Funding settlement shortfall and deductibility

[Bran]

Learned members,

My purchase is set up as following:

95% loan

10% equity release - deposit and stamp duty

Let's say the equity release doesn't come through in time for settlement (as it requires a change of lender and discharge of existing mortgage), how can I fund the shortfall and keep the deductibility?

The 10% will only be covered by dipping in to a higher interest line of credit (which is already mixed), and gulp, credit cards.

Will this be any different if it is an IP from day 1? Vs Year 3? I presume its the same, as it is where the trail began?

Any good ways to cover the shortfall then pay myself back with the loan?

Any alternatives I could offer the vendor to get it across the line on the date? (We both need it to settle the precise day it's planned to).

 

[Terry_w]

A loan is a loan - same principals apply whether borrowing from credit card of a LOC.

How are you releasing 'equity'? Make sure you don't ruin deductibility of interest by mixing borrowed with non borrowed funds.

Also sounds like you are highly leveraged, be careful.

 

[Bran]

Hi Terry

Yes, highly leveraged - this purchase is 105% borrowed.

I've refinanced another house to 90% LVR. A second separate loan is secured by this house, and will serve as the deposit, stamp duty for the new purchase.

The house is otherwised financed by a 3rd separate loan with another lender.

(An uninvolved 3rd house is left alone doing its thing at a lower LVR).

My serviceability is very high, I'm not too concerned by a short stretch at high LVR for these two properties.

Settlement day will be tight due to the time lost over Easter. How do I cover the shortfall and maintain deductibility of the deposit/stamp duty loan?

If I pull the money out of the LOC (Which is mixed), this portion of interest is deductible, but if I pay this debt with the 'equity loan' a week later, will this loan be deductible as the money enters my account rather than the vendors?

 

[Paul@PFI]

Make sure you don't ruin deductibility of interest by mixing borrowed with non borrowed funds..

Yes - Good example is using the credit card as you proposed.

ie existing card (private use) has a $10K balance and you draw another $10K for the IP. So its 50% deductible for a month lets say. When you refinance this to the new equity release you will lose deductibility on 50%. You cant earmark the $10K refinance as being for one specific use.

If this is the case you may be better delaying settlement and paying vendor interest - You lawyer should advise.

 

[Terry_w]

If I pull the money out of the LOC (Which is mixed), this portion of interest is deductible, but if I pay this debt with the 'equity loan' a week later, will this loan be deductible as the money enters my account rather than the vendors?

Get this split before drawing if you can.