PPOR to IP : Redraw/Offset – Have I messed up??

[sprocketsMember@sprocketsJoin Date: 2009Post Count: 1]

April 8, 2009 - 1:58 pm

Hi,

I thinking about buying a new PPOR at some point in the next year or so and turning my current PPOR into an IP. This is the only property I own and I purchased it 7 years ago.

The mortgage on my current PPOR is almost paid off with a significant proportion of the original loan amount available as a redraw and a much smaller amount in an offset account.

Have I made a colossal blunder in putting everything into the primary mortgage vs the Offset account for the purposes of deducting interest if I switch to an IP. Would redrawing and putting everything into the offset account now achieve anything at all, or is it just a waste of time?

Is there any way to restructure the existing loan which would help?

Thanks,

Peter

[Richard TaylorParticipant@qlds007Join Date: 2003Post Count: 12,024]

April 8, 2009 - 3:23 pm

Hi Peter

Yes hate to say i think you may have missed the boat as the interest on the redrawn funds wont be tax deductible meaning that you will be receiveing rent on the current PPOR which is taxable income yet have nothing to write off against it. 

This is one of the big big advantages of offset accounts.

Depending on when you are looking at moving I might have a suggestion if you want to shoot me an email with some actual figures be happy to give any advice i can.

Richard Taylor | Australia's leading private lender

[coretexParticipant@coretexJoin Date: 2009Post Count: 25]

April 8, 2009 - 11:04 pm

Richard
Wont be it be tax deducable sorry? im learning all of this

I have my PPoR and don't have a offset account as yet i want to knock off some P & I first, then have my loan offset capable.
will i be able to claim tax or interest on my rent still or if i redraw out of my equity? btw i will have someone living in after the first 6months due to my FHOG so i need to live in there first.

[ducksterParticipant@ducksterJoin Date: 2004Post Count: 1,674]

April 8, 2009 - 11:35 pm

Sprocket,
to be tax deductible you have to borrow money for an investment purpose.

But you cannot redraw and put it in an offset account and get a deduction.
however you could get a
line of credit on house one living in it as your PPOR and using the line of credit loan against it as a deposit for an additional investment property. This would separate the loan so it is easy to see what has been used for an investment purpose.

see
http://law.ato.gov.au/atolaw/view.htm?Docid=TXR/TR20002/NAT/ATO/00001&PiT=99991231235958
or
https://www.propertyinvesting.com/forums/getting-technical/finance/4327592?highlight=redraw

When you ask about tax deduction on interest you have to look at your marginal tax rate that you are on with your job wage.
If you are on 30 cent in the dollar you have to spend one dollar in expenses to get back 30 cents.
If you save having to pay the dollar you may have to pay 30 cents in tax if it causes a profit compared to spending one dollar to get 30 cents back (70 cents loss)
go to http://www.ato.gov.au and do a search on tax rates

Now if you own (rather than bank)  almost 100% of house one and rent it out you may pay 30c in the dollar on the rent is this such a bad thing.
You may be able to use this extra income to pay off the second house.

coretex
Use an offset account it does the same thing as paying more equity without the hassle in the future of redraw not being claimable.  You can use the offset balance for whatever you want without having to explain why you used it.
If you use an offset account it will reduce the interest charged on your PPOR loan and in six months time you can decide if you want to use the cash balance or reduce your interest bill.