Took the plunge, did I get the loan setup right?

[marty998]

Hi

I've been lurking here for a couple of years, mostly because I've felt stupid in the company of so many with buckets more experience (been wondering actually if that is a problem in getting more noobs on here to participate hmmm).

Finally got off my lazy butt and bought an IP. I'm happy enough with the loan setup, read enough SS threads to know what definitely not to do, but curious to know if this could/should have been done either simpler or differently*:

- PPOR current valuation 480k-500k. Loan 250k (4.89% interest only). Offset funds 170k (i.e. interest calculated on 80K atm).
- Took a $108k 2nd separate loan secured against PPOR to fund 20% & stamps/legals for IP (4.89% interest only).
- IP purchased for $450k. 80% loan (360k) secured against IP (interest only 4.89%, but looking to fix this rate @ 4.99% for 5 years).

No LMI, no x-coll, but same bank used for the 3 loans (staff deal, no fees etc).

Offset funds to be used for next PPOR to be purchased hopefully within a year. Current PPOR would become IP2 at that point.

Funny how quickly horizons can shift once you buy Prop #2. I can see that #3 is within reach, but now I'm trying to figure out how to get #4.

*If relevant, age 28, single, ave income, buy & hold type, risk shy i.e. would not be terribly comfortable with overall portfolio going above 80% etc.

Thanks all. Would never have believed I could get started were it not for this forum. Owe a lot to it (you).

 

[Shahin_Afarin]

So the $250k loan has $170k offset yes?

Where is the PPOR debt? Do you have any?

Which account is the rent money going into?

 

[marty998]

Not clear enough? 250k is against the PPOR. So PPOR has 2 loans (250 non- deductible & 108 deductible). Yes, offset funds are against the 250 non-deduc loan.

Rent money isn't going anywhere yet. Prop hasn't settled.

 

[Redom]

Looks pretty good Marty. You've avoided the major issue(s) that many investors, who aren't as well researched as yourself find themselves in.

You may be able to negotiate a slightly lower rate - especially if you go and purchase again and take your total debt to 1m+.

On another note, welcome to the boards, I also spent years reading before posting. Good luck on the investing journey.

 

[Terry_w]

Yes sounds like you have done it right. Hope the 20% wasn't drawn out into the offset account so you could right a cheque??

 

[Peter_Tersteeg]

The overall structure is fine.

Several lenders have staff deals where you can borrow up to 90% with no LMI. If your employer is offering this it can be well worth taking advantage of.

Depending on the lender it may be possible to renegotiate the variable rate to something a bit lower.

 

[Colin Rice]

Looks the goods and a sound foundation to build on.

You are among the minority who get it right from the outset.

 

[Jamie M]

Not clear enough? 250k is against the PPOR. So PPOR has 2 loans (250 non- deductible & 108 deductible). Yes, offset funds are against the 250 non-deduc loan.

Rent money isn't going anywhere yet. Prop hasn't settled.

Looks good to me.

I'd have the rent money paid into the offset linked to the non deductible loan.

Cheers

Jamie

 

[stumpie]

Looks good to me.

I'd have the rent money paid into the offset linked to the non deductible loan.

Cheers

Jamie

Just to make things more interesting?

if Marty follows what Jamie suggested and puts rental income into the offset linked to the PPOR, and sets up a separate transaction account (IP usage only) where he pays interest and IP expenses from. Could he periodically transfer funds from his $108K (assuming he has available funds) loan account to the transaction account (he will of course want to claim the interest on the loan acct) to cover any shortfalls without raising any eyebrows?

 

[Terry_w]

Just to make things more interesting?

if Marty follows what Jamie suggested and puts rental income into the offset linked to the PPOR, and sets up a separate transaction account (IP usage only) where he pays interest and IP expenses from. Could he periodically transfer funds from his $108K (assuming he has available funds) loan account to the transaction account (he will of course want to claim the interest on the loan acct) to cover any shortfalls without raising any eyebrows?

I would be raising both my eyerbrows. Borrowing to pay interest? What is the purpose. Borrowing to pay non interest costs should be ok.

But any income should be dumped into the offset account on the non deductiblle debt.

 

[marty998]

Yes sounds like you have done it right. Hope the 20% wasn't drawn out into the offset account so you could right a cheque??

Nope. Bank was pretty quick to fund the loan, didn't have to touch offset funds for the deposit (knocked the dep down to 5% too). Like I said, I've learned something from all the wise heads here who keep shouting not to do various things

Just to make things more interesting?

if Marty follows what Jamie suggested and puts rental income into the offset linked to the PPOR, and sets up a separate transaction account (IP usage only) where he pays interest and IP expenses from. Could he periodically transfer funds from his $108K (assuming he has available funds) loan account to the transaction account (he will of course want to claim the interest on the loan acct) to cover any shortfalls without raising any eyebrows?

I think the ATO takes a dim view of that doesn't it?

 

[stumpie]

I would be raising both my eyerbrows. Borrowing to pay interest? What is the purpose. Borrowing to pay non interest costs should be ok.

But any income should be dumped into the offset account on the non deductiblle debt.

hi Terry

correct me if i'm wrong but the ATO has not said what you must do with rental income i.e. it does not say you must apply it against the IP expense. so in this respect putting it into an offset acct as oppose to paying down the PPOR loan is the right approach to reduce the non deductible interest.

with respect to the structure of accounts i described above, interest on interest is also deductible if the original interest expense is a valid deduction. would it make any difference if the transaction account has an overdraft facility attached? and let's say the dominant purpose of setting up this structure is to buy time that in the future the IP will be positively geared.

i'm not a tax accountant and neither am I a lawyer, but i certainly am keen to explore what is possible within the boundaries of tax law.

 

[stumpie]

I think the ATO takes a dim view of that doesn't it?

This is what I'd like people to discuss and explore. If we don't ask you won't receive.

 

[Terry_w]

hi Terry

correct me if i'm wrong but the ATO has not said what you must do with rental income i.e. it does not say you must apply it against the IP expense. so in this respect putting it into an offset acct as oppose to paying down the PPOR loan is the right approach to reduce the non deductible interest.

with respect to the structure of accounts i described above, interest on interest is also deductible if the original interest expense is a valid deduction. would it make any difference if the transaction account has an overdraft facility attached? and let's say the dominant purpose of setting up this structure is to buy time that in the future the IP will be positively geared.

i'm not a tax accountant and neither am I a lawyer, but i certainly am keen to explore what is possible within the boundaries of tax law.

ATO has said that if the dominant purpose is to capitalise interest so you can pay down the PPOR debt faster then they can apply Part IVA to deny the deduction

 

[Terry_w]

Nope. Bank was pretty quick to fund the loan, didn't have to touch offset funds for the deposit (knocked the dep down to 5% too). Like I said, I've learned something from all the wise heads here who keep shouting not to do various things

that is good, but I was referring to the manner in which the borrowed money was used - how did you get the money from the bank loan account to the vendor etc?

 

[Colin Rice]

ATO has said that if the dominant purpose is to capitalise interest so you can pay down the PPOR debt faster then they can apply Part IVA to deny the deduction

AKA a "Tax Scheme".

Best practice is to pay interest from an external transaction/offset in order to prevent capitilising interest.

I do believe you can use a LOC and capitilise interest to pay loan interest as long as it is kept seperate and the interest is not claimed as a tax deduction on the LOC the interest payments where made from.

This can come in to play if tax flow is lumpy and can be used by the self employed to ensure loan repayments are met irrespective of current cashflow.

 

[stumpie]

AKA a "Tax Scheme".

Best practice is to pay interest from an external transaction/offset in order to prevent capitilising interest.

I do believe you can use a LOC and capitilise interest to pay loan interest as long as it is kept seperate and the interest is not claimed as a tax deduction on the LOC the interest payments where made from.

This can come in to play if tax flow is lumpy and can be used by the self employed to ensure loan repayments are met irrespective of current cashflow.

Colin, if one were to use the LOC to pay interest on the loan and not claim the interest on the LOC then its going to be very restrictive on how one would use the LOC without keeping records and apportioning interest if one would use the LOC to pay for other non interest expenses.

 

[stumpie]

Rixter, are you about? could you chime in from Geelong mate, i think you're using an LOC to pay interest and expenses and also having rental income credited to the LOC and capitalising the interest. is this correct?

 

[Colin Rice]

Colin, if one were to use the LOC to pay interest on the loan and not claim the interest on the LOC then its going to be very restrictive on how one would use the LOC without keeping records and apportioning interest if one would use the LOC to pay for other non interest expenses.

You would need to have a loan split if using a larger LOC that is apportioned to the actual loan you are paying the interest on to "keep it clean" for record keeping purposes.

Eg. 300k main LOC could have a sub account of 15k to pay interest on a loan for 300k and refreshed at the end of the financial year.

Not a common structure but can be used in certain circumstances if self employed and cash flow is unpredictable.

 

[antistar]

Congratulations marty and good on you for going into IP1 with decent equity and substantial savings in offset acct behind you.
Many gen Y 'investors' rush into multiple IPs with 90/95% lvrs all within a short space of time. The initial amount you begin with can make a huge difference in your investment growth down the track.
Cheers and good luck