Offset + split loans

[bez23]

Hi all,

I have a PPoR with offset facility interest only at 80% LVR. I did this because I thought it would be wise to keep the LVR high so when I move to another PPoR in a few years time, I can just rent this house out with maximum tax deductible debt.

First year investing and up to my third IP so far. What I did for these properties was to borrow 95% and paid the rest 5% + purchasing cost using money in the offset. The money that I am using in the offset comes with an opportunity cost which is paying more non deductible interest in my PPoR.

However, I came to realise recently that maybe it is wiser to use the money in the offset and pay down the loan to 75% lvr (or less) and create a split loan so that the whole loan (105%) is tax deductible. This will make PPoR back to 80% and basically change a non tax deductible saving(from offset) to tax deductible loan.

Can you find any fault in the above method? Any feedback is appreciated.

 

[Colin Rice]

That is a sound strategy and a great revelation to arrive at.

You have done well by the sounds of it thus far.

 

[Rolf Latham]

Depends if your lender is capable of doing the split : ) some struggle.

Typically, a god banker or broker would have suggested same, so im a little dissapointed that a credit adviser of some sort hasnt sorted that for you previously.

As Colin said though, its great that you have found that now, and moving forward you can use the same concept to "debt recycle"

ta
rolf

 

[bez23]

Structure

Yes, I am quite dissapointed with this as I could've potentially saved a lot of money in tax for the 3 IP. Perhaps this is what people mean by "get the structure right"!

I did a lot of reading in this forum but most people do 80% and IO and put cash into offset. Didn't know about the last part. I guess I am in a slightly different scenario because I am using cash to pay for the 10% where as most people are using equity. Eventually, I should have equity built up for me to utilize a LOC which should make things simpler.

 

[Colin Rice]

I did a lot of reading in this forum but most people do 80% and IO and put cash into offset. Eventually, I should have equity built up for me to utilize a LOC which should make things simpler.

You did well to get the first part right as most do not.

The great part about making "mistakes" is not repeating them.

As Rolf often says, "you dont know what you dont know".

Now you know and as a result of your post many others will as well

 

[Rolf Latham]

Perhaps this is what people mean by "get the structure right"!

One of many things.

The average borrower focusses on cost, the long term investor looks to value.

Value consists not just of immediate cost (which is easy to work out and is finite ) but also my lost opportunity and poor structure cost which is possibly near infinite and difficult to define.

Welcome to the world of value.

ta
rolf

 

[Terry_w]

Hi all,

I have a PPoR with offset facility interest only at 80% LVR. I did this because I thought it would be wise to keep the LVR high so when I move to another PPoR in a few years time, I can just rent this house out with maximum tax deductible debt.

First year investing and up to my third IP so far. What I did for these properties was to borrow 95% and paid the rest 5% + purchasing cost using money in the offset. The money that I am using in the offset comes with an opportunity cost which is paying more non deductible interest in my PPoR.

However, I came to realise recently that maybe it is wiser to use the money in the offset and pay down the loan to 75% lvr (or less) and create a split loan so that the whole loan (105%) is tax deductible. This will make PPoR back to 80% and basically change a non tax deductible saving(from offset) to tax deductible loan.

Can you find any fault in the above method? Any feedback is appreciated.

Yes.

As you pay down the loan on the PPOR you are defeating your original plan of keeping the LVR high and therefore the tax deductions high for this property once you move out.

There is a way to achieve both by utlising strategies involving private loans from related parties.

 

[agagan]

Watch out for ato if you do this:
http://www.propertyobserver.com.au/finance/ato-sounds-warning-on-split-loan-schemes/2011071250775
http://www.langes.com.au/australian_regulatory_compliance/2012/03/22/taxation-ruling-on-split-loans/

 

[Terry_w]

Watch out for ato if you do this:
http://www.propertyobserver.com.au/finance/ato-sounds-warning-on-split-loan-schemes/2011071250775
http://www.langes.com.au/australian_regulatory_compliance/2012/03/22/taxation-ruling-on-split-loans/

Note, these links have nothing to do with what is being mentioned in this thread but is referring to some other strategy.

Shows how important it is to get proper advice.

 

[bez23]

Yes.

As you pay down the loan on the PPOR you are defeating your original plan of keeping the LVR high and therefore the tax deductions high for this property once you move out.

There is a way to achieve both by utlising strategies involving private loans from related parties.

Hi Terry_w,

I am under the impression that when I create the split loan, the LVR can be brought back up to 80% (or effectively is 80% since I am not planning to pay down the split loan component since it is for investment purpose).

Would you mind explaining what the strategy is?

Cheers

 

[Terry_w]

Hi Terry_w,

I am under the impression that when I create the split loan, the LVR can be brought back up to 80% (or effectively is 80% since I am not planning to pay down the split loan component since it is for investment purpose).

Would you mind explaining what the strategy is?

Cheers

Not sure what you mean above by taking the loan back to 80% LVR.

eg. $100,000 purchase price. 80% LVR $80,000 IO loan. PPOR

You have $20k in offset = you pay interest on $60k

Option 1.
You use offset money as deposit for IP1. Interest PPOR increases as you have used the offset money.
Result = loss of tax deductions on $20,000,

Option 2.
You pay down PPOR loan to $60k and reborrow $20k to invest.
Result = deduction in non deductible debt and gaining a tax deduction on $20k loan loan

All good, but what happens if you move out of PPOR? Not only have you tied up the $20k deposit but you have tied up a further $20k

Option 3.
When you purchase house you borrowed $105,000 based on the following:
1. IO loan at 80% LVR from a bank
2. IO loan for 20% plus costs from X

Later you want to buy an IP you borrow $20k from X for deposit.

Net result is you have $40,000 worth of loan money deductible instead of nil deductible.
$40,000 x 5% = $2000 pa in extra tax deductions.
Now make the $100k loan more realistic and
think of the compounding effect of having an extra $y per month to pay off non deductible debt.

This is a complex strategy and involves a lot of legal and tax issues so do not try this without appropriate advice.

 

[bez23]

Not sure what you mean above by taking the loan back to 80% LVR.

eg. $100,000 purchase price. 80% LVR $80,000 IO loan. PPOR

You have $20k in offset = you pay interest on $60k


Option 2.
You pay down PPOR loan to $60k and reborrow $20k to invest.
Result = deduction in non deductible debt and gaining a tax deduction on $20k loan loan

All good, but what happens if you move out of PPOR? Not only have you tied up the $20k deposit but you have tied up a further $20k

Thanks, I'm most likely going to use this option. I understand tying up the 20k deposit (which I would do if i just transfer money from the offset to buy the IP anyway) but what do you mean by tying up a further 20k?

I'm not going to change PPoR for at least around 3-5 years and just want to be more aggressive atm with investment to ride the cycle.

Cheers

 

[Terry_w]

but what do you mean by tying up a further 20k?

The initial deposit.

 

[bez23]

I recently bought a house and land package and put money into my loan and created a split loan to extract the equity out (debt recycling), however the banks put the new borrowed funds into my home loan (instead of offset). I'm just wondering in ATO's point of view, have I essentially paid down the loan further? Or should i just redraw the funds out and place it in the offset account. Obviously if i was audited , I can substantiate it.

Also, the split loan funds won't be used up when I settle on the land, Just wondering if ATO can turn around and said that that split loan isn't tax deductible for the duration of the build because majority of it is just sitting in my offset/ loan account?

Cheers,
bez

 

[Terry_w]

I recently bought a house and land package and put money into my loan and created a split loan to extract the equity out (debt recycling), however the banks put the new borrowed funds into my home loan (instead of offset). I'm just wondering in ATO's point of view, have I essentially paid down the loan further? Or should i just redraw the funds out and place it in the offset account. Obviously if i was audited , I can substantiate it.

Also, the split loan funds won't be used up when I settle on the land, Just wondering if ATO can turn around and said that that split loan isn't tax deductible for the duration of the build because majority of it is just sitting in my offset/ loan account?

Cheers,
bez

From the above I cannot understand what you have done.

Think of these principals
1. Deposit into a loan is a repayment
2. withdrawing money from a loan is borrowing.
3. The interest on borrowings will only be deductible if the funds are directly used for investmnet purposes.

 

[bez23]

Not sure what you mean above by taking the loan back to 80% LVR.


Option 2.
You pay down PPOR loan to $60k and reborrow $20k to invest.
Result = deduction in non deductible debt and gaining a tax deduction on $20k loan loan

Hi Terry,

I'm just doing option 2, reborrowed by creating a split loan to invest (just to prevent contamination of debt). The loan is set up and the banks transferred the funds into the loan instead of offset.

Cheers.

 

[Terry_w]

Hi Terry,

I'm just doing option 2, reborrowed by creating a split loan to invest (just to prevent contamination of debt). The loan is set up and the banks transferred the funds into the loan instead of offset.

Cheers.

Do you mean the bank set up a split and paid the borrowed money into the second split so that it now has a nil balance?

That is good (if i understand you correctly).

Borrowing and paying into an offset is not so good - if there is cash in the offset then this is very bad!

 

[bez23]

The thing is.. the bank paid the borrowed money into my loan instead of the split!

Should I transfer the funds into the second split now and progressively use the funds in the split for progress payments?

Cheers

 

[Terry_w]

The thing is.. the bank paid the borrowed money into my loan instead of the split!

Should I transfer the funds into the second split now and progressively use the funds in the split for progress payments?

Cheers

Make them fix it. Or you will be disadvantaged.

 

[bez23]

Called the accountant and mortgage broker. Apparently this is not uncommon. I just transferred the funds into the split loan. Just need to keep statements now for an audit trail for the ATO/ accountant.