Forums / Getting Technical / Finance / Should I reduce my loan and re-take money out

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  • Profile photo of StevenSteven
    Participant
    @steven1982
    Join Date: 2017
    Post Count: 143

    Hi all

    One of the options I was presented with the amount of savings I have is to pay off my PPOR loan and re-take the money out as a separate loan or maybe a line of credit.

    For example,

    Let’s say I have a PPOR with 800K loan, and I have hypercritically speaking, 100K sitting in a separate offset account to offset the interest, so while I am on an 800K loan, but I am being charged interest based on 700K due to 100K setting in offset account.

    So there are now 2 options. Suppose let’s say I found a 500K property that I want to invest in, and we are looking at 100K deposit (20%) and 400K loan (80%).

    Option 1: Keep the 100K as cash in my PPOR offset account, and when the time comes, take the 100K out of my offset account and use that as deposit. In this case, my PPOR interest reverts back to 800K, and I pay interest based on 400K for investment. None of 800K in my PPOR is tax deductible and 400K of the investment is.

    Option 2: pay off that 100K, so my PPOR loan becomes 700K. Then re-loan the 100K out as a separate loan (or a line of credit), and park the 100K there. This way, the interest generated by that 100K is 0 unless I actually use that 100K, and when I use up that 100K to pay the deposit of the 500K property, the interest generated by that 100K now becomes tax deducible against the investment property.

    However, One thing to ask the experts:

    if I pay off the 100K and re-take that out as a separate loan, would I be charged higher interest compare to the interest rate of my PPOR?

    For example, currently my PPOR is on P&I rather than IO and the rate is 3.9%, so if I pay off the 100K and re-take it out as a separate loan for investment purpose, would the rate be higher than 3.9%?

    Cheers
    Steven

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,016

    The interest rate will depend on how you do it. You could get owner occupied rates if you are careful.
    But make sure you split the loan before you deposit the money.

    And don’t forget option 3
    Keep the cash where it is and just borrow against the main residence for a further loan.

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

    Lawyer, Mortgage Broker and Tax Advisor (Operating Remotely) www.terryw.com.au

    Profile photo of StevenSteven
    Participant
    @steven1982
    Join Date: 2017
    Post Count: 143

    Thanks Terry.

    Between Option 1 and 2, would Option 2 be normally preferred (unless interest rate for the “second loan” is much higher)?

    Option 3 would be good, but doesn’t look like I am in a good position to do so until after I get a pay raise.

    Cheers
    Steven

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 11,972

    Hi Steven

    Option 2 is certainly doable and interest rate would usually be higher than the interest rate on the first split if you are going IO on split 2.

    In saying that you may find you can improve the rate on split 1 be refinancing to compensate for it.

    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 TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,016

    Thanks Terry.
    Between Option 1 and 2, would Option 2 be normally preferred (unless interest rate for the “second loan” is much higher)?
    Option 3 would be good, but doesn’t look like I am in a good position to do so until after I get a pay raise.
    Cheers
    Steven

    Yes option 2 would be preferred as it will increase tax deductions – assuming ownership is the same.

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

    Lawyer, Mortgage Broker and Tax Advisor (Operating Remotely) www.terryw.com.au

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

    Option 2 is ideal – and with the right lender this can be done without an application/interest rate change.

    Best to speak with an investment focused broker who can weigh up the options – if your current lender isn’t ideal you may otherwise be able to use the time to get the setup restructured to save on both the owner occupied and future equity release portions – especially with the total amount of lending available.

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

    Investment Focused Finance Strategist - servicing Australia-wide

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