Is this the best way to structure it?

Also what if say you don't have any additional equity available in PPOR, but you have excess cash in an offset account?

No issue, the lender looks at the total secured lending against the security, not number of mortgages. You would generally keep the equity releases/topups through the same lender, as 2nd mortgages through another financial institution can be painful, costly and time intensive - no reason to go down this path with the correct structured planning of your finances.

 

[mgs4]

Yep 3 loans,
- 1 PPOR loan
- 1 deposit loan ( equity) PPOR security but can still claim the tax deduction as it's a purpose test.
- 1 new loan ( NO CROSSING)

Can all be with the one bank if you like, just make sure they dont cross..or 2 seperate banks.

------

if you dont have equity - the above won't work.

Using money in your offset is no diff as using cash.

Thanks for the post, on PPOR to more easily get new valuations and take additional capital out I would have thought the best way to structure is where PPOR loan and deposit loan are with the same bank. And perhaps the new loan is with different bank to make servicing and borrowing more flexible.

 

[ZachAnSel]

Thanks for the post, on PPOR to more easily get new valuations and take additional capital out I would have thought the best way to structure is where PPOR loan and deposit loan are with the same bank. And perhaps the new loan is with different bank to make servicing and borrowing more flexible.

Best way is to sit together with your broker, ask them to order free valuation.

Valuation will tell you how much your current PPOR. Then from there you can draw down equity (eg.80% value current PPOR - current loan).

This equity draw down, you need to setup as different loan (eg. LOC)
You can use this LOC as deposit for next IP (eg. 20%).
Then get the rest (80%) as new loan.

As Mick said, you will have three loans when all settle.

ps : Percentage could be different depends on your circumstance. Eg. LMI involve..

 

[danielt]

If the new loan against the ppor is then being used as a deposit for the new IP will the financier then cross collateralise the properties?

Will they want to do their own valuation on the IP?

Will they want to see the contract of the new IP?

 

[D.T.]

If the new loan against the ppor is then being used as a deposit for the new IP will the financier then cross collateralise the properties?

Will they want to do their own valuation on the IP?

Will they want to see the contract of the new IP?

The new loan against ppor is only used as deposit for IP.

So you end up with 3 loans
Loan A - original mortgage on ppor, secured by ppor, not deductible. No changes here.
Loan B - new mortgage on ppor, secured by ppor, used for deposit & fees on IP, deductible. When applying for Loan B they'll come value your ppor.
Loan C - new mortgage on IP, secured by IP, used to buy the IP, deductible. When apply for Loan C they'll want the IP sales contract and to go value only the IP

A and B are with the same bank whereas C is elsewhere.

B and C are tax deductible whereas A is not.

Notice the "secured by" bit in each line, whereby each entry only mentions 1 of the properties. Its only cross collateralized if one of the loans is "secured by" 2 or more properties.

Hope that all makes sense

 

[danielt]

So loan B - if the financier is different to loan C then they don't require any evidence of where the money is going? How's that different to "cash out"? Do they just take your word for it that its going to be used for IP (from different lender). Or it just makes lender B happy that they can document a reason for the new loan? .... As for 'cash out' some lenders appear to get nervous if you give a non descript reason ... But if u just tell them its for another IP then they are happy?

 

[Terry_w]

So loan B - if the financier is different to loan C then they don't require any evidence of where the money is going? How's that different to "cash out"? Do they just take your word for it that its going to be used for IP (from different lender). Or it just makes lender B happy that they can document a reason for the new loan? .... As for 'cash out' some lenders appear to get nervous if you give a non descript reason ... But if u just tell them its for another IP then they are happy?

I do a lot of these types of loans and every lennder will want to know where the cash is going, ie how it will be used. Many lenders will take a statement that the funds will be used for further investment properties without further evidence. Some many even want to control disbursement of the funds, so they will hold it until you can produce a contract of sale for the next one.

It will also depend on size. But I have done $800,000 'cash out' for a client with no probs.

BTW I would recomend clients not just increase a standard loan, but to set up the increase as a LOC. This way they can avoid tax problems.