Topping up PPOR loan and redrawing for IP #1?

Hello fellow Somersoftians!

In preparation for purchasing IP#1, I have been talking to brokers about how to set the finance up. The structure is fairly important as we plan to keep buying IPs as long as our serviceability will allow (plan: 2 IPs this year, 2 next year).

We have a PPOR IO loan. PPOR is worth $600k and the IO loan is $450k.

We have an attached offset account to the PPOR loan with enough money for the deposit for IP #1. I thought the usual way to buy an IP was to use the money in the offset as a deposit for the IP.

However I've just learnt of another method which confuses me somewhat and would like to hear people's opinions on it.

1. Deposit money into the PPOR loan and top it up.
2. Redraw this and use it as funds for IP #1.

The reason this confuses me is because I thought redrawing money should be avoided (which is why we have an offset facility instead of a redraw facility).

Any thoughts? Would really appreciate any help.

Cheers :)
 
Hi Tess,

Using the offset account for the deposit is a sound strategy to use. The second method you mention is problematic in that the portion you use on the deposit will be mixed in with your PPOR debt creating issues with claiming tax deductibility on this portion. I hope that helps.

Regards,

Cameron Perry
Perry Finanical Strategies
 
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I think both are going to be questionable for deductions. An offset is just parked money, pulling this out does not create a deducable loan it just increases the loan on PPOR.
 
Both of you have confirmed what I was thinking... really don't want to mess with redraws until I can see a clear reason why I should. Ta!
 
offset is fine as long as

the money is all borrowed money, and you dont pullte it with tax paid funds used for private purposes

An offset set up against an IO loan thats used only for Investment purposes, with only borrowed funds in the offset has no issues with nexus of funds since the structure is like a redraw or an LOC but with the funds parked outside of the loan.

But then im not your accountant, pls see the disclaimer below :)

ta
rolf
 
Its the purpose of the withdrawn funds that warrant the deductability so no problem withdrawing funds from LOC and buying ip - fully deductable.
You just need to account for it end of fin year and keep accurate records for 7 yrs. Say you withdraw 150k from your loc, well you know that 150k is deductable, the rest is not.
Can be hard to account for if there is rate vriations throughout the year, hence the need for accurate record keeping.
 
To maximise borrowings, could you get a LOC against the equity in your PPOR and use that as your deposit and costs for the new IP?

If your strategy allows for this, you could potentially use ALL borrowed funds for the IP, retaining your offset balance to minimise interest on your PPOR.
 
^ I'm about to do this.

Deposit cash is in an offset account with my PPoR... i'm paying it back into the mortgage then getting a new loan facility with the same lender secured against my PPoR.

Basically giving the bank some money back then re-borrowing it with a different facility.
 
Both of you have confirmed what I was thinking... really don't want to mess with redraws until I can see a clear reason why I should. Ta!

Tess,

I believe some of the answers above might have led you astray.

If you use the money in your offset facility for the deposit then you do not get a tax deduction for the interest on that money.

However if you:

1. Pay the money from the offset into your loan account.
2. Get a topup done on the loan AND the funds available in a different subaccount/split/LOC (so that it is completely seperate for accounting purposes)
3. Redraw on the new split/subaccount for the deposit for the IP

Then the interest on this loan is tax deductable (as it is used solely for investment purposes).

Regards,

Jason
 
Thanks for clarifying Jason. The broker never explicitly mentioned the sub-account (or LOC) which is why I had no idea what he was going on about.

Interesting reading, thanks for the post :)
 
I think I should have clarified what I said earlier a bit better. Yes, the money from the offset account needs to be attached to a loan used for investment purposes in order to claim tax deductibility.

Regards,

Cameron Perry
Perry Financial Strategies
 
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