Increase Loan and then split

Hi All.

Long story short, I'm dealing with a less than helpful broker :mad:, and my accountant is MIA at the moment, not ideal when possibly about to make a costly mistake.

For some reason our broker didn't want to go down the path of taking out a separate loan such as a LOC to access the equity in IP2 to fund IP3. Instead, he has sent us loan documents to vary our existing loan (ie increase in loan) and has suggested accessing the funds then splitting the loan to have a separate account number for the accessed funds.

My question is, I will have to park the funds somewhere until we find the right property (terms are that funds must be borrowed to the full additional loan on or before the end of one month after the variation disclosure date), will this void the ability to claim the tax deductions as then im essentially using cash? Or is it easy to show the ATO that those funds simply went from A (loan) to B (savings account) before getting to C (deposit for IP3)?
 
I've done this senario in some cases where it was going to benefitical to the client, be it timeframe, better rate etc.

Key is to not mix up the borrowed funds, funds could go back into redraw until required, could go into completely seperate offset (caution), you don't want to put the borrowed funds in with existing offset funds (caution against using borrowed funds to offset against PPOR).

Make sure you keep loan statements showing the trail of funds.

Above isn't the idea situation. Usually best to complete equity release first, much cleaner.
 
For some reason our broker didn't want to go down the path of taking out a separate loan such as a LOC to access the equity in IP2 to fund IP3. Instead, he has sent us loan documents to vary our existing loan (ie increase in loan) and has suggested accessing the funds then splitting the loan to have a separate account number for the accessed funds.

If I understand what has been suggested, depending on the lender, this might be a reasonable way to go about it.

If your existing loan is $300k and you've got $100k in equity you can access...

* Increase the $300k loan to $400k. This will give you $100k cash.
* Your loan now has a limit of $400k.
* Split this loan into two separate loans of $300k and $100k.
* Put the $100k cash back onto the $100k loan. You've now got your $100k equity loan with funds available for the deposit. If you use this $100k loan exclusively for tax deductible purposes, you should have no issues with claiming the interest.

The solution being proposed appears to be what you're asking for, with some lenders, this process is significantly quicker and easier than applying for a completely new loan as you've suggested. The only thing I'd do differently from what you've indicated is to split the loan and put the $100k cash into the redraw facility BEFORE you draw the funds.
 
My thoughts are to withdraw the funds and put straight into a linked offset account to that loan (no PPOR loan anyway) then the 10% deposit and the stamp duty can be transferred to their respective accounts from there. Will that satisfy the taxman you think?

And you might be right, the interest rate on a LOC is significantly higher. We can avoid all this if we exchange in the next 30 or so days, however, I'm not going to rush into a purchase for those reasons alone.
 
The only thing I'd do differently from what you've indicated is to split the loan and put the $100k cash into the redraw facility BEFORE you draw the funds.

Just to clarify.
1. Withdraw 100k
2. Split loan 300k/100k
3. Put 100k into 100k split
4. Then withdraw from there for purchasing costs

Does that sound right?
 
I think you've got it. :)

Change step 1 from "Withdraw $100k", to "Increase loan by $100k".


Just a follow up, if both properties are investments, and the ownership (tax implications) for both is the same, then you don't really need to isolate deductibility on a per-property basis. Some people and accountants like to set up separate equity splits for each property because it helps them clarify things, but it's not necessary if it's all deductible against the same individuals. This doesn't mean you're cross collateralsing either, that's a different topic.
 
Hi All.

Long story short, I'm dealing with a less than helpful broker :mad:, and my accountant is MIA at the moment, not ideal when possibly about to make a costly mistake.

For some reason our broker didn't want to go down the path of taking out a separate loan such as a LOC to access the equity in IP2 to fund IP3. Instead, he has sent us loan documents to vary our existing loan (ie increase in loan) and has suggested accessing the funds then splitting the loan to have a separate account number for the accessed funds.

My question is, I will have to park the funds somewhere until we find the right property (terms are that funds must be borrowed to the full additional loan on or before the end of one month after the variation disclosure date), will this void the ability to claim the tax deductions as then im essentially using cash? Or is it easy to show the ATO that those funds simply went from A (loan) to B (savings account) before getting to C (deposit for IP3)?

I would suggest you get tax advice. Sounds messy to me.
 
Be careful of the offset option and as Terry suggests, make sure you get good tax advice. For lenders with higher interest rates for LOC facilities, the funds to stay in the loan immediately to be available for redraw is a method used.

There are options:
  • Take the LOC option even at a higher rate but once you have settled on the IP, convert it back to a term loan 5 yr IO at a better rate, makes sure you can easily do so first.
  • Use a lender that has the same rate for a LOC as a term loan.

It is good that you ask the questions as getting it wrong, even inadvertently can be costly.
 
Thanks all for the replies. Managed to get the increase, split, then leave the funds in redraw and get a cheque book to start writing them cheques.

Just flew into Brisbane today, and have two days of seeing as many properties as possible. This is the fun part!
 
If you use this $100k loan exclusively for tax deductible purposes, you should have no issues with claiming the interest.

Can you tax savvy people help me understand what classifies as tax deductible purposes?

So taking OP's example, assuming he has split the loan and put the 100k in the spilt, can he use that 100k equity to

- Pay the deposit for the next IP?
- Pay the conveyancing fees or B&P for that said IP?
- Pay repair costs for a previous IP?
- Pay interest repayments for previous IP?
- Pay for mum's birthday gift?

thanks in advance
 
- Pay the deposit for the next IP?
- Pay the conveyancing fees or B&P for that said IP?
- Pay repair costs for a previous IP?
- Pay interest repayments for previous IP?
- Pay for mum's birthday gift?

In order
1. No - capital expense
2. No - capital expense
3. Not sure what you mean
4. Interest is claimable if it relates to production of income. Borrowing to pay interest is a bit more complicated
- Not at all

Keep in mind interest on borrowed money used for capital expenses may be deductible.
 
In order
1. No - capital expense
2. No - capital expense
3. Not sure what you mean
4. Interest is claimable if it relates to production of income. Borrowing to pay interest is a bit more complicated
- Not at all

Keep in mind interest on borrowed money used for capital expenses may be deductible.

That is a bit confusing. Terry is talking about deductibility, rather then whether you can use the borrowed funds to purchase.

My understanding is that you could use the loan for all the above except mum's birthday present. (personal use). Happy to be corrected if I'm wrong.

And for 3, repairs on an IP you own are deductible so I would say yes for that too.

The expense itself may not be deductible, but the interest on the borrowed funds used to pay for the expense can be.

If you can't claim interest on capital expenses we're all in trouble!! :eek:
 
Sorry I misread it.

Yes the money could be used for all of the above. But the birthday present would create a mixed loan because it is a private expense. Also deductibility issues with claiming interest on interest.
 
Thanks Terry, Jess.

What if I started adding rent income from all IPs into the account, would that cause any taxation headaches?
 
Thanks Terry, Jess.

What if I started adding rent income from all IPs into the account, would that cause any taxation headaches?

No, but if you had non deductible debt it may be better to pay rent into an offset account attached to this.
 
If I understand what has been suggested, depending on the lender, this might be a reasonable way to go about it.

If your existing loan is $300k and you've got $100k in equity you can access...

* Increase the $300k loan to $400k. This will give you $100k cash.
* Your loan now has a limit of $400k.
* Split this loan into two separate loans of $300k and $100k.
* Put the $100k cash back onto the $100k loan. You've now got your $100k equity loan with funds available for the deposit. If you use this $100k loan exclusively for tax deductible purposes, you should have no issues with claiming the interest.

The solution being proposed appears to be what you're asking for, with some lenders, this process is significantly quicker and easier than applying for a completely new loan as you've suggested. The only thing I'd do differently from what you've indicated is to split the loan and put the $100k cash into the redraw facility BEFORE you draw the funds.

Peter, this method frees up cash from equity to go towards a deposit, LMI stamp duty etc for the IP. But I still have to apply for a new home loan altogether for the IP right? This method gets the deposit, but what about the rest of money needed for the purchase?
 
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