Offset or Redraw??

[WonderMan]

Hi Folks, I have a question-

The balance on my PPOR loan is for $255,000 and I have $120,000 in the linked offset account. Towards the aim of purchasing my 2nd IP, would it be a better option to transfer some amount (Eg 80000) from my offset account to the PPOR loan account which would sit as redraw. This would reduce the PPOR loan amount to $175,000. I could then use the redraw as equity from my PPOR to partially fund my deposit on the 2nd IP as an investment loan. So effectively my PPOR loan would be $175,000 (non tax deductible) and 2nd IP loan would be $80,000 (tax deductible)and ofcourse another loan from the bank to cover the balance.

Essentially my question is would this approach be better than funding the entire deposit from my offset. It looks like I can reduce the non tax deductible portion from my PPOR in this way. Apologies if I've got it completely wrong or if its a dumb question.

 

[Marty McDonald]

Essentially my question is would this approach be better than funding the entire deposit from my offset. It looks like I can reduce the non tax deductible portion from my PPOR in this way. Apologies if I've got it completely wrong or if its a dumb question.

Yes heaps better but you need to make sure you don't mix the 2 purposes up in one loan. So split the current loan into 2 separate loans of $175K and $80K then pay this new $80K split down to $0 with funds from the offset....then redraw for investment deposits etc as needed. Bingo new investment loan.

 

[Terry_w]

Hi Folks, I have a question-

The balance on my PPOR loan is for $255,000 and I have $120,000 in the linked offset account. Towards the aim of purchasing my 2nd IP, would it be a better option to transfer some amount (Eg 80000) from my offset account to the PPOR loan account which would sit as redraw. This would reduce the PPOR loan amount to $175,000. I could then use the redraw as equity from my PPOR to partially fund my deposit on the 2nd IP as an investment loan. So effectively my PPOR loan would be $175,000 (non tax deductible) and 2nd IP loan would be $80,000 (tax deductible)and ofcourse another loan from the bank to cover the balance.

Essentially my question is would this approach be better than funding the entire deposit from my offset. It looks like I can reduce the non tax deductible portion from my PPOR in this way. Apologies if I've got it completely wrong or if its a dumb question.

1. Don't take from the offset as your PPOR interest will increase and you cannot claim this

2. Don't take from redraw as you will creat a mixed purpose loan and a tax mess.

3. If you repay the money into the loan you will have lost access to it and have to reborrow it if you need it.

Solution:
4. Borrow without paying down the loan set up a new loan secured by the PPOR. Ideally a LOC

if you don't have the equity then you may need to consider paying down the loan and the setting up a LOC.

 

[WonderMan]

Thanks Guys! Would you be able to confirm that if I were to use the entire redraw amount only for my new IP loan and for no other purpose, it would not be considered as a mixed purpose loan and hence the entire interest on this new IP loan would be tax deductible?

I didn't exactly get the 'tax mess' part. Could someone please elaborate

 

[WonderMan]

Hi Lake,
I was actually planning to deposit the redraw amount from offset account into my PPOR loan. Then refinance my PPOR loan so as to split it into 2. One would be the new PPOR loan for $175000 and the other would be a new IP loan for $80000 (non tax deductible). This would clearly separate my investment loan from PPOR loan and also separate the interest payments into taxable and non taxable components.
Would ATO have a problem with this strategy?

 

[miss green eyes]

May I ask in relation to my situation:
I have a mortgage on a PPOR, and all my savings are in an offset related to that mortgage.
I would like to take all the money from the offset to buy a second property as a PPOR, and turn the original PPOR (PPOR 1) into an IP.
Questions:
The interest on PPOR1 (which is now an IP) will jump. Will ALL the new interest then be deductible?
If I have used the offset to pay all the bills related to PPOR1 all this while (strata, council, water, LL insurance etc), is this OK in regards to tax deductibilty?
I hope I am not hijacking this thread - I'm only posting here as it seems to be related to the OP's situation. If it's a hijack, I am happy to exit this thread and start a new one.
Thank you.

 

[Terry_w]

Thanks Guys! Would you be able to confirm that if I were to use the entire redraw amount only for my new IP loan and for no other purpose, it would not be considered as a mixed purpose loan and hence the entire interest on this new IP loan would be tax deductible?

I didn't exactly get the 'tax mess' part. Could someone please elaborate

redraw = new borrowings.

If you park into an offset with other money = mixing deductible and non deductible and would not be able to claim the full interest when the money is drawn to invest.

hangon - edit here. What do you mean by 'redraw'. I think you may be referring to withdrawal from the offset and my answer above may not apply.

 

[Terry_w]

Hi Lake,
I was actually planning to deposit the redraw amount from offset account into my PPOR loan. Then refinance my PPOR loan so as to split it into 2. One would be the new PPOR loan for $175000 and the other would be a new IP loan for $80000 (non tax deductible). This would clearly separate my investment loan from PPOR loan and also separate the interest payments into taxable and non taxable components.
Would ATO have a problem with this strategy?

Do you mean withdrawal from the offset? An offset is a savings account. So just cash. You can pay down the PPOR loan and then split it. But if the PPOR ever becomes a rental you will have less to claim.

 

[TheLake]

Hi Wonderman

I believe in a roundabout way you are saying what Marty McDonald suggested. The difference being you want to pay down the ppor first then apply for a new loan. This would mean going through the rigmarole of applying for a new loan, valuation, fees etc. That's not necessary as you already have the loan, you just need to split it then follow Marty's suggestion of paying down the new $80k loan from the offset, then drawing for deposit for new ip.

Sorry if this doesn't make sense to you. In my head it does
Hopefully others might explain it better.

 

[Terry_w]

May I ask in relation to my situation:
I have a mortgage on a PPOR, and all my savings are in an offset related to that mortgage.
I would like to take all the money from the offset to buy a second property as a PPOR, and turn the original PPOR (PPOR 1) into an IP.
Questions:
The interest on PPOR1 (which is now an IP) will jump. Will ALL the new interest then be deductible?
If I have used the offset to pay all the bills related to PPOR1 all this while (strata, council, water, LL insurance etc), is this OK in regards to tax deductibilty?
I hope I am not hijacking this thread - I'm only posting here as it seems to be related to the OP's situation. If it's a hijack, I am happy to exit this thread and start a new one.
Thank you.

An offset is just cash, so taking it out generally has no direct tax consequences. If all the loan on the PPOR relates to the purchase of that property (PPOR) then all the interest would probably be deductible. Doesn't matter what the offset is used for it won't change.

 

[WonderMan]

Thanks Terry, Lake and Marty. I'm quite clear now. Appreciate your inputs.

 

[miss green eyes]

Thanks Terry!
I will glean this thread carefully for info.
Moral of the story:
Offset = good
Redraw = bad
isn't it?
I'll never redraw, if I can.

 

[Terry_w]

Thanks Terry!
I will glean this thread carefully for info.
Moral of the story:
Offset = good
Redraw = bad
isn't it?
I'll never redraw, if I can.

Well, generally that is the case. If you never pay down a loan there will be nothing to redraw. Put cash in the offset and this has the same effect as repayment into the loan (as long as you are not tempted to spend).

However if you do not have enough equity to buy the next property you may need to pay down the non deductible loan and reborrow via a new split.

 

[miss green eyes]

Thanks terry!

 

[Investig8]

Thanks to everyone for all your input, I've only been on here a day, and I can't count the hours I've been searching and reading related IP topics.

To get a clearer picture on this topic to see if I get it ..

PPOR - P&I loan (property has some equity)
PPOR - has an offset account attached to it
Get a LOC (for PI only) to 80% of PPOR and make it IO and avoid LMI as it would not be tax deductable on a LOC tied to PPOR.
Look to purchase IP1
Finance IP if its not over capitalised at 90/10
IP LMI will be tax deductable
Pay for initial deposits/expenses for IP1 from LOC
Get a 90% loan for the IP on IO terms
Deal concludes now:

All WAGES are currently being paid directly into the PPOR offset.

All RENT then gets paid to the offset account attached to the PPOR

The LOC continues to pay any expenses related to the IP

Which account pays the IP - 90% IO loan each month? the PPOR offset or LOC

With a growing LOC debt and interest accruing on the LOC, is the PPOR offset paying down the LOC and the interest payments on the LOC as well?

That's where I was getting lost, I've been drawing this layout on paper but I'm trying to figure out the last part to get the maximum financial benefit.

Thanks in advance, awesome forum ..

 

[Peter_Tersteeg]

PPOR - P&I loan (property has some equity)
PPOR - has an offset account attached to it
Get a LOC (for PI only) to 80% of PPOR and make it IO and avoid LMI as it would not be tax deductable on a LOC tied to PPOR.
Look to purchase IP1
Finance IP if its not over capitalised at 90/10
IP LMI will be tax deductable
Pay for initial deposits/expenses for IP1 from LOC
Get a 90% loan for the IP on IO terms
Deal concludes now:

All WAGES are currently being paid directly into the PPOR offset.

All RENT then gets paid to the offset account attached to the PPOR

The LOC continues to pay any expenses related to the IP

Which account pays the IP - 90% IO loan each month? the PPOR offset or LOC

With a growing LOC debt and interest accruing on the LOC, is the PPOR offset paying down the LOC and the interest payments on the LOC as well?

That's where I was getting lost, I've been drawing this layout on paper but I'm trying to figure out the last part to get the maximum financial benefit.

Thanks in advance, awesome forum ..

IP repayments (in fact all loan repayments) come from the offset account. This includes your PPOR loan repayments, IP loan repayments, LOC, everything.

All of your income goes into the offset account (wages, rent).

Tax deductible expenses come from the LOC. Repairs & maintenance, improvements, property management fees, etc.

 

[Terry_w]

Get a LOC (for PI only) to 80% of PPOR and make it IO and avoid LMI as it would not be tax deductable on a LOC tied to PPOR.

Deductibility doesn't depend on security of a loan but the purpose and use of the borrowed funds.

You should pay the LOC and th IP loan interest with cash - ie from the offset.

 

[Investig8]

Thank you Peter & Terry, got it now.

Deductibility doesn't depend on security of a loan but the purpose and use of the borrowed funds.

Thank you Terry, I understood that part (purpose and use of the borrowed funds for deductibility).

My reason for stating it though was I don't believe you can claim portions of LMI, so for example if I went 90/10 on a PPOR where previously it was say 75/25 and the extra 15% that pushed me over was for the LOC and this made the lender enforce LMI, I would have (because all these funds are secured against the PPOR) a mixed purpose between the PPOR and the LOC, ONLY from an LMI point of view, even though the individual loans would be separate and have their own individual purpose (1 personal/1 investing).

 

[Terry_w]

Thank you Peter & Terry, got it now.


Thank you Terry, I understood that part (purpose and use of the borrowed funds for deductibility).

My reason for stating it though was I don't believe you can claim portions of LMI, so for example if I went 90/10 on a PPOR where previously it was say 75/25 and the extra 15% that pushed me over was for the LOC and this made the lender enforce LMI, I would have (because all these funds are secured against the PPOR) a mixed purpose between the PPOR and the LOC, ONLY from an LMI point of view, even though the individual loans would be separate and have their own individual purpose (1 personal/1 investing).

Yes one argument is that part of the LMI (majority maybe) relates to the non deductible loan hence it must be apportioned.

 

[Investig8]

Yes one argument is that part of the LMI (majority maybe) relates to the non deductible loan hence it must be apportioned.

Wow, thanks Terry, I didn't know you could apportion the LMI on a PPOR, it seems a bit messy.

I won't be doing it for now but I was very interested in understanding it in full if that makes sense.