All Topics / Finance / Use of equity in PPOR to place a deposit for IP

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  • Profile photo of kat13kat13
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    @kat13
    Join Date: 2012
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    I get the general idea that this is what some people do, however I cam across someone today who says not to do this ever.  Is this really a problem, has anyone got any stories/advise on the pros and cons of this?

    Profile photo of Jamie MooreJamie Moore
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    It's the most common approach I come across – particularly for first time investors.

    Sometimes you get clients who don't feel comfortable with accessing equity in an unencumbered PPOR – and  I can understand why (there's an emotional factor at play – they have spent years paying down the debt).  However, it's often not a good financial decision because they usually end up using cash for the deposit/costs on their investment which isn't deductible. It can also place them in greater financial risk because they might end up using the majority of their savings and are left with no contingency fund.

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
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    Profile photo of BMWBMW
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    @bmw
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    better to do this than use your own cash IMO as the whole IP loan(s) is tax deductable even though some of it is secured against your PPOR. just don't cross your IP and PPOR loans. best see a good broker

    Profile photo of kat13kat13
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    @kat13
    Join Date: 2012
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    Great, so at least we are on the right track..  We have pulled out our equity in cash, so just have to find that awesome IP now.

    Profile photo of DerekDerek
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    @derek
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    kat13 wrote:
    I get the general idea that this is what some people do, however I cam across someone today who says not to do this ever.  Is this really a problem, has anyone got any stories/advise on the pros and cons of this?

    Be interested to know this 'someone's' investing experience and knowledge.

    I assume their solution was to save cash for a deposit – is this correct?

    Profile photo of Jacqui MiddletonJacqui Middleton
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    @jacm
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    It takes such a long time to save cash deposits.  If you have a pile of cash great.  Stash it for just in case.  If you create a couple of giant spreadsheets that compare how much out of pocket you are on a higher LVR loan versus a lower LVF loan the results are astounding.  Borrow as much as you can and keep your cash for the just in case scenarios.  As you will put the rents up each year, the tenants can repay the loan "in the future".

    Jacqui Middleton | Middleton Buyers Advocates
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    Profile photo of PLCPLC
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    @plc
    Join Date: 2012
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    Kat, you need to be wary of where you "park" your cash while waiting to buy the IP, as it may have an effect on your deductibilty.

    Cheers

    Tom

    PLC | Phoenix Loan Consulting
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    Profile photo of kat13kat13
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    @kat13
    Join Date: 2012
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    PLC – Its sitting in my offset account at the moment, linked to my PPOR loan – hoping that's the best option.

    Profile photo of TerrywTerryw
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    kat13 wrote:
    PLC – Its sitting in my offset account at the moment, linked to my PPOR loan – hoping that's the best option.

    Oh no!

    You borrowed money and put it in a savings account? The interest will no longer be deductible and you have created a mixed purpose loan.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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    Profile photo of kat13kat13
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    @kat13
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    We pulled out the equity on our house – 90K which got paid into cash into our offset account until we were ready to get something…but we are also using 30K for personal improvements which is maybe why it was done that way????

    We are currently waiting on preapproval for the rest (not sure how much we can get – but broker indicated up to 400K all up).  

    What should we be doing?  What sort of account do I need to stash it in?

    Profile photo of TerrywTerryw
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    @terryw
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    Sorry, don't mean to alarm you but Its too late now. You have set it up all incorrectly and The ATO can deny the deductions. See the case Domjan.

    You can't borrow money and put it into a savings account – well you can but the interest will not be deductible because it is not investing. Mixing it with cash makes it even worse as you can't trace the borrowed funds.

    It is like taking some milk and storing it in a class of orange juice and then saying you will take the milk out later to make a cup of tea.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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    Profile photo of kat13kat13
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    @kat13
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    I wasn't that alarmed because we really didn't even think about claiming the interest as we are using part of that for personal use.  A portion of that was only going to be used as a deposit towards the investment.

    So for future investments, what should I be doing?  Is it best to go for the whole loan altogether where equity can contribute but I don't actually pull that out as cash? (hope I am making sense)

    Profile photo of TerrywTerryw
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    @terryw
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    You should only borrow to directly invest.

    Best to use a LOC or put the funds back into the loan and then use redraw. Never park funds into a savings account. Don't even do this for 1 min so as to write a cheque.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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    Profile photo of kat13kat13
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    @kat13
    Join Date: 2012
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    Aaahh ok then, time to rethink a few things before I go ahead with the rest of this.

    Profile photo of PLCPLC
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    @plc
    Join Date: 2012
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    Hi Kat,

    As Terry mentioned, if using for investment purposes, it would be best to create a separate Line of Credit or Interest Only loan and utilise it at the time it is needed. To claim interest on investment borrowings, the ATO likes to preferably see a direct link between the borrowed funds and the item it is being used for.

    Your broker should help you structure this correctly.

    Cheers

    Tom

    PLC | Phoenix Loan Consulting
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    Profile photo of jmsracheljmsrachel
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    kat13 wrote:
    We pulled out the equity on our house – 90K which got paid into cash into our offset account until we were ready to get something…but we are also using 30K for personal improvements which is maybe why it was done that way????

    We are currently waiting on preapproval for the rest (not sure how much we can get – but broker indicated up to 400K all up).  

    What should we be doing?  What sort of account do I need to stash it in?

    Can I be a pain and ask where should Kat put the money once the equity is pulled out as cash. Now that I have learnt not to put it in the offset, where do you park it? Or do you wait till you’ve signed contracts then organise to pull it out?

    Profile photo of TerrywTerryw
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    @terryw
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    jmsrachel wrote:
    kat13 wrote:
    We pulled out the equity on our house – 90K which got paid into cash into our offset account until we were ready to get something…but we are also using 30K for personal improvements which is maybe why it was done that way????

    We are currently waiting on preapproval for the rest (not sure how much we can get – but broker indicated up to 400K all up).  

    What should we be doing?  What sort of account do I need to stash it in?

    Can I be a pain and ask where should Kat put the money once the equity is pulled out as cash. Now that I have learnt not to put it in the offset, where do you park it? Or do you wait till you've signed contracts then organise to pull it out?

    You have to be careful to pay the money straight from the loan to the investment without passing through any savings account. So best method is to use a LOC or increase the loan without taking the money and then use a bank cheque to pay the deposit etc.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://structuring.com.au/
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    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://Terryw.com.au/

    Profile photo of Richard TaylorRichard Taylor
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    @qlds007
    Join Date: 2003
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    Yes Kat not wanting to knock a fellow broker but doesn't sound like your Broker is too au fait with investment loan structuring.

    Sticking the funds in your offset account will be a nice red flag to the ATO.

    Cheers

    Yours in Finance

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
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    Profile photo of jhoganjhogan
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    @jhogan
    Join Date: 2012
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    Hi, I've just read this post and have done a similar thing on our first IP – I have a loan against out PPOR for the 20% deposit and we were asked where we wanted it deposited as there is a months delay on settlement. we put it in our PPOR offset account and will be paying the settlement on the IP this week.

      Have i mucked things up by doing this?  and if so can I remedy it in any way – in my mind it was just parking the money somewhere until I could hand it over.

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
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    jhogan. Too late I'm afraid.

    Did you have any other funds in the account the borrowed money went into? Domjan's case is the authority that the interest won't be deductible in this case…

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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