Forums / Getting Technical / Finance / Don't pollute my PPOR loan…

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  • Profile photo of SchnakeSchnake
    Participant
    @schnake
    Join Date: 2014
    Post Count: 11

    Hi All,

    I’m after some clarity with respect to a potential future IP loan.

    At the moment I have 1 PPOR and 2 IPs.

    PPOR has accessible equity via re-draw facility – access to $250K. I also have an offset account against the PPOR with $50K.

    IP’s have equity, but lets call it non accessible via redraw (re-structured loan to IO a few years ago). IP 1 has ~$400k, IP2 has $70K of equity.

    Hypothetically, I want to buy another IP. I can get part of the deposit and purchase costs from the offset account. But because its tax deductible, I don’t want to re-draw from the home loan. What is the best way to minimize the impact on my home loan and get funds for an 80% LVR purchase?

    Thanks in advance.

    Profile photo of Ethan TimorEthan Timor
    Participant
    @ethantimor
    Join Date: 2016
    Post Count: 282

    Good thinking wanting to minimise the PPOR debt, I reckon. It’s not tax deductible so overall it costs you more than IP debt.

    Why isn’t the equity in the IPs accebible? I would probably refinance at least one of the IPs, set them up with a redraw or offset facilities and gain access to the equity there. Simple 😊

    Hope this helps?

    Ethan Timor | Aligned Finance Pty Ltd
    http://www.alignedfinance.com.au/
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    Active Investor & Broker; Based in Northern NSW, servicing Australia wide; Author of '34 Proven Ways to Maximise Your Borrowing Power' (download free from our website)

    Profile photo of rhodesvrhodesv
    Participant
    @rhodesv
    Join Date: 2004
    Post Count: 6

    If you have enough equity you can borrow 105% (ie purchase price plus cost). I borrow 80% secured against against the new IP and a second loan for 25% secured against my PPOR. Over time as the IP has increased in value I have secured both loans against the IP. I pay IO on the IPs and as much as I can on the PPOR, well in excess of the P&I required payment. I also capitalise running costs, such as repairs, rates (but not interest) paying from a LOC and claim that interest and put the extra cash into my PPOR mortgage.

    Profile photo of SchnakeSchnake
    Participant
    @schnake
    Join Date: 2014
    Post Count: 11

    Thanks for the

    Good thinking wanting to minimise the PPOR debt, I reckon. It’s not tax deductible so overall it costs you more than IP debt.
    Why isn’t the equity in the IPs accebible? I would probably refinance at least one of the IPs, set them up with a redraw or offset facilities and gain access to the equity there. Simple 😊
    Hope this helps?

    I say not accessible, short of re-financing… I suppose what you have suggested is what I was thinking… but was interested in seeing if there was another way.

    If you have enough equity you can borrow 105% (ie purchase price plus cost). I borrow 80% secured against against the new IP and a second loan for 25% secured against my PPOR. Over time as the IP has increased in value I have secured both loans against the IP. I pay IO on the IPs and as much as I can on the PPOR, well in excess of the P&I required payment. I also capitalise running costs, such as repairs, rates (but not interest) paying from a LOC and claim that interest and put the extra cash into my PPOR mortgage.

    …and here is the other way I was looking. Thanks for this suggestion.

    So in short, would it be fair to say I should not be touching my accessible (via re-draw) equity in my home loan to pay a deposit?

    Profile photo of rhodesvrhodesv
    Participant
    @rhodesv
    Join Date: 2004
    Post Count: 6

    I wouldn’t use your redraw if there was another option. You need to maximise the tax deductible borrowings, and reduce the non tax deductible, and keep good documentation that the loans you are tax deducting interest on have only ever been used to buy IPs, to show the ATO if you ever get audited.
    The redraw could be used if you don’t have enough equity, but that’s not going to give you the biggest tax benefit. I am three years out from paying off my PPOR, (the non tax component at least) which will make all the fuss with setting up two new loans every time well worth it.

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

    the best way would be to borrow the deposit under a separate split secured by any property and then borrow the remaining 80% secured against the new purchase.

    Don’t use redraw

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

    Profile photo of SchnakeSchnake
    Participant
    @schnake
    Join Date: 2014
    Post Count: 11

    Thanks Terry et al. Makes complete sense… It seems the broker I have consulted is sending me up the wrong path by suggesting accessing PPOR equity via redraw for an IP purchase. (Or I am have misunderstood something… Despite you all having managed to explain it to me far more eloquently).

    • This reply was modified 2 years, 11 months ago by Profile photo of Schnake Schnake.
    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,173

    Brokers cannot provide tax advice – unless they are also tax agents or tax lawyers. but many of them do provide tax advice and get it wrong.

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

    So long as your lender allows it – split the existing PPOR into two components – portion 1 for PPOR use, Portion 2 to be used for the investment funds. Rough number example in an example where you would use 250k:

    Initial Loan:

    *400k loan facility, 150k loan remaining, 250k in redraw available

    New Setup:
    Loan Split 1 (ppor debt):150k facility, 150k owing – $0 redraw
    Loan SPlit 2 (ip deposit): 250k facility, 0 owing – $250k redraw available

    You can then draw from the split as needed for the deposit, whilst reducing your PPOR non deductible facility improving borrowing capacity. Likewise the IP leverage is maximised without requiring cash funds to be chipped in + a clear line is defined by what is personal vs investment debt.

    Corey Batt | Precision Funding
    http://www.precisionfunding.com.au
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    Investment Focused Finance Strategist - servicing Australia-wide

    Profile photo of SchnakeSchnake
    Participant
    @schnake
    Join Date: 2014
    Post Count: 11

    So long as your lender allows it – split the existing PPOR into two components – portion 1 for PPOR use, Portion 2 to be used for the investment funds. Rough number example in an example where you would use 250k:
    Initial Loan:
    *400k loan facility, 150k loan remaining, 250k in redraw available
    New Setup:Loan Split 1 (ppor debt):150k facility, 150k owing – $0 redrawLoan SPlit 2 (ip deposit): 250k facility, 0 owing – $250k redraw available
    You can then draw from the split as needed for the deposit, whilst reducing your PPOR non deductible facility improving borrowing capacity. Likewise the IP leverage is maximised without requiring cash funds to be chipped in + a clear line is defined by what is personal vs investment debt.

    Thanks Corey. This is different again (I think). So in other words; refinance PPOR and secure new tax deductible loan/split against PPOR? Without actually increasing the amount owing against PPOR because I’m not re-drawing. I know it’s technically not, but kind of like a off set account? Why not do this against existing an investment property loan?
    Also, does anyone know if the NAB offers this?

    Profile photo of rhodesvrhodesv
    Participant
    @rhodesv
    Join Date: 2004
    Post Count: 6

    I am mostly with the NAB. I use multiple mortgages against a single property no problem. The only issue I have is NAB always assumes cross securitisation, so I have to check them every time we refinance to keep the loans separate. I pay 3.8% variable on my PPOR, and 3.83% on the investments.

    Corey when you say split you simply mean multiple loans right?

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

    So long as your lender allows it – split the existing PPOR into two components – portion 1 for PPOR use, Portion 2 to be used for the investment funds. Rough number example in an example where you would use 250k:Initial Loan:*400k loan facility, 150k loan remaining, 250k in redraw availableNew Setup:Loan Split 1 (ppor debt):150k facility, 150k owing – $0 redrawLoan SPlit 2 (ip deposit): 250k facility, 0 owing – $250k redraw availableYou can then draw from the split as needed for the deposit, whilst reducing your PPOR non deductible facility improving borrowing capacity. Likewise the IP leverage is maximised without requiring cash funds to be chipped in + a clear line is defined by what is personal vs investment debt.

    Thanks Corey. This is different again (I think). So in other words; refinance PPOR and secure new tax deductible loan/split against PPOR? Without actually increasing the amount owing against PPOR because I’m not re-drawing. I know it’s technically not, but kind of like a off set account? Why not do this against existing an investment property loan?Also, does anyone know if the NAB offers this?

    What I’ve suggested is not a refinance at all – so there’s no assessment required, no discharge, estab of govt charges ($500+ in fees), and takes circa a week instead of up to a month for you to have the funds available. It’s just an amendment which splits an existing loan into two loans, which allows the second loan to be paid down and drawn from so a new purpose (investment) can be clearly shown.

    NAB can generally allow this all to be done via a tick and flick form (other lenders which can do this amongst others: CBA, STG, AMP, Choicelend etc).

    Rhodesv: That’s correct, a split is just another loan account. ‘Splitting’a loan is the process of having a loan split from 1 loan account into multiple.

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

    Investment Focused Finance Strategist - servicing Australia-wide

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