PPOR to IP with variable and fixed loan

Patrick wrote:

1) For the fixed loan, upon maturity after 3 years, the loan will be converted into the variable loan.
Will this contaminate the loan for tax purposes?

2) Will the interest tax still be deductible on the full loan amount (400k)?

3) Will it be better off to just have a 400k variable (interest only with offset) loan?

Thanks

1.) AFAIK, as long as the purpose of the borrowed funds is used for investing purposes, there is no loan contamination.
The problem here is, what you are trying to do is pay off a portion of the Tax Deductible debt. Which is not beneficial for you in the long run, as you mentioned this PPOR will be converted to IP later on. Why not consider having just one loan, no split, have it interest only, and a linked offset facility where all your money will be sitting. Alternatively, you can have the whole loan amount fixed also for a few years, IO + Offset account setup. Be very careful with this one though as breaking a fixed loan is costly. So if you plan to convert your PPOR to IP in 3 years time and not less than that, this is also a good option.

2.) the interest on the loan amount of $400k will be deductible when you convert this to an IP. So having the loan amount staying at $400k and not paying down the principal amount is good for you in the long run. Just be really disciplined in not mixing personal spending with the current PPOR loan account.

3.) For me, with your goals in mind of converting to IP later on. Having one loan of $400k, an offset facility linked to this loan is the way to go. Being variable or fixed is a personal choice, if you feel more safe with fixed interest rates, then go with it. I reckon fixing for 5 years though is a really really long time. 2-3 years fixed is reasonable. But I am always a fan of Variable+ I/O + Offset set up loan.

Hope this helps!

1). A loan changing from variable to fixed would not cause contamination
2) No it won’t because if you are paying PI the balance is reducing. As long as there are no redraws made all the interest should be deductible though.
3) IO would be better as you are not tying up cash in an investment property. Could be variable or fixed – that is a call you should make. You could hedge your bets and have part fixed IO and part variable IO with offset.