Will the bank allow me to sell IP1?
If the bank allows and I sell IP1 for 600k. What happens to the IP1 main loan and IP1 split loan?
IP1 main loan gets paid off. IP1 needs to be securitised elsewhere in order to have IP1's title released at settlement.
But obviously if you pay down the IP1 split loan, which is really a deposit for IP2, then you lose deductibility on those funds, which is undesirable. If there's a chance you'd want to use the funds for non-deductible purposes, e.g. PPOR, your best bet is to either:
1) Transfer that $100K debt to be secured against IP2, if it's gone up enough in value to support that, or
2) See if your lender will accept a substitute security for that $100K debt, such as $100K cash on deposit, and then when you buy IP3, or IP2 has gone up enough in value to create sufficient equity, you transfer this loan to be secured against IP3 or IP2.
mugen said:
And are Split loans aka LOC loans? Or different things?
Different things.
Split loans are where you're approved for, say, $400K against a $500K property, and can "split" two loans however you want. So you can adjust the amounts of deductible and non-deductible portion. e.g. You have a PPOR worth $500K and owe $200K, and want to buy an IP. You can ask the lender to set up a "split" loan, with $200K for private purposes (PPOR), and $200K for a deposit on an IP (IP1). If you pay down your PPOR debt to $100K, you can then ask for your deductible loan to be increased to $300K without having to go through a reval or anything, because your total debt remains as $400K. But now you have $300K deductible debt, and if you're smart, set up another "split", and now have 3 loan accounts: PPOR debt $100K, IP1 deposit $200K, and $100K in your third split account for IP2 deposit.
You could - at least theoretically - have a split facility with any kind of loan.
A line of credit is a particular type of loan product that's basically like a big credit card, secured by your house. So if your house is worth $500K and it's paid off, they might give you a LOC for 80% or $400K. Then you can have a zero balance, or spend money taking up to $400K, and you pay interest on what you owe at the time, same as a credit card. You can go up to $400K, pay it all off, then go up to $400K again. They're mainly useful for people who have high turnover.
But an interest-only loan with an attached offset can basically work the same way, has lower fees, and doesn't risk compromising tax deductibility. For example,
Use $400K to buy an IP,
You pay it off in a LOC,
then redraw to buy a PPOR
> None of the interest on the LOC is deductible.
BUT
If you have a $400K I/O loan to buy an IP,
Then save $400K in your offset,
then take the $400K out of the offset to buy a PPOR,
> All of the interest on $400K remains deductible.
So not really sure why you'd ever use a LOC over an I/O loan plus offset. (Though brokers might know some good reasons.)