How to property structure two loans

[davidw89]

Hi,

I'm looking for advice regarding the best way to structure my loans. For example:

Loan 1: $200k against PPOR, with a valuation of $1 mil
Loan 2: $600k against Investment property with a valuation of $1 mil.

Bank agrees to refinance up to 80% of the combined properties, so new loan size will be $1.6mil.

How do I structure it properly so that in the future, should I invest in properties or shares, it will be tax deductible? Also, with the investment loan, should I split it two way again as I don't want to contaminate the loan with tax deductible vs non tax deductible.

My thoughts:
Loan 1: New Mortgage Size 800k against PPOR. 800k sitting in offset account?
Loan 2: New Mortgage Size 600k against Investment Property (tax deductible).
Loan 3: New Mortgage Size 200k against Investment Property (not tax deductible).

Which offset account should I use to take out funds for future property investment or share? How do I claim a tax deduction for those funds taken out?

3 offset account or 2?

 

[Paul@PFI]

Hmmmm. Doesn't that make three loans ??

He walks into a room with a spade in each corner. Take your pick I say. He looks confused.

 

[Paul@PFI]

Hi,

I'm looking for advice regarding the best way to structure my loans. For example:

Loan 1: $200k against PPOR, with a valuation of $1 mil
Loan 2: $600k against Investment property with a valuation of $1 mil.

Bank agrees to refinance up to 80% of the combined properties, so new loan size will be $1.6mil.

How do I structure it properly so that in the future, should I invest in properties or shares, it will be tax deductible? Also, with the investment loan, should I split it two way again as I don't want to contaminate the loan with tax deductible vs non tax deductible.

Which offset account should I use to take out funds for future property investment or share? How do I claim a tax deduction for those funds taken out?

3 offset account or 2?

1. From the $1.6m you want a new $200K loan to payout the former PPOR loan. Then you want another loan that pays out the $600K. (I said Payout for a reason - It must be a refinance) Then for the balance you want a new loan account/s that the lenders allows to be a sub account....That way each "new loan" is separate and identifiable. No blended loans.

2. Any new loan is only tax deductible when you draw it and if its being drawn to acquire income producing investments etc....The loan security means nothing. It how you use the $$$. So lets assume you buy $100K of CBA shares and $40K of shares that wont pay a dividend. Only $100K is deductible. So draw as two loans. Don't blend as one loan.

3. Your ONLY offset should be linked to PPOR as its non-ded.

4. Get a good mortgage broker. They know this stuff.

 

[Peter_Tersteeg]

My thoughts:
Loan 1: New Mortgage Size 800k against PPOR. 800k sitting in offset account?
Loan 2: New Mortgage Size 600k against Investment Property (tax deductible).
Loan 3: New Mortgage Size 200k against Investment Property (not tax deductible).

Technically I can see how this would work, but the structure lends itself to messing things up because you're moving deductible debt from one security to another. Instead...

Loan 1: Existing PPOR mortgage $200k. (non deductible) Keep offset account against this for various types of income and expenses (your day to day account).
Loan 2: PPOR Equity loan $600k (tax deductible). Use this for further investment. Funds from equity loan should be kept in redraw facility until used.

Loan 3: Existing IP mortgage $600k. (tax deductible) No need to change anything.
Loan 4: IP Equity loan $200k. (tax deductible) Funds from this equity loan should be kept in redraw facility until used.

You could potentially combine loans 3 & 4 into a single loan if the purpose of funds is consistent. Given $600k is for the existing property and $200k is for share investing, the purposes deductibility may be inconsistent so it's probably safer to keep them separate. If in doubt, seek tax advice on this.

The term 'equity loan' may mean a Line of Credit, it may not. Specific implementation will depend on the lender and how the money is managed. Any cash from equity should be kept in the loan account itself rather than an offset account (again it can technically work, but there's a high risk of messing things up).

 

[Terry_w]

This is how I would do it
Loan 1 $200,000 ? IO or PI with offset account attached. Security = PPOR
Loan 2 $600,000 ? LOC or IO loan which allows redraw from the loan. Security = PPOR
This loan should be split into smaller portions to allow easy segregation. Share borrowings can come from one split and investment property deposit from another split, for example.

Loan 3 = 80% of the value of the new investment property. IO. No offset.
No need for a second offset account unless you have more than $200k cash laying around.

This is the ideal structure from a tax and credit point of view.

 

[davidw89]

Terry, if I structure it as above, with one offset account, it would offset Loan 1 right? As for excess funds above $200,000, where would that need to be placed?

 

[Terry_w]

Terry, if I structure it as above, with one offset account, it would offset Loan 1 right? As for excess funds above $200,000, where would that need to be placed?

1 offset

You don't 'place' funds anywhere. You borrow to invest so as to keep the interest deductible

 

[davidw89]

How do you "borrow" to invest in small transaction such as shares? Do you draw it down from loan 2? There's no point putting it in offset 1 if it exceeds 200k as it would be offsetting anything.

You said:
This loan should be split into smaller portions to allow easy segregation. Share borrowings can come from one split and investment property deposit from another split, for example.

How exactly do you do this? You split the loan every time you want to make an investment? That means you have to call the bank every time to split? Is there a fee? I was wondering if someone can draw a diagram for me as I'm having trouble visualising this.

 

[Peter_Tersteeg]

You can split loans into different parts for different purposes. You're already planning to do this to distinguish between deductible and non deductible debt.

The challenge is that most loan products have minimum sizes, so you can't split it into $1000 here or $5000 there. This also becomes cumbersome to manage.

You can split it into larger amounts as defined by the general use and owner. $50k for shares in your name, $30k for managed funds in your partners name. This makes it easy to distinguish where the tax implications of each loan need to be assigned.

Some products are more suited to this than others. Several lenders have 'portfolio loans' specifically designed for this. It allows you divide your loans up into any combination of splits and sizes, and often the name on the account can be varied.

Very convenient but the problem is they're also very expensive products. They tend to work best when used in conjunction with an active financial plan. If you're not actively working the system it will probably just cost more in the long run over a regular loan with a bit of forward planning.

 

[davidw89]

Loan 3 = 80% of the value of the new investment property. IO. No offset.
No need for a second offset account unless you have more than $200k cash laying around.

This is the ideal structure from a tax and credit point of view.

See above, you've just increased the loan size of the investment property. Will the new large loan size be 100% tax deductible?


I would like two offset account but apparently only one is free under the break free package from ANZ.

 

[Jamie M]

I would like two offset account but apparently only one is free under the break free package from ANZ.

The second is only a tenner a month.

Cheers

Jamie

 

[Terry_w]

How do you "borrow" to invest in small transaction such as shares? Do you draw it down from loan 2? There's no point putting it in offset 1 if it exceeds 200k as it would be offsetting anything.

You said:
This loan should be split into smaller portions to allow easy segregation. Share borrowings can come from one split and investment property deposit from another split, for example.

How exactly do you do this? You split the loan every time you want to make an investment? That means you have to call the bank every time to split? Is there a fee? I was wondering if someone can draw a diagram for me as I'm having trouble visualising this.

If you are using ANZ you would set up a portion of the loan as an 'equity manager' product. Use this to invest. If you have multiple investments then you may need multiple equity managers.

 

[Terry_w]

See above, you've just increased the loan size of the investment property. Will the new large loan size be 100% tax deductible?


I would like two offset account but apparently only one is free under the break free package from ANZ.

If you borrow 100% for the new investment property then 100% would be deductible - unlesss you have stuffed up along the way.

Not sure why you want a second offset?