Loan Structuring...

[Kunzy]

Hi SS,

Would really appreciate any advice to help me on my current situation.

Just for background, I currently have a unit as my PPOR (410K) with 163K I/O loan outstanding. I am now in the process of upgrading to purchase a house to be my new PPOR ? value up to 600K.
I will convert my current PPOR to an IP and use the available equity (approx. 195K) as part of the purchase of my new PPOR.

Would the below be the correct way to structure my loans moving forward:

? Loan A: 163K ? Existing unit to be IP
? Loan B: 125K ? LOC 20% Equity for new PPOR
? Loan C: 475K ? 80% Loan on new PPOR

? Loan D (potential): Use remaining LOC (70K) Equity to purchase IP2 (making sure I separate this portion to Loan B)

Also since Loan B is to be used to fund the purchase of a PPOR, am I right in that only Loan C is the portion I am able to claim if I was to turn this place to an IP in the future ?

Many thanks !

 

[Jamie M]

Hi Kunzy

The logic behind splitting the loans looks correct.

However, I'd up the loan amount for the second split to cover purchase costs too.

Bummer about the principal on loan 1 being reduced so far.

In the future - if your new PPOR (the one you're buying) becomes and IP then you'd be able to claim against both loan 2 and loan 3.

Cheers

Jamie

 

[Terry_w]

Probably the best way to structure.

But have you ever withdrawn from the existing loan ever?

 

[Jamie M]

oh -and prob no need to take out a LOC. A variable interest only split will usually achieve the same result albeit with a lower rate.

Cheers

Jamie

 

[Kunzy]

Excellent thanks for the replies guys !

Yep definately a bummer that I've reduced so much on my existing property...
Had no idea about these impacts when I first bought but better late than never right !!!

Jamie - thanks will look into the split loan (only ever looked at LOC) and upping Loan B to cover purchase costs.
Terry - yes I have redrawn 40K so my deductible portion will only be 123K... Have it as an I/O loan now with 70K in the offset.

Thanks again - much appreciated !!!

 

[Terry_w]

Terry - yes I have redrawn 40K so my deductible portion will only be 123K... Have it as an I/O loan now with 70K in the offset.

!

In that case you need to rethink your spits as you have a mixed purpose loan possibly.
best to seek specific tax advice

 

[Rolf Latham]

Terry - yes I have redrawn 40K so my deductible portion will only be 123K... Have it as an I/O loan now with 70K in the offset.
!

40 k in one go, or did you use the loan as an " all in one facility" with wages going in and expenses coming out ?

ta
rolf

 

[Terry_w]

40 k in one go, or did you use the loan as an " all in one facility" with wages going in and expenses coming out ?

ta
rolf

This is an important distinction.

 

[Kunzy]

Rolf - it was 40K in one go.

Just redrew the extra principal payments I made. Was never an 'all in one facility'...

 

[Terry_w]

Rolf - it was 40K in one go.

Just redrew the extra principal payments I made. Was never an 'all in one facility'...

This $40k loan - was it used for this property? reno, repairs etc?

 

[Kunzy]

Terry - haven't used it on anything related to the property. Just redrew it and now have it sitting in an offset account.

 

[Rolf Latham]

Even though the circumstances of your deductability are not ideal, all is not lost.

A good debt recycling strategy will help you to convert your new non deductible debt to deductible much more quickly.

Properly worked, you would be surprised at the long term effect of your tax savings, in many circumstances over 20 years, this can run into 100s of thousands of dollars

ta
rolf

 

[Kunzy]

Thanks Rolf - not familiar with debt recycling but will look into it...

However if I continue with my original plans should I still able to claim the original 123K as a deduction ?

 

[Rolf Latham]

However if I continue with my original plans should I still able to claim the original 123K as a deduction ?

If the 132 was never contaminated with having been paid down or redrawn from for purposes other than the home of renvoations to the home, the 132 would be deductible - pls seek specific tax advice.

As part if your borrowing strategy, if i was your credit adviser, I would splut the 163.......into the 40 and the balance. While your loan is IO, apportionment may be easy, once it turns into PI yuk !

ta
rolf

 

[Terry_w]

Yes I agree with Rolf. $40k is a loan which doesn't relate to the property so not deductible the $123k portion may be deductible once rented, depending... So get some tax advice.

 

[Kunzy]

Will seek tax advice this coming week. Thanks for the info.

 

[Kunzy]

Hi guys,

Just a follow up question - for the structure of Loan B (which is drawn from the available equity), is it best to have the money sitting in an offset account from the outset ? That way I draw the money from the offset and ensure that should I turn this into an IP in the future there is no contamination of the loan ?

Also, my accountant confirmed that my remaining portion is still deductible (though somewhat complicated by what I have done) ! So thanks for the earlier advice !

 

[Terry_w]

Hi guys,

Just a follow up question - for the structure of Loan B (which is drawn from the available equity), is it best to have the money sitting in an offset account from the outset ? That way I draw the money from the offset and ensure that should I turn this into an IP in the future there is no contamination of the loan ?

My opinion is no. I don't like parking funds in an offset as it weakens the connection between the borrowing and the use. Also easy to contaminate.

 

[Kunzy]

Even if the purchase is for me to upgrade and purchase a new PPOR ?
Will this mean Loan B would be considered deductible in the future still ?

 

[Terry_w]

Even if the purchase is for me to upgrade and purchase a new PPOR ?
Will this mean Loan B would be considered deductible in the future still ?

If loan B is used for the property purchase then the interest on this loan would be deductible in the future if that property becomes rented out.