Refinance and increase loan in preparation for next investment

[beachside]

I have an IO investment loan which turned into P&I a couple of years back when it turned 5. I have not been in a situation to provide full financials to switch back/refinance.

I am about to be in the position where I can refinance.

Question 1. If I go for IO for 5 years I may find myself up the creek again in 5 years - which was not expected when loan was taken out and everyone said it was easy to switch back to IO. If I had gone for a LOC at slightly higher interest I would not have had the problem - in hindsight. Any other disadvantage in going for a LOC now if I refinance to try and avoid potentially being stuffed in 5 years?

Question 2. There may be a few opinions on this, and I don't have confidence in getting a decent and clear answer from the ATO - phone or in writing based on previous frustrating experiences on a recent tax question.

As I have been paying down my investment loan for the last couple of years the amount of money I have available (effectively cash on hand - sitting in offsets etc) to invest (ie flips etc) without new finance is diminishing. I have ample equity on my PPOR which is security for loan in question and therefore could borrow more money above refinance amount. My current loan is offset with offset account which includes cash, incoming income and rent, outgoing living expenses, interest, holding costs of IP etc. I have checked out this current situation with ATO and they have no problem with mixed account as it currently is.

However, if I refinance and take out a larger loan beyond the current balance of loan then I am not just refinancing. The extra money would sit in LOC or offset account (depending on loan) and not attract any interest until used. But.... will this change anything in the eyes of the ATO. Would they see through their strange eyes that I was using the loan for everyday personal expenses rather than the cash I had in the account and income and rent etc. The benefit of having the one mixed account is that every cent sitting in there is offsetting the interest payable on the loan, and therefore interest claimed in tax. From speaking with a ATO person previously (one that was knowledgeable and helpful) I am aware that the slightest innocent movement of money can stuff the equation. Ie investment loan, person wins some money and deposits it temporarily in account to offset interest so that the balance is zero, then redraws a few days later to use elsewhere. ATO sees this as paying off investment loan and then redrawing money for personal use. Stuffed!!

Opinions.....and would the correct one step forward

Thanks

 

[Rolf Latham]

One soln is to choose a lender thats less painful and offers 15 years out of the box, or allows IO extensions without an endoscopy

ta
rolf

 

[Peter_Tersteeg]

You could always look on the period of when you need to renew your I/O component as an opportunity to review your finances. Also as Rolf indicated, there's quite a few lenders who offer more extended I/O periods or they have much easier renewal processes.

Call me old fashioned, but there's also something to be said for simply letting a loan revert to P&I after a period of time. I'm fully aware that it's not optimal from an investing or tax perspective, there's plenty of excellent reasons to go I/O. There's also a good argument that if you don't have any personal debt, it can be beneficial to pay down your investment loans and own your IPs outright.

Certainly it's not for someone in an acquisition phase, but as you transition to a retirement phase it can be very advantageous. Many peoples investment exit strategy involves eventually paying down debt in some manner.

 

[Terry_w]

I have an IO investment loan which turned into P&I a couple of years back when it turned 5. I have not been in a situation to provide full financials to switch back/refinance.

I am about to be in the position where I can refinance.

Question 1. If I go for IO for 5 years I may find myself up the creek again in 5 years - which was not expected when loan was taken out and everyone said it was easy to switch back to IO. If I had gone for a LOC at slightly higher interest I would not have had the problem - in hindsight. Any other disadvantage in going for a LOC now if I refinance to try and avoid potentially being stuffed in 5 years?

Question 2. There may be a few opinions on this, and I don't have confidence in getting a decent and clear answer from the ATO - phone or in writing based on previous frustrating experiences on a recent tax question.

As I have been paying down my investment loan for the last couple of years the amount of money I have available (effectively cash on hand - sitting in offsets etc) to invest (ie flips etc) without new finance is diminishing. I have ample equity on my PPOR which is security for loan in question and therefore could borrow more money above refinance amount. My current loan is offset with offset account which includes cash, incoming income and rent, outgoing living expenses, interest, holding costs of IP etc. I have checked out this current situation with ATO and they have no problem with mixed account as it currently is.

However, if I refinance and take out a larger loan beyond the current balance of loan then I am not just refinancing. The extra money would sit in LOC or offset account (depending on loan) and not attract any interest until used. But.... will this change anything in the eyes of the ATO. Would they see through their strange eyes that I was using the loan for everyday personal expenses rather than the cash I had in the account and income and rent etc. The benefit of having the one mixed account is that every cent sitting in there is offsetting the interest payable on the loan, and therefore interest claimed in tax. From speaking with a ATO person previously (one that was knowledgeable and helpful) I am aware that the slightest innocent movement of money can stuff the equation. Ie investment loan, person wins some money and deposits it temporarily in account to offset interest so that the balance is zero, then redraws a few days later to use elsewhere. ATO sees this as paying off investment loan and then redrawing money for personal use. Stuffed!!

Opinions.....and would the correct one step forward

Thanks

Not sure I understand your second question but if you refinance and take out more than the loan you are refinancing you will effectively have 2 loasn.
1 would be be for the amount refinanced and 1 for the new purpose - if this is to park into an offset account the interest on this will not be deductible, except under strict conditions.

If you have one combined loan the you will suffer even more as you will end up with a split loan.

 

[Aaron_C]

If you are worried about the 5 year interest only renewal then consider longer IO terms initially or get a LOC.

 

[beachside]

Not sure I understand your second question but if you refinance and take out more than the loan you are refinancing you will effectively have 2 loasn.
1 would be be for the amount refinanced and 1 for the new purpose - if this is to park into an offset account the interest on this will not be deductible, except under strict conditions.

If you have one combined loan the you will suffer even more as you will end up with a split loan.

I think you got the gist of it Terry.

Can you clarify the 2 loans scenario as I was just expecting to take out a new loan covering both. If as you say:
1 the refinance of existing,
2 the increased amount to park in offset. But there would be no interest owing until used. When used there would be paper trail supporting its use. Strict conditions??? I would not be using other than for investment.

Combined loan /split loan. How would I suffer?

Thanks

 

[Terry_w]

I think you got the gist of it Terry.

Can you clarify the 2 loans scenario as I was just expecting to take out a new loan covering both. If as you say:
1 the refinance of existing,
2 the increased amount to park in offset. But there would be no interest owing until used. When used there would be paper trail supporting its use. Strict conditions??? I would not be using other than for investment.

Combined loan /split loan. How would I suffer?

Thanks

Once you borrow money and pay the money into a savings account then it is no longer borrowed money but savings.

eg. $100,000 loan used to buy investment
Increase loan to $150,000 and park $50,000 in offset.
Now this is a mixed loan. 100/150 will relate to the investment
50/150 relates to parking money

Once money hits a savings account it is no longer borrowings, but savings.

My view is that the interest will not be deductible at all because you have invested money into a savings account which is no investment at all. Whatever you do with the moneyafter that is irrelevant.

However the ATO may take a more lenient view, as evidenced in a private binding ruling PBR.


If there is other funds in the savings account then you will not be able to obtain a deduction on the full amount.

If there is no funds at all in the offset account then you may be able to claim a full deduction if the money is subsequently used for investments - but you cannot rely on the PBR but you should apply for one of your own.