Refinancing cost ? Where to allocate?

[devank]

Hi,
Recently we refinanced a loan (say IP1) to extract equity as well as make the LVR from 80% to 90%.

Here are the numbers.
Loan Paid Out= $290 K
LMI = 6K
Registration of Mortgage = $162.90
Registration of Discharge of Mortgage = $162.90
Title search fee = $27.90
Surplus Funds = 59K
New Loan = 355.5K

Now, I'm going to use the Surplus Funds (59K) as deposit for another IP (Say IP2).

Q1. Do I need to treat all costs (LMI & other) as 'capital' cost?

Q2. Interest for 290K goes with IP1. Interest for 59K goes with IP2. That is clear.
What do we do with other costs? Do they go against IP1 or IP2?

 

[Paul@PFI]

1. No. Some may be deductible. New costs to refinance may be deductible over another 60mths. Apportioned between IP1 and other use which hasn't happened yet. Some may just be outright non-deductible at this point.
2. Incorrect. IP2 hasn't been bought. When funds are used to acquire IP2 then when its producing income its deductible.

Hope the new funds aren't in an offset. There have been many posts on that issue. You may taint IP1 deductions.Interest for IP2?..No. There isn't a borrowing for an asset not acquired.

Extracting equity doesn't create a single deduction for IP2 at this time. So a portion of costs may be non-deductible for now.

 

[devank]

Thanks Paul.
I conveniently ignored the fact that IP2 hasn't been bought yet

Hope the new funds aren't in an offset. There have been many posts on that issue. You may taint IP1 deductions.

Nothing is mixed with an account which is used for personal use.
I have a separate 'offset' account which is ONLY used for property investment interest deductions, rent deposits and maintenance costs.

 

[Terry_w]

Thanks Paul.
I conveniently ignored the fact that IP2 hasn't been bought yet



Nothing is mixed with an account which is used for personal use.
I have a separate 'offset' account which is ONLY used for property investment interest deductions, rent deposits and maintenance costs.

Sounds like you have mixed borrowed and non borrowed monies!

You will need to apportion interest.

 

[JasonZ]

@ Paul@PFI

I am in a similar situation to devank.

I am about to have my IP1 revalued, I was curious what is the best way to handle the situation without tainting IP1? Keep the refinanced amount in a separate savings account collecting about 2% interest until IP2 has been purchased?

I have been using the offset of IP1 as a savings account (no PPOR). In order to prevent the hassle of apportioning interest, should I shift the amount from my IP1's offset account into the real savings account during the revaluation process?

 

[Terry_w]

@ Paul@PFI

I am in a similar situation to devank.

I am about to have my IP1 revalued, I was curious what is the best way to handle the situation without tainting IP1? Keep the refinanced amount in a separate savings account collecting about 2% interest until IP2 has been purchased?

I have been using the offset of IP1 as a savings account (no PPOR). In order to prevent the hassle of apportioning interest, should I shift the amount from my IP1's offset account into the real savings account during the revaluation process?

You should not be borrowing and placing the borrowed money into a savings account. You run the risk of ruining deductibility like Devank. If you mix borrowed money with non borrowed you will be throwing good money away.

Why not just use a LOC? Or a IO loan with redraw ability?

 

[JasonZ]

Thanks Terry.

My loan is IO and does have a redraw facility. I was not advised by my accountant or mortgage broker, which should I be replacing?

As an example, if I top up my 70% loan to 80% again. Where does the new 10% appear? Where should the 10% sit while I search for IP2 in order to maintain maximum deductions?

 

[Terry_w]

Thanks Terry.

My loan is IO and does have a redraw facility. I was not advised by my accountant or mortgage broker, which should I be replacing?

As an example, if I top up my 70% loan to 80% again. Where does the new 10% appear? Where should the 10% sit while I search for IP2 in order to maintain maximum deductions?

Don't think of 'top up' but of 'borrowing'. You will be borrowing, say, $50,000 extra funds. Interest on these funds will only be deductible if the funds are used for investing or for business. If you are not going to use the funds now then you don't want to borrow them yet. You have 3 options

1. Use a LOC with a $50k limit. Undrawn. Use the funds when you need them and pay directly from the LOC

2. Use a IO loan with redraw. Borrow the money now and pay back into the loan immediately - entire balance will be nil, but $50k available (make sure this won't close your loan though)

3. Borrow money and park in a 100% offset account. This is dangerous as you borrow now but use later. There is also the risk of mixing non borrowed money with borrowed - as Devank did with his.

The preferred method is 1, then 2 then 3.

All of these should be set up as separate loans, other wise you would end up with a mixed purpose loan - one loan with the money used for different purposes.

 

[JasonZ]

Thanks again Terry, much appreciated!

You forgot to tell me whether I should be getting a new tax accountant, mortgage broker or both for not providing me with a response like yours

 

[Terry_w]

Thanks again Terry, much appreciated!

You forgot to tell me whether I should be getting a new tax accountant, mortgage broker or both for not providing me with a response like yours

Mortgage brokers cannot give tax advice (unless they are also tax agents or lawyers) so you can't really blame the broker. Most accountants don't understand deductibility of interest - but the amount of blame would depend on how you asked the question.

ps. I have a draft book on deductibility of interest, 104 pages long so far.

 

[devank]

3. Borrow money and park in a 100% offset account. This is dangerous as you borrow now but use later. There is also the risk of mixing non borrowed money with borrowed - as Devank did with his.

What is the issue if the whole purpose of the IO loan and its offset are used for investment purpose as long as not mixed with personal use?
Where can I find a Gov's reference for similar matter?


I do have an other loan (IP3) with another bank (NAB). It has its own offset with its own extracted equity alone. Nothing goes in. Based on what you are saying, I couldn't have used NAB's offset to park the IP1's extracted equity.

 

[chunho01]

Alright, as I'm reading through the thread, I got confused with my own situation about the whole 'contaminate' issue.

I have an Offset Account linked to variable loan portion of my IP mortgage.
I also use this Offset Account just like any regular/personal account (Transferring money regularly into Transaction Account for personal use).

From my understanding, this whole 'contamination' thing doesn't concern me at all? Since my deductible is still calculated from whatever bank interest I pay, regardless of my Offset account usage?

 

[Terry_w]

What is the issue if the whole purpose of the IO loan and its offset are used for investment purpose as long as not mixed with personal use?
Where can I find a Gov's reference for similar matter?

The problem is that you have mixed cash with borrowed money. This is like getting a bottle of milk, 200ML and putting in 20ML of coke. When you remove 20ML you can't say you have removed the coke - only 10% of the removed liquid may be coke.

I do have an other loan (IP3) with another bank (NAB). It has its own offset with its own extracted equity alone. Nothing goes in. Based on what you are saying, I couldn't have used NAB's offset to park the IP1's extracted equity.

Not sure what you mean here, but it sounds dangerous. Why not just fix up your loan structures and then you won't need to worry.

 

[Terry_w]

Alright, as I'm reading through the thread, I got confused with my own situation about the whole 'contaminate' issue.

I have an Offset Account linked to variable loan portion of my IP mortgage.
I also use this Offset Account just like any regular/personal account (Transferring money regularly into Transaction Account for personal use).

From my understanding, this whole 'contamination' thing doesn't concern me at all? Since my deductible is still calculated from whatever bank interest I pay, regardless of my Offset account usage?

You only need to be concerned if you are borrowing money and parking it in an offset before later using it.

 

[devank]

Why not just fix up your loan structures and then you won't need to worry.

That means
1. Pay back the extracted equity (may be more from my savings as well)
2. Borrowed it again
3. Deposit the borrowed cash into a new savings account
?
Right?

 

[Terry_w]

That means
1. Pay back the extracted equity (may be more from my savings as well)
2. Borrowed it again
3. Deposit the borrowed cash into a new savings account
?
Right?

No - you are repeating the same mistakes again. Don't park money in a savings account if you can avoid it - and you can avoid it nearly always.

I can't comment on the paying back of the extracted equity as your loan may already be mixed. In that case you would have refinance and split it into 2 and then pay back into the non deductible portion before later reborrowing when you need to use it.

 

[albanga]

So Terry the mistake made is that earnings from rent (even though they were from an investment) went into the offset?
If so then how does one pay the loan interest without contaminating the loan? I was under the impression that as long as the purpose was for investment this would not be the case.

Example:
IP Loan 1 - 300k IO with offset
Interest 1k per month
Other investment outgoings $200.
Rent recieved = $1200 per month.

If all rent goes into the offset and then each month you pay IP only expenses from here and then the IP only interest is deducted from here then you still have a problem?

 

[Paul@PFI]

IMO if the offset is against an IP rather than a PPOR you may be better off without an offset but with a generous bank savings account that pays 0% interest. At least you wont lose deductions for interest and wont have a tax issue.

 

[devank]

you may be better off without an offset but with a generous bank savings account that pays 0% interest.

I don't think Terry agrees with that savings account.

I assume Tax office came up with rules to make sure people don't borrow for personal use and then claim interest.
I can't see any logic in making things complicated when EVERYTHING is investment related. No transaction is related to personal use or PPOR.

May be my brain cells are directionally proportional to the number of hair on my head. Both slowly dying

 

[Terry_w]

So Terry the mistake made is that earnings from rent (even though they were from an investment) went into the offset?
If so then how does one pay the loan interest without contaminating the loan? I was under the impression that as long as the purpose was for investment this would not be the case.

Example:
IP Loan 1 - 300k IO with offset
Interest 1k per month
Other investment outgoings $200.
Rent recieved = $1200 per month.

If all rent goes into the offset and then each month you pay IP only expenses from here and then the IP only interest is deducted from here then you still have a problem?

This is the same as paying $1200 into an IO loan in which the interest is $1000. i.e. you are paying off principal.

Another reason not to use the parking method - it is confusing to get your head around.