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Viewing 13 posts - 1 through 13 (of 13 total)
  • Profile photo of ShanusShanus
    Participant
    @shanus
    Join Date: 2010
    Post Count: 3

    Hi all,

    The details:

    Purchased unit in March 2010 for $327k, and we are currently still living in it. Planning to move closer to Melbourne CBD and rent and converting our unit to IP. The current loan does not have an offset facility and we are paying P&I. I know that was wrong in hindsight but didn’t know any better back then.

    The current balance is $185k, however that includes $50k that is available to redraw. We are refinancing to a product with 100% offset and will be paying IO.

    The new loan is for $238k, and that $50k savings will now go into the offset account.

    Just want to make sure that I am doing this all correctly, and we are good to go when we do find a rental property and convert this to IP.

    Thanks

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 12,010

    Shanus wow my friend stop right there.

    Do that and you run the risk of contaminating the interest on the entire loan.

    Your 50K redraw has gone and you can’t refinance it back into the loan and claim the interest.

    I do hope your Broker / Banker hasn’t suggest such strategy as if they have i would be switching Broker tomorrow.

    All you can claim is the interest on the current loan balance of 185K.

    Is the property is your sole name or in joint names ? (reason i ask is you mentioned “we are still living in it”)

    If it is in joint names then there is an option but would need further information first.

    Cheers

    Yours in Finance

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
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    0-40 Properties in a decade with a unencumbered portfolio value in excess of $40M. Ask me for a copy of my API Interview.

    Profile photo of PLCPLC
    Participant
    @plc
    Join Date: 2012
    Post Count: 400

    Richard is right on this. The maximum you can claim on the interest is $185K. The $50K won’t be deductible.

    If you really want the $50K in funds, then it would need to be done as a separate split to make things clean.

    Cheers

    Tom

    PLC | Phoenix Loan Consulting
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    Melbourne based Mortgage Broker | Making Finance Simple

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 12,010

    As i say might be some options if the property is owned jointly.

    Cheers

    Yours in Finance

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
    Email Me | Phone Me

    0-40 Properties in a decade with a unencumbered portfolio value in excess of $40M. Ask me for a copy of my API Interview.

    Profile photo of ShanusShanus
    Participant
    @shanus
    Join Date: 2010
    Post Count: 3

    Yikes!

    Yeah it is in my wife and my name.

    So what do I do now? The refinance hasn’t happened yet, should I redraw that $50k and put it in my everyday bank account for now?

    • This reply was modified 5 years, 1 month ago by Profile photo of Shanus Shanus.
    Profile photo of PLCPLC
    Participant
    @plc
    Join Date: 2012
    Post Count: 400

    No, do not redraw the $50K whatever you do. As soon as you redraw it, you contaminate the loan at the current moment in time.

    There is the option of either you or your wife purchasing the other half of the property from the other (I think what Richard was referring to as an option). Doing this will allow you to increase the loan size and keep the deductibility while still having those extra funds available. As the property is in Victoria, there is no stamp duty payable transferring to a spouse, the only cost is the paperwork itself.

    If the above is not viable to you then the refinanced loan really needs to be structured correctly.

    Cheers

    Tom

    PLC | Phoenix Loan Consulting
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    Melbourne based Mortgage Broker | Making Finance Simple

    Profile photo of CatalystCatalyst
    Participant
    @catalyst
    Join Date: 2008
    Post Count: 1,404

    Yes, unfortunately, like most people, you are assuming the $50K is yours. It’s not. You paid it to the bank in extra payments and it now belongs to the bank. If you take it out you are reborrowing that $50K so you cannot claim it on the loan as deductable.

    Pity. Lots of people fall into this trap. That’s the difference between a redraw and an offset.

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,173

    Shanus, as a tax lawyer I can say you have done yourself a disservice here. Paying the loan down will mean you will lose deductions for potentially the next 30+ years costing you thousands!

    But all is not lost. if the property is in Victoria you may be able to sell your share to your spouse or vice versa which could be done without stamp duty or CGT and could allow you to claim much more interest if done correctly.

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

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of BennyBenny
    Moderator
    @benny
    Join Date: 2002
    Post Count: 1,366

    Since this scenario is a common one, I wanted to “bump” this subject back into view.

    Many banks talk to people of Redraw, and “Yes, no problems, you can just borrow the money back again if you need it!” In our ignorance, if we don’t check with others who KNOW, (like Richard, PLC, Terryw, or Catalyst above), then we really can create a rod for our own backs.

    And Catalyst’s comment is key:-

    “Pity. Lots of people fall into this trap. That’s the difference between a redraw and an offset.”

    If you own any IP’s, or are even thinking of buying them into the future (perhaps by turning your current PPOR into an Investment Property), then READ UP on these two NOW !!! You can thank us for it later :p

    Start by reading the whole thread above. Then go looking for all you can find on Offset Accounts, starting here – https://www.propertyinvesting.com/topic/4410491-the-big-picture-for-new-readers-especially/#post-4697973

    Benny

    Profile photo of Colin RiceColin Rice
    Participant
    @fms
    Join Date: 2011
    Post Count: 338

    Many banks talk to people of Redraw, and “Yes, no problems, you can just borrow the money back again if you need it!”

    I have had clients tell me that bank staff have told them that redraw and offset are the same thing. They clearly serve different purposes but if you have no understanding of tax law you may think otherwise!

    An option to consider is go interest only with a linked offset. Make interest only payments (from this same offset) and store the principal plus any savings in the offset account. Having salary’s and rent from IPs paid into the offset is beneficial in most cases as well as it will potentially offset non deductible debt.

    This way you preserve the principal loan amount at 100% of its original value, so if you do rent out in the future you get max deductions, yet still receive the same net benefits as if you where paying down the loan due to funds in linked offset.

    Its a great way to “hedge your bets” because if you never rent it out then you have bulk cash in the offset (you become the bank so to speak) with the ultimate aim of having the same amount in offset as the original principal amount.

    Disclaimer: the above only works well if you are disciplined with finances and dont just spend money because its in the bank. Also, new responsible lending guidelines need to be observed so a P&I on a PPOR loan may be applicable in some circumstances as well.

    • This reply was modified 3 years, 2 months ago by Profile photo of Colin Rice Colin Rice.

    Colin Rice | CDR Finance
    http://cdrfinance.com.au/
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    Perth Based Mortgage Broker - Investment Property Finance Specialist | E: [email protected]

    Profile photo of BennyBenny
    Moderator
    @benny
    Join Date: 2002
    Post Count: 1,366

    Hi Colin,

    I have had clients tell me that bank staff have told them that redraw and offset are the same thing.

    That is a HUGE danger then….. How do we reach the masses to warn of things like this?

    I have dealt with many Bank people over the years – the major problem is that the good ones are moved out and upward, and “juniors” are shifted in to take over as the new advisers. Hence the problem – as these new ones don’t know what they don’t know – this problem is quite common in the early stages of any business, including investing.

    The biggest problem therefore is that the average Homebuyer DOESN’T KNOW that their Banker “doesn’t know” either !!! Aarrgghhhh !!

    Benny, tearing hair out…..

    Profile photo of Colin RiceColin Rice
    Participant
    @fms
    Join Date: 2011
    Post Count: 338

    @benny – yes indeed and I would estimate 90%+ of investment loans would be deemed “contaminated and not fit for purpose” if thoroughly investigated but they dont drill that deep. I suspect the cost v reward may not be there to do so (yet) as I have never heard of it during an audit from ATO.

    I have instructed banks to place funds in a dedicated offset or to be made available as redraw in the mortgage account but these instructions fail to make it tot the button pusher in India so just gets whacked in the personal offset / transaction account therefore mixing personal with investment lending.

    Colin Rice | CDR Finance
    http://cdrfinance.com.au/
    Email Me | Phone Me

    Perth Based Mortgage Broker - Investment Property Finance Specialist | E: [email protected]

    Profile photo of Corey BattCorey Batt
    Participant
    @cjaysa
    Join Date: 2012
    Post Count: 1,010

    It does happen a lot unfortunately Colin.

    There was also a certain big 4 bank who encouraged when they brought out their transaction offset account, to release all of their redraw into their offset account (as it was the same but even better!). That would have caused a lot of potential tax problems for a LOT of people.

    Corey Batt | Precision Funding
    http://www.precisionfunding.com.au
    Email Me | Phone Me

    Investment Focused Finance Strategist - servicing Australia-wide

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