All Topics / Hotch Potch / A new tax effective loan product

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  • Profile photo of TerrywTerryw
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    @terryw
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    A new tax effective loan product is about to be released by one of the smaller lenders in the next few days.

    The product allows a cheaper interest rate to be applied to a home loan while the customer has a an investment loan with a corresponding higher rate. The has the effect of increase the interest on the investment loan while decreasing the interest on the home loan resulting in a larger tax deduction.

    It is such a simple concept that I am amazed no one has thought about it before.

    Terryw
    Discover Home Loans
    North Sydney
    [email protected]

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of AdministratorAdministrator
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    Almost a split loan in disguise Terry. How is that High Court appeal going?
    Jim.

    Profile photo of BillfromozBillfromoz
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    @billfromoz
    Join Date: 2003
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    G’day Terry..

    The Canberra Building Society did that at my request in 1973.
    It was fantastic until they were taken over by I have forgotten who.

    Then they undid it on me… still 3 years was better than nothing.

    The good old days

    But there is always something…what IS the latest on the ATO appeal re capitalising interest on the investment loan?

    Bill O’Mara

    Profile photo of TerrywTerryw
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    Hi there Bill and Jim. I forgot the most important part, the interest rate will be 3.99% on the owner occ interest only (LOC) 30 years and then you can have a Term Loan on an investment property also 30 years interest only at a rate of 7.74%

    I think that high court appeal by the ATO is set down for Nov 7.

    Terryw
    Discover Home Loans
    North Sydney
    [email protected]

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of AdministratorAdministrator
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    I’m pretty sure Mr Carmody would take a pretty dim view of this, just as he does the split loan. I’d be pretty wary of embarking on such a pretty blatant tax dodge.
    Jim.

    Profile photo of KewlDudeKewlDude
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    @kewldude
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    Agree Jim! Any info on the ATO’s point of view?

    Cheers
    Kym

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    Just another thought Terry, I assume that there must be restrictions on the balance of private vs investment loan amounts, ie the lender certainly won’t tolerate your paying off all of the 7.74% part quickly to leave a large loan at 3.99% by itself.

    Split loans are a lot simpler maths wise, and the best strategy is obvious, ie pay off the ppor bit first, but with your unbalanced rates, it is a bit less obvious. (unless you HAVE to keep the payments equal of course)
    Jim.

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    Hi Terry and all,

    Got a better one for Carmody .. how about class action – refusal of all mortgage payments until all principal payments are credited to the PPOR, with all interest against the IP, provided you hold 2 properties minimum ? Imagine the building industry then !!

    Seriously though, I thought what you described was already in place. Is it not legal yet? Is it not what is referred to as amortization? What’s the difference legally if I found seperate lenders for each property, with differing interest rates anyway?

    Re CBS .. certain they became Civic Permanent Building Society, then Civic Advance Bank, Advance Bank, then St.George.

    Regards, Phil

    Profile photo of MrInvestITMrInvestIT
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    @mrinvestit
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    Hi all,

    Terryw, could you please let us know which institute is going to offer this super package when it comes out eventually?

    Ok my night shift is over so I’ll say good night / good morning to you all and head home.

    Michael

    Profile photo of TerrywTerryw
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    @terryw
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    Hello everyone

    The new loan product has been released by Tonto Home Loans. You can download a product information sheet from this address:
    http://www.tonto.com.au/news/FirstRun%20HL50%20031008.pdf

    I am still not sure of the full details on this loan. But i beelive the cheaper portion is at 3.99% as a LOC (redraw allowed) and the investment portion is 7.74% as a fixed IO loan with no additional repayments allowed.

    i am not sure how the ATO will view this product. It is up to everybody to get their own financial advice concning this product.

    For further info please contact you mortgage broker.

    Terryw
    Discover Home Loans
    North Sydney
    [email protected]

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of investroninvestron
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    why not draw to 100% value of your i.p., pay off your ppor and then the whole lot is deductable, without the worry if the f#*^?#@ a.t.o agrees or not.

    Profile photo of AdministratorAdministrator
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    quote:


    why not draw to 100% value of your i.p., pay off your ppor and then the whole lot is deductable, without the worry if the f#*^?#@ a.t.o agrees or not.


    I think you’re missing the whole point of a split loan, Investron. The purpose is to borrow for the bulk of both your PPoR and an IP at the same time, but fudging it so that you get a bigger tax deduction compared to two separate loans.
    With a normal split loan you end up effectively shifting the loan from both the ppor and IP to just the IP, but with the Tonto loan you just pay more interest on the IP loan from the start. The effect would be similar in the long run, but probably more effective in the short term.
    Regards, Jim

    Profile photo of AdministratorAdministrator
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    Ouch! Terry I just read the product info sheet. They want a total of about 7.4% of the loan spread over the first 5 years as an establishment fee. $37,000 establishment fee for a $500k loan. It seems that any tax advantage would be negated by this fee, or do I have it wrong?
    Jim.

    Profile photo of xtrla8xtrla8
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    Jim,

    You do have it wrong, the deffered establishement fee only kicks in if the loan is paid out in the first five years. For example if you pay out the loan in the first year the deffered establishment fee is 2% if you pay it out in yeaar 5 it’s 1.2%, after 5 years it no longer applies.
    A deffered establishment fee is fairly common, particularly from mortgage managers like Tonto. As in anything beaware of what you’re signing and how a clause like a deffered establishment fee might affect your plans.

    Steve

    I’ve got good news and bad news. 1st the good news “Your Success is in your hands!” Now the bad news “Your Sucess is in your hands!”

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    Thanks Steve, I thought it should be something like that, but it’s certainly not ovious in their info sheet. I had a loan with Tonto (via Qld State Home Loans) a while ago, and it had a $700 exit fee if I refinanced it within 3 years. I refinanced them after 3 years and one month, because I found them incredibly amateurish. Their internet access never seemed to agree with the written statement, and they couldn’t handle interest in advance without st***ing up all the maths. Their written statements were a real mess as well. Their initial establishment fee was $300 but they neglected to tell me that I had to pay for their solicitor as well, which was a further $600. Westpac charges me zero.

    I see that the 7.74% part of this Tonto loan is IO with no principal recuction allowed. The maximum amount of the 3.99% part is 50% of the 7.74% part, which means that the average interest rate (if you max out the 3.99% part) is 6.49%. The only way that this loan could be viable is for us to keep the 3.99% part maxed out for the duration of the loan, ie never to pay out the PPoR part. This would still be feasible, because it’s just a tad over inflation, but in my opinion this loan is borderline value compared to a normal combination. I’ll have to do a more accurate analysis, but I’m pretty sure the benefit wouldn’t be worth the risk of upsetting the ATO.

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