$100k in equity

Hi all,

Just need a bit of advise.
Last year we released equity of $100k from our PPOR. This was done by creating Loan 2 (with an offset) against PPOR. We used approx. $60k from Loan 2 offset a/c and the rest is still sitting in the offset so we are paying interest only on the part of equity that we used.

Does this set up sound correct?

Also, the remaining equity is not enough to buy another IP. What else can we use this equity for w/o contaminating loans?

Hope my post is not too confusing.

 

What did you use the 60k for?

 

Deposit to buy IP1. Sorry I thought I included that in my post.

 

The best way is an equity release from your PPOR, this then creates a new loan with an offset account attached and you only pay interest on the money your spend from it. This new loan is used to finance purchase costs of the IP. You should also keep a buffer for rainy days for your IP and other issues. With only 40K you are limited on your next step, you may just have to wait until you have more equity in your PPOR or new IP. Another option is to manufacture some equity by renovating your IP and/or IP, but 40K is not going to get your too far.

 

Thanks Lawrence, that's exactly what we did. When you say buffer, can I consider left over $40k from equity release as buffer? Or its best to save up outside this left over equity?
I guess what I am trying to say is that I get confused as to what can this left over equity be used for apart from a deposit for next IP without contaminating loans?

Can I use it for renovating PPOR?
Can I use it to fund a overseas trip? I know the answer is NO to this.
Can I use it to invest in shares?

 

Correct as in tax law?

Not ideal
see
Tax Tip 1: Parking borrowed money in an offset account Tax Tip 1: Parking borrowed money in an offset account

 

Assuming the interest is currently deductible, if you use the extra money for anything other than for expenses on the same property the loan would be a mixed purpose loan.

You could use the money for whatever you like, including overseas trips.

Where you use the money for other investments or private expenses you could just apportion the interest.

 

That 40K you have been left can be spent how ever you like, the bank already approved the total figure, you just didn't spend it all on the IP. The last IP I purchased in 2016 I made sure after all costs I had about 30K left. I then used another 15k of this money to add a internal wardrobe and a few other items to the IP. I then kept the remaining 15K as my buffer, this is emergency money for vacancy periods, maintenance etc. I can't stress always keep a sensible buffer as you don't know what is around the corner and you don't want to be in a positon of borrowing money. Hope that answers your question.

 

I wasn't aware of this. I hope it would still be okay as the offset account has no other funds than the borrowed money (equity release). If am not wrong, the broker should have advised us of correct loan structure.

 

Brokers, generally, don't have a clue about the tax side of things.

 

Your broker may not be licensed to give tax advice.
Marg

 

From what I have seen that doesn't stop them!

 

To avoid any future issues, would it be best to split the equity release loan into 2 In case I want to use the remaining $40k for a different expense than IP1? Who is the best person to discuss this with? Accountant?

 

It could be, but the money has already been borrowed so potentially damage done.
I would suggest splitting the loan and repaying the 'unused' portion and then reborrowing again - just before use for investment..

The only people that could advise on this would be a tax agent or a tax lawyer.

 

thanks Terry