"Link Loans, Anyone know? "

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Anonymous

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From: Anonymous


I have a question for anyone who can answer.

I have recently heard of a type of loan called a link loan, where you have two or more properties say one PPOR and one I.P.
The theory behind it is you do not have to make any payments on the I.P. ( for a time ) thus enabling you to pay down the Non - Deductible Debt quicker.

Once the Non - Deductible Debt is paid down you then start on the I.P. payments. The debt of course is larger then when you started. ( no free Ride )

I know that an Interest Only Loan would be similar but I thought I'd ask.

Cheers

Anthony
 
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Reply: 1.1
From: Russell Chellew


Hi ,
I know of a lender that may still do these link loans.

I have a feeling though, that there has been a tax ruling against these type of loans.

Suggest that you seek an Accountants advice also.

I will make some further enquiries with the lender and post outcome ASAP.

cheers

Russell
 
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Sim

Administrator
Reply: 1.1.1
From: Sim' Hampel


Anyway, a combination of Offset accounts and IO loans will get you pretty much the same result, so no point playing tag with the taxman in my opinion.

Go see an independent mortgage broker who will explain the best and most tax effective way to set it up for you.

 
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A

Anonymous

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Reply: 1.1.1.1
From: Anonymous


Thanks for the information, especially you Sim, as far as I can tell from the links Sim supplied, The ATO allows such a setup with the link loan however the interest accrued other than that of a normal IO loan is not tax deductible.

That being interest on interest.

So what you would have normally paid in interest is still allowable.

Hope this is correct, of course I will see my Accountant re this matter as all people should.

Does anyone know if the above is incorrect and which lenders are offering such a facility?
Ant
 
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Reply: 1.1.1.1.1
From: Stephen Burman


This has always been of interest to me as while I know the ATO has put out a ruling, a ruling in itself does not mean that this is non-deductable (it just means that at this point of time the ATO THINKS it is). One of my main areas of interest was that I work close to the banking industry and at the time a lot of the banks thought the product was OK but basically thought it wasn't worth taking on the tax man. I'd be interested to hear if anyone actually has taken on the tax man on this one.

As for those who say interest on interest is not deductable, well there are many business's who do that every day and get away with it. In fact for most property investors, unless you are paying your interest back on the day it is capitalised to your account (and most don't) there is a component of interest on interest every month for all of you and I haven't seen the taxman complain about that.

What drew the ire of the taxman was mainly the degree to which this occurred in this practice. Since NO money was going to the investment loan it was felt that this was basically tax avoidance but from memory even the ruling didn't say this was all bad. If you were to do something less extreme. i.e. pay all outgoings on earning the rental income (rates, repairs etc) from the rental property account this is similar to what many business's do and may be OK.

Would be interested in anyone's experience in this area as I think this is an area where people are not really thinking this through and are probably not putting the ruling in context, i.e. it refers to a specific situations and not necessarily fully applicable to others lending practices.

Steve B
 
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Reply: 1.1.1.1.1.1
From: Rolf Latham


Hi STeve

Just a quick interjection :eek:)

Most loan interest is indeed not capitalised on a daily basis. Interest is calculated on a daily basis and added to the loan balance at the end of the month.

I feel you are on the right track with the practice having been sidelined due to overuse.

Ta

Rolf
 
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Reply: 1.1.1.2
From: Jas


On 6/10/02 10:20:00 AM, Sim' Hampel wrote:

>Go see an independent mortgage
>broker who will explain the
>best and most tax effective
>way to set it up for you.
>
>

Sim, you've been talking to much to Rolf recently... "Go see an independent mortgage
broker" Isn't that his line?

;)

Jas



In the end, all bankruptcies are caused by too many tax deductions
 
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Reply: 1.1.1.2.1
From: Russell Chellew


Further to my earlier posting, my lending source doesn't do theses link loans anymore.

Sims, suggestion of combination of Offset and interest only loan is good option .

cheers


Russell
 
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"RE: Link Loans, Anyone know?"

Reply: 1.1.1.3
From: Duncan M


>Anyway, a combination of Offset accounts and IO
>loans will get you pretty much the same result,
>so no point playing tag with the taxman in my opinion.


Sim,

Can you expand on this strategy?

Regards,

Duncan.
 
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Sim

Administrator
"RE: Link Loans, Anyone know?"

Reply: 1.1.1.3.1
From: Sim' Hampel


Hi Dunc,

It is simply a combination of using an IO loan for your PPOR (if your bank will let you) with an offset account attached to it.

Then, pay all income (rental plus personal) into the offset account to minimise your ongoing non-deductible interest (the more money in the account the better).

Finally, when you move out of your PPOR and it becomes an IP, simply move the money out of the offset account (if you need it - otherwise leave it there !). You have not paid back any principal on the loan, so when it becomes an IP, the interest is all there to be deducted.

Let me go through step by step.

1. You buy a house to live in, expecting that you will move out someday and make it into an IP.

2. Find a lender who will give you an IO loan on a PPOR with an offset account attached for this property.

3. All income, whether from IP rents or personal income etc, gets left in the offset account (basically this could be your every-day transaction account if you wanted)... and the more money left in the offset account, the less non-deductible interest you pay.

4. Say you then buy another property and move into it as your PPOR, renting out your original property as an IP. You take out another IO loan with offset account against that new property, and move all your money to this new offset account. If the new loan is with the same lender as the old loan, you may be able to simply have them change which loan is being offset by the offset account.

5. The balance of the old IO loan hasn't changed, and all the interest is now deductible. The new IO loan is not deductible of course, but the interest you do pay is once again reduced by the money in your offset account.

Note that this works best if you have a decent amount of cash sitting around. But every little bit counts ! Do the sums though - if you are paying more in rates and fees for an IO PPOR loan with offset, it may actually be costing you more, especially if you don't have that much cash to park in the offset account !

The trick of course is to get a PPOR IO loan with offset. Rolf ? Will Westpac do this with their Rocket loans for PPOR ? According to their website, no. How about any other lenders ?

 
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"RE: Link Loans, Anyone know?"

Reply: 1.1.1.3.1.1
From: Duncan M


Thanks for the details response Sim,

You still need to make interest payments on the IO IP Loans, correct? Do you
have any suggestions on legitimate ways to allow interest to essentially
capitalise and use rental income to reduce PPOR debt (either directly or by
letting it accrue in an offset account?)

Cheers, Duncan.
 
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Sim

Administrator
"RE: Link Loans, Anyone know?"

Reply: 1.1.1.3.1.1.1
From: Sim' Hampel


Yes, of course you need to still make repayments on IO IP loans - and I guess this is the main difference between what I am suggesting and what the linked loans let you achieve.

So as you pointed out, you need to find a way to capitalise the interest on the IP loans until you have sufficiently reduced your non-IP debts - if you want to play that game of course.

Of course, you then come across issues such as the deductibility of capitalised interested (see this thread: http://bne003w.server-web.com/~wb013/read?46111,30e#46111 ), as well as finding a loan product that will let you capitalise that interest.

For a newly purchased property, you wouldn't usually have that much equity available to convince the lender to let you capitalise interest I wouldn't have thought. However, if you have equity available, why not set up a LOC facility to access that equity and simply have interest payments on the main IO component be paid for from that LOC ?

I'm sure there are bank products that let you do this kind of thing, for me though the "legitimacy" issues arise out of whether the extra interest is going to be deductible.

 
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"RE: Link Loans, Anyone know?"

Reply: 1.1.1.3.1.1.2
From: Rolf Latham


Hiya Dunc

As Sim says use LOC to draw funds, or use proper RLOC for the IPs in the first place. A true revolving line of credit does not require any interest repays till limit is reached, thereby capitalising interest. Have fun keeping track of it :eek:)

Ta

Rolf
 
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