Mortgage structure for 2nd property - HELP!

Hi,

My partner and I are looking at buying a house to live in soon and need some advice on mortgage structuring.

We are currently living in a 2 bedroom unit that I bought in 2008 for $303k. It was valued at $345k yesterday. There is $205k remaining on the mortgage, and $80k available for redraw. We will be renting the unit out after buying the new house for around $350 per week. The new house will be in the $550k-$650k price range.

Before discovering this site, my plan was to:
- redraw all of the $80k off the unit’s mortgage for a deposit on the home (keeping $10k for safety)
- get a basic variable home loan for the new house with unlimited redraw (same as for the unit)
- make P&I repayments on both loans, but salary crediting on the house’s mortgage and making only the minimum repayments on the unit’s mortgage
- negative gear the unit

After reading through some posts on this website, I am now unsure if this is the best way of doing things. Is there a smarter option to structure these two loans?

Any advice would be greatly appreciated.

Cheers,
LMac
 
By using the redraw to fund your new home, you're in danger of mixing deductible and non-deductible debt, which risks you loosing the ability to claim any tax deductions on you existing mortgage when it becomes an IP.

My suggestion would be to isolate your $80k redraw into a separate loan. This would give you two loans, one which a limit of $205k (which would later become tax deductible), the other with a limit of $80k and all of your redraw in it. The second loan would not be tax deductible.

You then use your $80k for the deposit on the new house. This structure effectively divides up deductible and non-deductible debt, so you know exactly how much interest you can claim on your tax.



BTW, make sure you check your lender out and do your sums throughly before purchasing a property. $80k may not be enough to put down a deposit plus purchase costs on a $650k house.
 
what is the mortgage amount left?

$285k - ie $205k plus $80k redraw
or
$205k - ie $125k owing plus $80k redraw


this will affect how negatively geared you are on the unit (or may even be positively geared - i didn't run the figures), as you most likely will not be able to claim the interest cost as a deduction on the redraw component.
 
Thanks Peter.

I have just emailed One Direct to see if they can split the unit's mortgage into two parts. They are no longer offering new loans, so I'm not sure if they will.

Excuse my ignorance, but once I have redrawn the $80k from this mortgage and the balance increases to $285k, what is the reason that this entire amount won't be tax deductible?

Thanks again,
Luke
 
The ATO sees redraw as in effect a new loan. Deductability is based on the purpose of the loan. the pupose of the redraaw/new loan is to purchase something that isnt income producing, therefore not deductable.
 
Your existing loan is intended to become tax deductible.

The problem is, you're redrawing some money from a deductible loan for personal use (buying your own home), so the money you're redrawing is not tax deductible.

This mixes the use of the loan and the ATO may rule that the entire loan is not deductible as a result.

By splitting the it into two parts, you clearly set up a loan that is tax deductible and a part that is not tax deductible.
 
I'm starting a new job in soon, so I won't be buying anything until my 3 month probation period is over.

Can I redraw the $80k from the unit's mortgage now, place it in a savings account until around November and get around it that way? Or would the redraw amount still be non-deductible?
 
talk to your accountnant, but something tells me the ATO might be a wake up to that sort of thing. Its done now. get educated on the best structure moving forward. You might consider recycling the non deductable debt, and get where you want to be in a couple of years. the other alternative is to sell the exisitng place and buy both a new PPOR and a new investment, and start clean.
 
Your existing loan is intended to become tax deductible.

The problem is, you're redrawing some money from a deductible loan for personal use (buying your own home), so the money you're redrawing is not tax deductible.

This mixes the use of the loan and the ATO may rule that the entire loan is not deductible as a result.

By splitting the it into two parts, you clearly set up a loan that is tax deductible and a part that is not tax deductible.

Peter,

If I'm unable to seperate my loan into deductible and non-deductible components with changing lenders, can't I just apportion the interest charged as detailed in TR 2002/2?

Why would the ATO rule that the entire loan in non-deductible?

Would the apportionment be a simple percentage calculation based on the balance of the loan before and after the redraw is made?
 
Once a loan has a mixture of income producing purposes (the original loan for which will now be an investment property producing income) and private use, the original loan is diluted & its impossible, depending on the amount of transactions, according to the ATO, to determine the claimable amount so the nexus is lost.

You could apportion the loan but any payment will be divided up in the same way the loan is split. I.e You wont be able to choose to pay extra on the $80k portion which is your principal residence and not the IP portion, it will be divided accordingly.

Question - have you used an offset account with this loan (sounds like you havent i.e redraw)? Well the real question is, have you made withdrawals from this loan over its life span for anything personal including payment of Credit Cards etc? If so, the purpose of the loan and claimability is most likely already lost. Any withdrawals what so ever are seen as new loans within a loan.

If not, and its just going to be this one transaction, then the split should work fine.
 
Question - have you used an offset account with this loan (sounds like you havent i.e redraw)? Well the real question is, have you made withdrawals from this loan over its life span for anything personal including payment of Credit Cards etc? If so, the purpose of the loan and claimability is most likely already lost. Any withdrawals what so ever are seen as new loans within a loan.

Unfortunately you're right. It's not an offset account, only redraw, and I have made personal withdrawls during the life of the loan. Any advice on the best way forward? Would refinancing solve any of these problems?

Thanks for all of your help guys - it is greatly appreciated.
 
From here on, refinancing wont really solve any of your problems unless their hasnt been too many withdrawals and an accountant, or yourself, can easily justify and distinguish an amount still claimable on the loan. It has to be easy to identify. Any personal withdrawals will stand as new borrowings & reduce the amount claimable. I.e, you may only be able to claim interest on $100k or $150k ......

Come audit time however, if/when it happens, the ATO wont take an easy explanation, they will need proof, and to them the purpose of the loan may already be lost. They are strict on these set ups.

I am in exactly the same boat. I found this site about a year ago when I suddenly found interest in investing, however bought my first house 4 years ago under a redraw set up (at the time I had no idea or intent on investing further) & used the account like a bank account. Still a large loan, but completely unclaimable if I was to turn it into an IP. Glad I know a lot more now.

So Im selling up and putting the equity from it in to our new PPOR & buying 2 IP's with as high LVR as poss. No real harm done, just wish I used an offset from the start, but live and learn !!
 
You cant go back. Its done now. talk to your accountant, and a broker. Set up the best structure you can moving forward. Its not that big a set back! You have paid off some of your house!! Its a much better problem than many others I can think of.
The main options are selling and buying 2 new ones with the right structure, or perhaps applying for a private ruling on the amount you can deduct given the loan accounts history, or debt recycling, which serves the same purpose after a year or two.
 
Will the loan statements be enough proof for the ATO in determining how much of the mortgage is deductible? When this property becomes an IP, I should be able to calculate exactly how much I have redrawed for personal reasons and therefore determine what percentage of the mortgage is deductible. Or is it not that simple?
 
Would be best to speak to an accountant or alternatively, & more appropriately, try to get a ruling/approval from the ATO for definite clarification.

Think of it like this. If you dont get it right and get audited in 5 years time, and then your advised by the ATO that the loan for that whole time was not claimable, it would be an extremely large amount you would owe the ATO & could be financially ruining.
 
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