Separating expenses from net rent

[devank]

I'm refinancing a loan to extract equity. Extra equity is going to be placed in an offset account. This fund is mainly going to be used for future deposits. At tax time, I was going to simply divide the interest charged based on the amount borrowed against each property.

I was also planning to use this for receiving rent, paying interests and other property expenses.

Terry came with a big stick and said that I should not deposit any money including rent into that sort of offset. Keep the interest payments and rents separate. However, I can claim interests on the other expanses (eat into the new offset).

Problem here is that, I can't simply separate the other expenses from the rent. Agents are already taking that out of our rent. I can think of three solutions.
1. Start paying expenses myself instead of getting the agent to do it. It kind of defeats the purpose of having an agent.
2. Get the agent to direct debt me. I'm not sure if they do this.
3. Start moving the exact amount (expenses) every time I receive a statement from the agent. This kind of adds administrative work on my part.

Does anyone have any better way to handle this?

 

[Paul@PFI]

1. Yes. Seems correct.
2. LOL.
3. Wont work. You arent paying it. You just moving from one acct to the other. Thats a fail.

This new loan erodes equity. Any benefit from increased deduction is just a reduction in equity. Is this helping or hindering ?

 

[devank]

This new loan erodes equity. Any benefit from increased deduction is just a reduction in equity. Is this helping or hindering ?

Well.. I guess it depends on where you on life.

I'm 39 so I have about 2 cycles left.

I won't have a full-time job from next month. Going to try contracting. Rents can easily cover the interest payments.
This is one way for me to make IPs look after themselves. Hopefully the properties increase in value more than the reduction in equity.

 

[Paul@PFI]

Yep - Tap the equity to lift the burden makes sense. This happens a bit for some when kids come along. In higher income years reverse the strategy to run debt down.

 

[Terry_w]

I'm refinancing a loan to extract equity. Extra equity is going to be placed in an offset account. This fund is mainly going to be used for future deposits. At tax time, I was going to simply divide the interest charged based on the amount borrowed against each property.

I was also planning to use this for receiving rent, paying interests and other property expenses.

Terry came with a big stick and said that I should not deposit any money including rent into that sort of offset. Keep the interest payments and rents separate. However, I can claim interests on the other expanses (eat into the new offset).

Problem here is that, I can't simply separate the other expenses from the rent. Agents are already taking that out of our rent. I can think of three solutions.
1. Start paying expenses myself instead of getting the agent to do it. It kind of defeats the purpose of having an agent.
2. Get the agent to direct debt me. I'm not sure if they do this.
3. Start moving the exact amount (expenses) every time I receive a statement from the agent. This kind of adds administrative work on my part.

Does anyone have any better way to handle this?

Hi devank

1. Agent is there to manage the property not pay your bills. Think of all the frequent flyer points you could be getting.
2. No
3. This wouldn't work be the agent has paid the bill on your behalf as your agent (in the legal sense - you) and you cannot reimburse yourself.

My main concern would be putting cash into the offset acccount which contains only borrowed money. Once you do that 100% of the offset is no longer borrowed money = 100% of the interest no longer deductible.

 

[neK]

I'm refinancing a loan to extract equity. Extra equity is going to be placed in an offset account. This fund is mainly going to be used for future deposits. At tax time, I was going to simply divide the interest charged based on the amount borrowed against each property.

Why can't you just get a new loan account number and keep the funds in the loan?

For example, I've applied to for top ups before.
My loan account numbers are 123 456 789 01 and 123 456 789 02.
I'll apply for a top up, the loan account number is 123 456 789 03.
For each loan account number I'll establish an offset account

Once the top up is approved (lets say $200,000 to use as a hypothetical), the bank will establish loan account 123 456 789 03 and pay the amount of $200,000 into the offset.*

Then i will just transfer it back from the offset into the loan until such time a property that meets my criteria comes along.

*Some banks will let you keep the funds in the loan account and not pay it to the offset at all. Unfortunately the bank I'm with says they have to pay it to an account.

 

[devank]

nek.. Ihave the similar set up with ANZ under their professional package.

Now, I'm moving to Homeside which charges for each account created.

Another point is that I want to extract equity NOW. This kinda safety net I like to create in case things go wrong horribly.

 

[redwing]

Why drawn down and put the equity available into the Offset, wouldn't you be better off with a Line Of Credit?

 

[devank]

Why drawn down and put the equity available into the Offset, wouldn't you be better off with a Line Of Credit?

Initially I wrongly thought that it was ok to use that offset account to deposit rents and withdraw interest payments as I'm not using this bank for any of my personal transactions.
If that sort of transaction is not allowed then LOC might be the ideal. However, there is no 'contamination' issue here (only IP related expenses are going to be withdrawn) I thought I could still treat the offset as LOC.

 

[Deltaberry]

If your offset account doesn't do anything, except pay interest to the bank (assuming you've used 100% of your refinanced money to buy an IP), and you put the same interest back into that account, you're probably ok?

 

[baby blue eyes]

I am with home side and repaid the extra back to the loan itself. I redrew it when I needed it. I would not leave borrowed funds sitting in an offset more than a day or two.

 

[devank]

I would not leave borrowed funds sitting in an offset more than a day or two.

What is the reason?

 

[mumbai]

What is the reason?

I have the same issue. My borrowed funds are also lying in the offset account!

 

[allsuccess]

I would not leave borrowed funds sitting in an offset more than a day or two.

I have this too with my recent re-finance. I'll apportion the interest for the IP when it's tax time.

e.g. Before re-finance
IP Loan 200K

After re-finance
IP Loan 250K but 50K is sitting on a Offset against PPOR.

During the tax time, I'd only claim interest (apportioned) for 200K.

 

[Brady]

I have this too with my recent re-finance. I'll apportion the interest for the IP when it's tax time.

e.g. Before re-finance
IP Loan 200K

After re-finance
IP Loan 250K but 50K is sitting on a Offset against PPOR.

During the tax time, I'd only claim interest (apportioned) for 200K.

Why would you do it like that. Messy and struggle to see a reason.

Could just put the $50k back into the investment loan. There is no benefit of borrowing $50k extra then putting it against the PPOR offset, still pay the same amount of interest. Only difference now you have to waste time apportioning.

1. Fund back into IP redraw, then when used for investing purposes funds are deductable
2. Funds into seperate 'clean' offset
3. LOC

 

[allsuccess]

Why would you do it like that. Messy and struggle to see a reason.

Could just put the $50k back into the investment loan. There is no benefit of borrowing $50k extra then putting it against the PPOR offset, still pay the same amount of interest. Only difference now you have to waste time apportioning.

1. Fund back into IP redraw, then when used for investing purposes funds are deductable
2. Funds into seperate 'clean' offset
3. LOC

Well, It was due to a mistake in selecting a particular product (CBA loan product), where I can't have offset against it or have as LOC. My intention is to buy another IP but I'm not in a hurry. So, if I didn't end up buying, I have to fix this mess.

 

[Brady]

Well, It was due to a mistake in selecting a particular product (CBA loan product), where I can't have offset against it or have as LOC. My intention is to buy another IP but I'm not in a hurry. So, if I didn't end up buying, I have to fix this mess.

But you have an offset against your other loan?

1. Put funds into redraw, not need to mix like you're now.
2. Fix any mess now, don't wait until you find a property.

 

[allsuccess]

But you have an offset against your other loan?

1. Put funds into redraw, not need to mix like you're now.
2. Fix any mess now, don't wait until you find a property.

Thanks Brady, will check this.

 

[baby blue eyes]

What is the reason?

I don't want any contamination issues. Redraw available and I redraw if/when I need it if I can't pay out of the loan account directly the I ensure the offset is empty of any other funds.

I like westpac where you can pay bills from your loan account. Don't know if you can do that with Homeside.