example
Take for example a $1.5mil loan which was originally $900k. $600k increase with money released parked in offset.
There are 2 main problems with this:
1. One mix loan relating to 2 purposes = mixed purpose loan
2. Borrowed money mixed with non borrowed = interest cannot be traced to investment
Summary So Far
$600,000 increase relates to offset parking (this is 40% of the total loan)
$900,000 relates to purchase of existing property (possibly) (this is 60% of the total loan)(owner occupied portion)
Borrowing $600k and mixing with non borrowed savings means the interest on this portion won't be fully deductible even if $600,000 is later used to invest.
Bad Solution ? Don?t do
You may think a solution may be to pay $600k into the original loan and redraw again. But this will create a further mess because that original loan is mixed.
Depositing $600k back into the loan will result in this
$600k x 40% will come off the $600k borrowed to park in the offset, or $360,000.
$900,000 x 60% will come off the owner occupied portion or
Now the portions of the loan will be
$600,000 - $240,000 = $360,000 relating to the mistaken parking in offset
$900,000 - $360,000 = $540,000 relating to the owner occupied portion
Total loan is $900,000 again with $600,000 available in redraw.
If the main residence was ever rented out the max interest claimable would be on the $540,000.
The loan is still one big loan and redrawing would result in even more mixing.
Solution ? it?s simple really
Refinance the loan into 2 relevant portions.
$600,000 and $900,000.
This must be done before repaying any more money.
Once the portions are separate then $600k can be taken from the offset and used to repay the $600k loan (make sure bank doesn?t close the account).
Since the loan balance is now nil the $600,000 can then be borrowed and used for investment purposes and all the interest would then be deductible.
The $900,000 loan can be run as per normal.