Stuffed up! I have been paying extra repayments into redraw instead of offset

[dumadiscount]

Made a bit of a mess!

About to convert my PPOR to IP and realised I have stuffed up badly:

- CBA Home Loan (P&I) is approximately $525K, current balance $375K ($80k available in redraw)

- The home loan came with a MISA offset account.

- I have had the home loan since 2009 and made extra repayments almost every month.

- This was my first home so I assumed all the extra repayments were going into offset, never realised the offset is an actual separate account.

- Called CBA, they said I can't see the MISA account on netbank cause there's no money in it (but it exists).

1. Do I have any alternative here other than to suck it up and take it as lesson learnt?

2. If not alternative, when converting to interest only, should I take out all redraw funds and stick it in MISA (non-deductibly notwithstanding).

Thanks!

 

[D.T.]

1. Suck it up for the time being. Next time you do a refinance or topup you can sort it out then

2. DO NOT

 

[dumadiscount]

Thanks DT!

So:

- Just leave the 375k with 80k redraw untouched.

- Pay minimum interest payments on loan in home loan account

- New extra repayments into MISA?

Are there consequences of withdrawing redraw money in an emergency if I need it (other than increasing interest payments).

 

[Terry_w]

You've paid down a loan relating to the purchase of the property. If you redraw $80k now this is consider a new loan and interest will only be deductible if the money is used for investment/business expenses.

This mistake will cost you around $80,000 x 5% = $4000 per year in lost deductions for the next 30 years.

If you redrew the money now for personal expenses then you would have a mixed purpose loan and would have to apportion the interest... Any repayments to the loan would come off both parts.

 

[dumadiscount]

thanks terry, thought that might be the case.

found out more bad news... we have redrawn $115k over the life of the loan for various holidays, cars, etc. does that take the deductible principal down from $375k to $260k?

 

[Peter_Tersteeg]

This isn't a disaster and from a certain perspective it would be quite a good thing...

By paying down the loan you've created equity in the property. You can borrow against this equity for investment purposes (as a deposit for another property purchase). Your equity loan would be fully tax deductible in most circumstances.

That's the light version, you do need to structure it properly, but it can be made to work quite well.

You could also redraw the money for a car, holiday, etc. There's no tax deductions in this case because there's no investment purpose.


The extra repayments becomes a problem if you want to turn the home into an IP at some future date. It's not ideal and there's some tax deductions you'll miss out on, but realistically the real cash figure most people would get back in this case isn't a large amount of money. You'd probably miss out on about $1,200 a year.

From here on, put the money into an offset account. Letter late than never.

 

[Terry_w]

thanks terry, thought that might be the case.

found out more bad news... we have redrawn $115k over the life of the loan for various holidays, cars, etc. does that take the deductible principal down from $375k to $260k?

Possibly worse as you have created a mixed loan so when you were depositing money it was reducing both the loan relating to the house purchasse and alsso the holiday part.

Best to see your accountant work out the proportions and split the loan. Maybe add a 3rd split for deposit on the new property.