Forums / Getting Technical / Finance / First IP loan structure

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  • Profile photo of rickgm83rickgm83
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    @rickgm83
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    Hi people,

    I have one house at the moment with principle and interest loan. Its the place I'm living in.

    I have $50k useable equity which i was going to refinance into the loan and then rent the property out and change to interest only.

    With the $50k i want to purchase my second house to live in. (deposit, stamp duty, fees etc.)

    Now come tax time can i claim interest on the whole refinanced amount of the first property?

    I'm unsure if this is a good way to structure the loans without putting any money down. Your thoughts please..

    Profile photo of TheFinanceShopTheFinanceShop
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    How are you calculating 'equity'? i.e .what is the current loan amount and the value of the property?

    Secondly are you estimating the value or have you conducted a valuation?

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    Profile photo of rickgm83rickgm83
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    I've had a valuation done and a lender has calculated the equity.

    Valuation $315k

    Owe $218k

    Profile photo of TheFinanceShopTheFinanceShop
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    Thumbs up re the valuation – that answers a few important questions.

    Equity at 80% is actually $34k and equity at 90% lend is $65k (minus the LMI payable). 

    Now back to your question – if you are planning to live in the property you are purchasing then any loan amounts that you take out for that purchase will not be tax deductible. 

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    Profile photo of rickgm83rickgm83
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    So if the loan on the first property that will now be rented is $268k ($218k + $50k for purchase of second property)

    I can only claim interest paid calculated on $218k?

    Is there a better way to structure the loans? Use first house as security against the second (PPOR) and keep my original first loan at $218k?

    Profile photo of PLCPLC
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    @plc
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    Correct, interest can only be claimed against the $218K. The $50K will be non deductible debt.

    You need to make sure the two loans are separate so that you don't have a mixed purpose loan.

    Cheers

    Tom

    PLC | Phoenix Loan Consulting
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    Profile photo of TheFinanceShopTheFinanceShop
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    The purpose of the $50k in borrowed funds is used for the PPOR hence it is not tax deductible. So only the $218k is deductible. Speak to your broker or banker about the best structure but best to keep the properties standalone and set up the $50k as a separate facility so that the interest that you want to claim is not contaminated. 

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    Profile photo of rickgm83rickgm83
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    Ok thanks,

    This example was keeping both propertys/ loans seperate but might look into seperating the refinanced $50k aswell.

    The other option I was thinking is having the seperate loans for each house but using the first house as collateral on the second.

    Wouldn't this mean the first loan stays at $218k but it has a $50k collateral written against it?

    I'm not 100% sure on how it works and if this would be a better idea as I can see it would free up more income.

    Profile photo of TheFinanceShopTheFinanceShop
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    You can leave the properties unlinked and set up the separate loan facility without linking the 2 properties. What do you mean by free up more income?

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    Profile photo of Jamie MooreJamie Moore
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    Hi Rick

    Welcome aboard.

    You just need to keep things nice and simple.

    You need three loans set-up.

    Current property

    Loan 1: current loan (change to interest only – no point in paying down more principle)

    Loan 2: equity release for PPOR (this is used to cover the deposit/costs on next PPOR)

    New property

    Loan 3: remaining balance needed for new PPOR purchase

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
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    Profile photo of rickgm83rickgm83
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    Bit more clearer now, i think i was just trying to over complicate things.

    I would have a better tax advantage if i stayed in my current house as it has the lesser debt but i want to move unfortunately.

    I think how Jamie and the others have explained is the only option.

    Thanks guys.

    Profile photo of TheFinanceShopTheFinanceShop
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    Sometimes you cannot sacrifice the way of living for the sake of making a buck or 2.

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    Profile photo of adam.padam.p
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    Also in the same situation, have been reading posts, discussions and still something missing for me.

    Using the same figure but with the following existing structure:

    1.) Current PPOR: P&I, 100% offset, no redraw facility

    2.) Refinance PPOR. Using the same figure from rickgm83​, the extra $50K goes into 100% offset account.

    3.) Convert PPOR into IP (for this dicussion, loan type doesn't matter)

    4.) Buy new PPOR using money from offset account (where that extra $50K were deposited)

    Questions:

    a.) If there is delay from point 2.) to point 3.) above, is that $50K deductible? It was sitting in offset account. The point is, that $50K surplus is not used immediately to pay new PPOR.

    b.) There is no redraw facility but only offset account. Will this really make any different when refinancing PPOR, convert to IP and buy new PPOR immediately? Most of the discussions I read is because they have redraw facility but not offset account.

    c.) Assuming point a.) answer: $50K is deductible. How long to wait before converting PPOR into IP so that it's legally to claim that $50K as tax deductible?

     

    Profile photo of TerrywTerryw
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    Not sure why you are talking about redraw facility?

    Whether to took the $50,000 from the loan yesterday or 29 years ago it is still what that borrowed money is used for that counts. ie the $50k seems to be used for a private expense and will not be deudctible.

    Furthermore if you increased the loan or use redraw (maybe this is what you mean?) the result is the same. And you will end up with a mixed purpose loan which will make things less than ideal for future tax deductions

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    Profile photo of PLCPLC
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    Terry is correct Adam.

    It's about the purpose of the borrowed funds, and from your scenario, the $50K you borrowed on the first PPOR goes to purchase a new PPOR (personal use) via the offset account, which means no deductibility.

    Cheers

    Tom

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    Profile photo of adam.padam.p
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    Thanks for the comment. I now understand. 

    Basically there is no way to increase current loan and claim tax deductible on full new loan amount. The tax deductible part pretty much stuck with existing loan amount.

    Profile photo of Jamie MooreJamie Moore
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    adam.p wrote:
    Thanks for the comment. I now understand. 

    Basically there is no way to increase current loan and claim tax deductible on full new loan amount. The tax deductible part pretty much stuck with existing loan amount.

    Correct.

    For instance – you have a $500k PPOR and you've paid $400k off……loan is now down to $100k.

    You then decide to turn it into an IP.

    You can only claim interest on the $100k.

    If you increase this loan to purchase a new PPOR – those funds (the increase portion) won't be deductible because it's not an investment.

    If you increase the loan to purchase another IP – those funds will be deductible.

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
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    Profile photo of adam.padam.p
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    If for example: new PPOR loan approved: $300K. This is separate from current PPOR -> IP refinance.

    Assuming going for the same lender for:

    – Refinancing PPOR -> IP

    – New loan for new PPOR

    Which of the following the same lender will give?

    Scenario A:

    LOAN 1: PPOR to IP, IO, No Offset, Amount: $268K ($218K + $50K)

    LOAN 2: new PPOR, P&I, with Offset, Amount: $300K

    or

    Scenario B: (prefered scenario to split IP and PPOR loan)

    LOAN 1: PPOR to IP, IO, No Offset, Amount: $218K

    LOAN 2: new PPOR, P&I, with Offset, Amount: $350K ($300K + $50K)

    Profile photo of TerrywTerryw
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    Either could be done assuming equit and income.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
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    Profile photo of PLCPLC
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    Adam,

    You are correct to split IP and PPOR loans to make them separate. Doesn't mix borrowed funds with personal and investment.

    However it would more look like the following:

    Using Security A (PPOR > IP):

    Loan 1: IO, no offset, amount – $218K

    Loan 2: (separate split from the above): P&I, optional offset*, amount – $50K

    Using Security B (New PPOR):

    Loan 3: P&I, optional offset*, amount – $300K

    *offset can be linked to either account or both, but should be linked to at least one.

    Cheers

    Tom

    PLC | Phoenix Loan Consulting
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