Reducing the Loan limit to reduce the monthly debit interest

[JohnHenry]

Situation:
I have accumulated almost $50k in one of my used to be PPoR loan now has become my IP loan since I no longer living in the property. I still owe the bank approximately $ 150.000 in order to reduce the monthly debit account in my current investment loan.

My Plan:
I’d like to use the existing $50k which I have transferred into this account during my time living in the PPoR to reduce the monthly interest only debit against my offset account.

Question:
Can I reduce the limit on that account from $150k into just $100k from a taxation point of view ?

The bank said that I can do that to reduce the monthly debit, but shall I leave the debit rate as is now to be able to claim negative gear component or shall I reduce the monthly debit account so that I can move towards neutral gear as possible ? I understand that once the $50k has been used to reduce the loan limit I cannot reclaim that money back, and I can’t increase that anymore.

 

[Terry_w]

Situation:
I have accumulated almost $50k in one of my used to be PPoR loan now has become my IP loan since I no longer living in the property. I still owe the bank approximately $ 150.000 in order to reduce the monthly debit account in my current investment loan.

My Plan:
I’d like to use the existing $50k which I have transferred into this account during my time living in the PPoR to reduce the monthly interest only debit against my offset account.

Question:
Can I reduce the limit on that account from $150k into just $100k from a taxation point of view ?

The bank said that I can do that to reduce the monthly debit, but shall I leave the debit rate as is now to be able to claim negative gear component or shall I reduce the monthly debit account so that I can move towards neutral gear as possible ? I understand that once the $50k has been used to reduce the loan limit I cannot reclaim that money back, and I can’t increase that anymore.

Define 'accumulate'. Do you mean paid into the loan an extra $50k?
Do you owe $150k, and if so how could you reduce the limit to $100k?

I recall a few years ago posting in detail in a thread you started around offset accounts. Why didn't you set up an IO loan with a 100% offset account when you knew in detail how they worked and all the benefits?

 

[Peter_Tersteeg]

Given the amount of advice you've had on the forum previously regarding loan structuring, I would hope by this time your loans are structured as interest only with an offset account. The easiest way to reduce your monthly outgoings is to simply put the money into that offset account. This will also give you access to the savings in a tax flexible manner should you need that cash in the future.

 

[JohnHenry]

Define 'accumulate'. Do you mean paid into the loan an extra $50k?
Do you owe $150k, and if so how could you reduce the limit to $100k?

I recall a few years ago posting in detail in a thread you started around offset accounts. Why didn't you set up an IO loan with a 100% offset account when you knew in detail how they worked and all the benefits?

Yes, your memory serves you very well.

I have 100% offset account set against this loan already, the reason why I got $50k in this loan was because when I stayed in the property, this loan was Principal + Interest and I transferred more/additional money into this account to pay it off sooner, and now since I have moved out of the property, this loan is converted into Interest Only loan which is now monthly debiting my Offsett account.

 

[JohnHenry]

Given the amount of advice you've had on the forum previously regarding loan structuring, I would hope by this time your loans are structured as interest only with an offset account. The easiest way to reduce your monthly outgoings is to simply put the money into that offset account. This will also give you access to the savings in a tax flexible manner should you need that cash in the future.

Yes I do learn a lot of stuff and things in this forum and I am very grateful because of you guys

my reason is that, since I cannot use / withdraw that $50k money inside the loan which I have transferred into the loan account anyway, I am thinking to reduce the amount of debit interest charged by lowering down the loan limit with that money in the loan.

 

[Corey Batt]

If the 50k is sitting in redraw of the loan and the loan is IO, you should not be charged on those funds. reducing the loan limit to a lower amount won't have any affect other than removing your ability to quickly access those funds.

 

[Terry_w]

So you have paid $50k extra off your loan. You cannot reduce the interest you pay - oh I see, you want to only pay half the interest so that the loan balance increases and this will free up more cash for the payment of private debt maybe.

This will be tricky as your loan terms may not allow you to do this. Ask your lender do they have a repayment holiday.

ATO will also be interested in why you are doing this? Scheme to increase deductions and pay off your home loan sooner may mean they won't allow it.

 

[JohnHenry]

If the 50k is sitting in redraw of the loan and the loan is IO, you should not be charged on those funds. reducing the loan limit to a lower amount won't have any affect other than removing your ability to quickly access those funds.

Hi CJay,

No, the $50k is in the loan already and I believe that it is not supposed to be used or be redrawed due to the taxing implication.

 

[JohnHenry]

So you have paid $50k extra off your loan. You cannot reduce the interest you pay - oh I see, you want to only pay half the interest so that the loan balance increases and this will free up more cash for the payment of private debt maybe.

This will be tricky as your loan terms may not allow you to do this. Ask your lender do they have a repayment holiday.

ATO will also be interested in why you are doing this? Scheme to increase deductions and pay off your home loan sooner may mean they won't allow it.

Terry,

I paid / transferred some amount of money back then while I was in the property, that is the reason why the money is in the loan account, but since I have moved out of the property and the loan is now investment loan (Interest Only), I cannot use the fund anyway, so I was wondering if that amount of money in the loan can be used to reduce the limit of the loan to reduce the mount of monthly Interest only payment.

 

[Burnar]

Terry,

I paid / transferred some amount of money back then while I was in the property, that is the reason why the money is in the loan account, but since I have moved out of the property and the loan is now investment loan (Interest Only), I cannot use the fund anyway, so I was wondering if that amount of money in the loan can be used to reduce the limit of the loan to reduce the mount of monthly Interest only payment.

Cjay has already said this: changing the limit will not change the amount of interest you are required to pay.

You have already reduced the balance, which has already reduced the interest payable.

If you were paying PI, rather than IO, it may be possible, depending on the bank, to reduce the amount of Principal you are debited each month. But you have already stated that the loan is IO, so this does not apply in your case.

If you reduce the limit of your loan, you are only reducing the amount or redraw available. This may be a good idea, as it will prevent you from redrawing and creating non-deductible debt. This also may prevent flexibility in future.

 

[Terry_w]

Terry,

I paid / transferred some amount of money back then while I was in the property, that is the reason why the money is in the loan account, but since I have moved out of the property and the loan is now investment loan (Interest Only), I cannot use the fund anyway, so I was wondering if that amount of money in the loan can be used to reduce the limit of the loan to reduce the mount of monthly Interest only payment.

Once you have placed money into a loan this is a repayment. Taking money out is reborrowing it and is a new loan for each redraw.

What you are trying to do is to let the loan capitalise by not paying the interest and letting the loan size increase. The ATO has said they can apply Part IVA and deny the deductions on the extra interest incured if this is a scheme with the intention to increase tax deductions. Doesn't mean they will, but they could.

 

[JohnHenry]

Once you have placed money into a loan this is a repayment. Taking money out is reborrowing it and is a new loan for each redraw.

What you are trying to do is to let the loan capitalise by not paying the interest and letting the loan size increase. The ATO has said they can apply Part IVA and deny the deductions on the extra interest incured if this is a scheme with the intention to increase tax deductions. Doesn't mean they will, but they could.

Wow, that's cool. many thanks for the advice Terry and Burnar !

 

[Rolf Latham]

Doesn't mean they will, but they could.

That pretty much applies to anything re taxation without case law or a PBR in place doesnt it : )

ta
rolf