refinance PPOR loan to purchase investment property

[dehgam]

Hi,

I am aware that many people would have asked the same question in the past but I am still not clear on this and will appreciate your opinion.

In a nutshell, i am planning to refinance my PPOR and use the additional funds (i.e. cashout component) to buy another investment property.

My existing homeloan: $250,000

Current valuation of house: $425,000

Refinance based on 80%: $340,000

Ask the new lender to split the loan in two:

First loan: $250,000 (principle and interest)

second loan: $90,000 (interest only)

Initially i will advise lender to park the cashout component (i.e. $90,000
in second loan)

In the next few months, I will buy an investment property and that is when, I will withdraw funds from second loan ($90,000) and use them to purchase the new property.

I am thinking about doing this because then i can clearly show that $90,000 was used to generate income and hence I can claim tax deduction for interest paid on that amount.

Thanks

 

[Terry_w]

How are you going to 'park' the $90k?

 

[Peter_Tersteeg]

It looks like you're going about this the right way.

You're accessing your equity as cash which will allow you to avoid cross collateralisation and make finance structuring decisions based on your needs, not the banks interests.

Parking the $90,000 excess funds back in the loan account will avoid problems with the ATO, and by having two separate loan accounts you're making a clear distinction of personal lending and investment lending. The interest only component means you don't pay for it until you use it.

So far so good

 

[Brady]

It looks like you're going about this the right way.

You're accessing your equity as cash which will allow you to avoid cross collateralisation and make finance structuring decisions based on your needs, not the banks interests.

Parking the $90,000 excess funds back in the loan account will avoid problems with the ATO, and by having two separate loan accounts you're making a clear distinction of personal lending and investment lending. The interest only component means you don't pay for it until you use it.

So far so good

Looks good to me as well, just make sure that if you pay the $90,000 back into the new loan that the bank doesn't close the loan down sometimes leave it $1 short can be fine

Also have had customers put the funds into an offset account which is only offsetting the $90,000.

 

[dehgam]

Thank you Peter and Brady for your feedback. Much appreciated.

 

[Aaron_C]

I would suggest making the $250k loan interest only as well.

 

[Brady]

I would suggest making the $250k loan interest only as well.

Plus one, and put all funds into offset again this loan.

You never know when and if a PPOR will become a IP in the future,

If you struture it the you will have the flexibilty to decide

 

[dehgam]

I would suggest making the $250k loan interest only as well.

Hi Aaron,

Why make $250K interest only? Can you please help me understand?

Thanks,

 

[Aaron_C]

Why make $250K interest only? Can you please help me understand?

Because by paying P&I you are just making additional cash payments into your loan but not being able to access them later except with a refinance.

 

[mpwr]

In the OP's split loan scenario, are you really allowed to tax deduct the interest on the 90K amount b/c its an IP?

http://www.langes.com.au/australian_regulatory_compliance/2012/03/22/taxation-ruling-on-split-loans/

I thought you might have to do some debt recycling to achieve this effect?

 

[Terry_w]

In the OP's split loan scenario, are you really allowed to tax deduct the interest on the 90K amount b/c its an IP?

http://www.langes.com.au/australian_regulatory_compliance/2012/03/22/taxation-ruling-on-split-loans/

I thought you might have to do some debt recycling to achieve this effect?

Hi M

It seems you have misinterpreted the article you linked to - probably due to its misleading title. It is not splitting the loan that is the problem but borrowing to pay interest on an investment property and using the funds you would have paid into the loan to pay down your non deductible debt first.

The op could claim the interest on the $90k depending on where he parks the funds and how he conducts the loan.