2.5% Home Loans

Soooo if I go buy a 600k PPOR and a 200k IP does it still work?

 

Joke question, but brings up a great point.

The product has a specific calculator which balances the owner occupier debt vs the investment debt and gives you an applicable discount. This is why the advertising needs to be careful - as it's a discount up to 3%. Obviously if there's a ratio where the majority is owner occupier debt, you won't achieve the full discount. Likewise if you have a very small owner occupier debt, they will in turn reduce the investment portion down as there's specific rules to ensure they're not double dipping.

 

Maybe 50% joke question , but answered nonetheless. So optimally the 600k PPOR would have a 200k cash deposit and the IP would be upgraded to 400k stock. Allowing an even 400k each split. Now part 2 question. Is the PPOR on a rising rate of interest as you pay it down because it's P&I and is the IP IO?

 

Actually it's quite the opposite, as the PPOR loan erodes the rate can be reviewed lower, to a maximum of the 3% discount of course.

The IP MUST be IO.

The thing I like about the ATO Product Ruling is that it's mandatory for the loans *not* to be cross collateralised, and the rapid reduction in PPOR debt required. Essentially even though you're getting a discounted rate, the P&I repayment will be based on the upper amount, accelerating the free-up of equity which can then be split off as a seperate loan account tied to the PPOR.

 

But what does the product ruling say?

 

PR 2015/2 Income tax: tax consequences for a borrower being charged a discounted home loan interest rate calculated under Loan Reducer
https://www.ato.gov.au/law/view/document?docid="PRR/PR20152/NAT/ATO/00001"

This may be the product ruling, or is one for a similar product.

 

That's the one, was just digging it up to email to you.

 

I've read it and it looks legit. Very surprised the ATO allowed this, especially with their reasoning.

Looks like a good product, but make sure you get your own tax advice before proceeding.

 

I have access to a lender that charges 0% interest. Its called paying off your home loan..
I have this rate at the moment!! lol

 

In my view the PR doesn't cover what was originally put forward. The IR on investment loans cannot be modified at all due to any operation of the product. It is the entire basis of the PR that the rate not be impacted:

Any fudging of interest rates on the investment loan would potentially (imo 100%) result in the PR not applying, as the finding of the lack of a tax benefit would be reversed.

 

I've been trying to get my head around this as well. In terms of how it all works for the customer, the way I'm reading it is that a $1m portfolio with a 5.5% investment rate and a 4.9% required rate of return for the lender, would see the following outcomes:

80% investment, 20% personal:

Total interest @ 4.9% = $49,000
Investment interest @ 5.5% = $44,000
Personal interest = $49,000 - $44,000 = $5,000
Personal interest rate = 2.5%

40% investment, 60% personal:

Total interest @ 4.9% = $49,000
Investment interest @ 5.5% = $22,000
Personal interest = $49,000 - $22,000 = $27,000
Personal interest rate = 4.5%

So the total interest expense remains the same regardless, but the higher the investment proportion, the higher the tax-deductible proportion than the borrower would otherwise achieve under a regular discounted arrangement (which would appear to be contrary to Part IVA).

The lender can set the interest rate for the investment portion of the loan portfolio up to a maximum of 3.5% above the RBA cash rate (per 19(g) of the ruling). Currently this would be 5.5%. As a comparison, CBA's SVR is currently 5.45%, so the investment loan rate (or margin above the RBA cash rate) that the lender is offering under the scheme is comparable to prevailing rates in the market.

So given the rate is in line with existing commercial offerings, this must be where the ATO is coming from when they say "The amount of deductible interest incurred on the investment loan of the borrower is not expected to be greater than the amount of deductible interest that would have been allowable to the borrower under the investment loan but for entering into the scheme described in paragraphs 16 to 20 of this Product Ruling. A tax benefit should therefore not arise to the borrower in relation to a year of income in connection with this scheme."

In reality however, customers rarely pay the SVR and instead usually obtain a discount (currently 0.5% in CBA's case, for example). So it's interesting that the ATO is comfortable with the lender diverting this discount entirely to the private portion of the loan.

 

Only saw this leaflet from the Expo now so shame didn't get to chat with them

 

?? Huh?? I don't get it?

 

Anyway, I heard about this a few months ago and believe its all legit. Pity my partner won't let me do anything with the PPOR... if it was all just mine I'd go for it.

 

No, but I know about Yza , what she says and what she does are not the same thing, be wary and do your research. Any body who would be associated with her would have questionable integrity. I am surprised she is not in jail, she is probably disqualified from being a mortgage broker.

 

Doesn't mean the product isn't legit, I know Corey has it on his panel for example

 

http://www.theadviser.com.au/breaki...e_Adviser_Bulletin02_11_2015&utm_medium=email

 

Hi what I meant was if you have no home loan who cares about rate.

 

Looks interesting. If workable/legit will keep this as an option for refinancing my PPOR next year. Is there an offset facility available?

 

There is an offset facility available but repayments must be principle and interest on the o/o loan and there are max loan amounts generally of about $750,000 that apply.