PPOR Loan Refinancing structure to buy first IP

[Sandydubes]

Hi,

I am refinancing my PPOR Loan (different lender) to draw equity to be used as deposit to buy my first IP.

Situation:
1. Current loan 280K. Offset account balance 100K. Redraw available 60k.
2. PPOR current valuation for refinancing 530K. Refinancing@ 80%LVR = 424K.

Proposed Loan structure through Refinancing: all splits are I/O loans.
1. Split 1- 200K. 100% offset account - nominated as personal transaction account. Will have 20K balance at settlement.
2. Split 2 - 140K. 100% offset account - will have 140k balance at settlement. Declared as investment account to be used for deposit towards IP.
3. Split 3 - 84K. 100% offset account - will have 84K balance at settlement. Declared as investment account to be used for deposit towards IP.

Questions:
1. My consideration is to use the equity available to pay for deposit towards IP and claim tax decutions on the interest cost. I am advised to pay off the current loan from my existing offset balance (100k). This will ensure that the personal funds (current offset balance) is not mixed up with the loan balance (under split 2 and 3) and hence no dramas for tax deductions. Does this make sense? Am I missing any considerations?
2. I am aware of that if I at any time convert my PPOR to an IP than it does not help as I am reducing my loan from current 340k (280 +60 redraw) to 200k under refinance setup. I am ok with this as the possibility of making my PPOR to an IP is remote.

Look forward to your comments/suggestions/perspectives.

Regards,
Sandy

 

[Aaron_C]

Sounds fine on paper Sandy. However, what is your timeframe to buy the IP? This topic of refinancing/putting excess in offset accounts has been discussed quite at length here.

There is a prevailing opinion that if you refinance equity from your PPOR for investment purposes, and park it there for a while, it loses its tax deductibility for the debt because you didn't use the money straight away to purchase an IP. The longer you leave it there, the less likely you can argue that the refinance was purely for investment purposes.

 

[Terry_w]

Sounds a bit risky to me.

It appears you may be going to borrow money and then park it in the offset account before later using it for investment. This could possibly break the connection between borrowing and investing and could lead to none of the interest being deductible.

If you want to do this then get a private ruling.

Why not just use a LOC? simpler and less risk.

Since you have so much equity I would suggest you keep your $100k in the offset for now and just use the LOC for investments. You may find you need the $100,000 for personal expenses.

 

[Peter_Tersteeg]

I think most of the offset accounts are unneccesary, the exception being the one against non-deductable debt. The other two offset accounts just make things overly complex and it's unlikely that they add any real value. As Terry stated, there's a chance they'll comprimise deductability of some loans if you're not careful.

I'm also wondering what the specific reason for having two investment splits is? There's lots of good reasons to do this, but when you can keep things simple it's often better in the long run.

 

[Rolf Latham]

Why not just use a LOC? simpler and less risk.

.

Hi Terry

I think we better firm that up a little

Less risk of failing an audit with the ATO sure, however LOCs add a bunch of yucky additional risks that each borrower needs to consider

No "term", annual reviews and repayable on demand clauses are common, folks READ your mortgage memoranda and understand what it means.


ta
rolf

 

[evisional]

Terry_w,

Can I ask how the LOC work? Do you suggest to open a LOC against the PPOP equity?

My situation is similar:

I have PPOP worth: $400,000
Offet account: $120,000
PPOP Loan : $200,000
Max borrow: $400,000 x 80% = $320,000
Fund available = ($320,000 - $200,000 + $120,000 = $240,000)

The PPOP is under my name, we are planning to buy a IP under my name + my future wife

How I structure this load and use this equity to buy a IP, valued $850,000 so that I can get maximum tax deduction?

Option 1). Use offset account balance to pay the PPOP loan. So, PPOP loan is $180,000. The open an LOC againts PPOP under my name + fiance: $240,000 and use this LOC for deposit for IP.

Option 2). Borrow 100% to buy IP and use PPOP + IP as collaboral mortgage under my name + my fiance

Option 3): your idea?

 

[Rolf Latham]

I will let Terrie get onto the guts of the question

I have only ONE comment

Cross collateral

Avoid like the plague unless there is a CLEAR benefit to YOU, not the lender, not the broker YOU !

ta

rolf

 

[Aaron_C]

I don't share the same aversion to LOC as others do. It is so much cleaner than depositing the extra cash-out into an offset account. I guess the drawbacks of revocability and higher interest rates are more important to others. It all depends on your timeframe - if you are going to make multiple purchases within the next 6-12 months I would definitely recommend an LOC on your current property because it is unlikely a bank will revoke a LOC within that time period.

 

[Rolf Latham]

I don't share the same aversion to LOC as others do. It is so much cleaner than depositing the extra cash-out into an offset account. I guess the drawbacks of revocability and higher interest rates are more important to others. It all depends on your timeframe - if you are going to make multiple purchases within the next 6-12 months I would definitely recommend an LOC on your current property because it is unlikely a bank will revoke a LOC within that time period.

In most cases an IO loan with redraw saves the same purpose, in this scenario.

Some sucky lenders such ANZ dont want to play ball.

A LOC has ONE primary purpose where I can support it

Capitalising investment costs and interest,

and a secondary purpose of where redraw on IO is not poss, and you are chicken of using a clean offset, or the lenders offset isnt a true 100 % product.


ta

rolf

 

[Terry_w]

Hi Terry

I think we better firm that up a little

Less risk of failing an audit with the ATO sure, however LOCs add a bunch of yucky additional risks that each borrower needs to consider

No "term", annual reviews and repayable on demand clauses are common, folks READ your mortgage memoranda and understand what it means.


ta
rolf

Yes, very good point Rolf. LOCs have many disadvantages too.

One more disadvantage is that people tend to end up depositing money from salaries etc into the LOC accounts and not realizing the problems this creates.

Another alternative is to just use an IO term loan with redraw and get the money drawn down straight into the loan. later redraw it with bank cheque payable directly to the investment its going into. This avoids the savings account all together.

 

[Terry_w]

Terry_w,

Can I ask how the LOC work? Do you suggest to open a LOC against the PPOP equity?

My situation is similar:

I have PPOP worth: $400,000
Offet account: $120,000
PPOP Loan : $200,000
Max borrow: $400,000 x 80% = $320,000
Fund available = ($320,000 - $200,000 + $120,000 = $240,000)

The PPOP is under my name, we are planning to buy a IP under my name + my future wife

How I structure this load and use this equity to buy a IP, valued $850,000 so that I can get maximum tax deduction?

Option 1). Use offset account balance to pay the PPOP loan. So, PPOP loan is $180,000. The open an LOC againts PPOP under my name + fiance: $240,000 and use this LOC for deposit for IP.

Option 2). Borrow 100% to buy IP and use PPOP + IP as collaboral mortgage under my name + my fiance

Option 3): your idea?

Avoid option 2. Bad idea I think.

If you want to buy an IP for $850,000 then you could set yourself up in a few different ways.

1. Try to get a high an LVR as possible such as 90%. Deposit needed = $85,000 plus costs.

This could come from a separate loan secured against your PPOR. This could be a LOC or could be a term IO loan. But what you want to avoid is taking this borrowed money and passing it through a savings account as once it hits the savings account it is no longer borrowed money.

Your existing PPOR loan is $200,000. Value is $400,000 so you could possible set up a LOC/term loan at $120,000 and use this as deposit and costs. This may not be enough though.

2. Try to maximise LOC size. This could be done by paying the offset account money off the PPOR loan and then increasing the LOC/Term loan. So PPOR debt becomes $100,000 and LOC becomes $220,000.

This trouble with this is if your PPOR ever becomes an investment property then your $100,000 is tied up.

 

[evisional]

Thank Terry W and others

Now I have a better ideas.