first time with LOC

IP 1
Value: 550k
Oweing: 350k
Equity: 200k
rent: 535pw

IP 2
Value: 450k
Oweing: 350k
Equity: 100k
rent: 400pw

PPOR
Value: 580k
Oweing: 500k

Hi, I heard from somewhere I could actually use a LOC to push down the mortgage on a PPOR. I have heard of LOC but didn't actually grasp the concept. Vaguely, I can supposedly take the rent from IP 1 and IP 2 (after property manager's, insurance, water and rates) and dump it in PPOR repayments + the usual fortnight repayments. Then the interest payments for IP 1 and IP 2 can be paid via equity from them, at a higher interest rate.

If someone is to be so kind to me and tell me if I'm right or wrong in the above. Are there tax or legal implications or complications? Since using the rents to pay for PPOR, I suppose the interest i pay for the LOC is not tax deductible as well (right?). I would like to reduce the PPOR loan.

thanks in advance.
 
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Hi Kero,

I think any posts about capitalising interest should answer your question. (But I'm new here too so I'm sure other people will correct me if I'm wrong :) )

API mag has also done some articles on capitalising interest.

I only worked up the courage to do this with our IP's a few months ago...& it still feels 'naughty-boy' heh heh.

It's been expained to me as using debt to pay debt, which I found quite a difficult concept to grasp having been raised to believe loans and being in debt are 'bad'.

Check with your accountant how to do it. Mine advised using the rent from our 2 IP's to pay our PPOR loan. Then use the LOC to pay for the IP loan/s. The interest on the LOC is then tax deductable as you are using the money for 'business purposes'. (Don't use the LOC or any personal use as you can't deduct interest i you do.)

The accountant advised the the ATO must be satisfied that the reason for doing this is to 'fulfil the great Aussie dream of owning your own home sooner' and not for tax purposes, otherwise you could get into trouble. (I think it goes back to some tax ruling on a case for 'Hart'.)

Also, use LOC to pay for any other expenses like B/Corp, rates repairs etc.

Hope this helps...and I'm sure if I'm mistaken about any details, someone here will enlighten us both!

Good luck, please feel free to let us know how you go! :)
 
thanks mat & mary.

my purpose is to drive down the debt on my PPOR. How do I actually approach the bank or broker with this? If I tell the broker, she is definitely not going to be happy for obvious reasons. And the bank, not sure how they would react if i say i am borrowing to reduce this debt i have with you guys.

with the LOC, only if you are willing, how do you guys intend to pay off the LOC?
 
This is what I did and am doing for a few more months, till I dont need to anymore.

I dump both my rents into my PPOR mtge. Use the LOC for interest payments and pay the rest of the bills out of my weekly pay (same as you suggested, but I like being able to give tenants my mtge act to dump the money directly and putting aside $x / pay into a 'bills account' for expenses).

In July/August I will put my current contribution into an offset instead.
 
Hi Kero

many of my clients do the Debt recycle thing !

Providing that your acctant or tax adviser is ok your broker should be able to help set up a stucture and explain in detail.

If not we certainly can help u here

The structure works a treat where u are on a high taxable income

ta
rolf
 
Hi again Kero,

I guess you could tell the bank it was for improvements to your PPOR? (Not sure if you're allowed to do this?) I don't think I was even asked why I wanted a LOC when the bank set it up for me.

Re: how do we intend to pay it off: This was another one I had a hard time getting my head around. With the strategy we're using...we NEVER want to pay the LOC off!

We will get the properties revalued when we've almost maxed it out & increase the limit on the LOC.

Eg: Currently we have $30K, have used $6K (also paid a couple of B/Corp & rates bills for another property through this LOC) & think the remaining $24K it should last us at least another year and a half:
(B/Corp $1650 a year, Rates & H2O $1364, Repairs budget $1K, Agent $720 a year, Insurance $120, Tax $275, oh & loan approx $12.5K)

Hope this helps...it's still sometimes scary using debt this way, but maybe if you read up on what some authors have to say about good debt versus bad debt, it may alleviate your worries a bit. If your finances are set up to cover this (you have some equity in the property to fall back on, your property's capital growth is fairly certain etc), take the leap of faith & do it!

Best of luck :)
 
thanks Rolf. Wife and I are sorting out colors and all for the new house. But will drop you a line when it comes closer.

Mary and Mat, thanks for your answer. appreciate you sharing your experience. :)
 
You shouldn't have to tell the bank anything. The LOC will be secured against a property, and all the usual servicability tests will be done to make sure you can afford to pay back the LOC when fully drawn.

I've used this structure in the past, and it worked quite well, once your PPOR debt is fully paid or offset, then you can start redirecting income and rents back to your LOC.

The trick is to be strict with your LOC, use it only for IP expenses and ensure all interest costs for the LOC are deductible.
 
I've used this structure in the past, and it worked quite well, once your PPOR debt is fully paid or offset, then you can start redirecting income and rents back to your LOC.

Gooram,

Does the tax office view paying down the balance of the loan the same as parking the money in an offset account?

Thanks Paul.
 
Pablo, My understanding and attempt to explain what others have said much more conscisley to me before is:

Once you have extra csh to put against an investment loan, if you put it in an offset, the bank/ATO consider the loan blance to be the smae, but the interest is ony charged on the 'loan amount minu the offset aount'. This mans, you can take $ out of the offset, and you will obviously be charged more interest, but the laon balance will always be considered to have stayed the same, hence, it doesn't matter what you spend the $ you withdraw from your offset on, it's still tax deductable. - orignal loan is $100k... you put $20k into an offset, you deductable loan balance is $100k, but interest is only charged on $80k... you redraw $20k for a holiday... Your deductable loan is $100k and interest is charged on $100k.

When you put cash into your loan, you pay down the principal, any money you take out (by refinancing or by redraw) wil be taken on it's merits - orignal loan is $100k... you put $20k extra in, loan blance is $80k... you redraw $20k for a holiday... Your deductable loan is only $80k as the holiday is a non deductable expense.

(Hope that made sense)
 
so if i use my LOC for interest repayments for the investment properties, I can tax deduct both investment loans and LOCs interest repayments? this LOC i am applying for is solely to pay down the house loan. i hope we won't be tempted to spend on 'other stuff'. thank goodness the Mrs is a good money manager. :)

ok... once i finish drawing down all of the LOCs, i would have to pay interest for the full LOC or pay it in full. is it possible to use another LOC to pay for the first one? how does experience or experts tacke this one?

and administratively, when someone uses LOC to pay for investment loans, do you mean telling the bank to deduct the interest from the LOC and not from your say, offset account?
 
Jaycee,

I'm sorry I did not mean to ask how an offset account works, although you explained it very well. The question I was meaning to ask was to do with debt recycling (capitalising the interest/ expenses) and putting the rent into an offset account against the PPOR rather than paying down the loan balance. Will the ato see these as the same?
 
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