Using Equity and Savings for a deposit?

[albanga]

Hey All,

I have read that some brokers recommend that if you have both equity and savings and wish to purchase an IP that you should pay the savings into the loan and then release that equity in order to make it fully tax deductible?

Example - Say I have 30k in equity and another 20k in savings and wish to purchase a property which requires a 50k deposit. I pay the 20k into the loan and then release the entire 50k.

Just a couple of thoughts on this:
If you pay into the loan doesn't it just put it into redraw but the limit still remains? If so do you then need to contact the lender to get them to reduce the limit so u can draw the entire 50k as a loan?

Secondly is this a little risky? What happens if you pay into the loan and the valuation comes up less? I suppose you could get the valuation first and then do this but even then there are risks.

Do all brokers reccommend this method?
Or perhaps I am over complicating it.

 

[Jess Peletier]

It works well if the loan you're paying into is a PPOR. It basically turns what was PPOR debt into IP debt.

There's no real advantage in doing it if the equity is in an IP.

Ideally you'd get a valuation done prior to putting the cash in the loan, and then would create a new loan split to use as deposit for the new IP, keeping both loans separate for tax purposes.

 

[Jess Peletier]

If you pay into the loan doesn't it just put it into redraw but the limit still remains? If so do you then need to contact the lender to get them to reduce the limit so u can draw the entire 50k as a loan?

For eg -

Loan balance $250k, accessable equity $30k, limit $280k. Cash $20k

Put cash in loan - Loan balance =$230k- accessible equity $50k. Limit still $280k

Create 2 loan splits, one is the original $230k, the other is the $50k equity.

 

[albanga]

Thanks Jess!
So basically you would need to pay into the loan and then get the equity split as opposed to paying into the loan and simply redrawing it as that would contaminate the loan?

Yes understand without a PPOR it makes little sense.

 

[Jess Peletier]

That's right, if you don't split it you have a mixed use loan. And a headache

 

[Terry_w]

You would probably only want to pay down a PPOR loan with offset cash if you have no equity available to borrow against.

If you use your cash you will be paying more non deductible interest.

If you don't have a PPOR loan then in the short term it will be the same whether you use offset cash of borrow - unless rates on loans are different. But think longer term. An IP may eventually become a PPOR for example.