A question about putting equity back into a loan and ensuring you are not mixing loans

Discussion in 'Accounting & Tax' started by Leilah, 9th Mar, 2022.

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  1. Leilah

    Leilah Well-Known Member

    Joined:
    14th Dec, 2016
    Posts:
    59
    Location:
    ACT
    Hi All

    I have a question and would really appreciate some advice please.

    Some time ago, our broker drew equity out of one of our investment properties and created a loan. Funds from the equity withdrawal were placed into an offset. We then used the funds to purchase another investment property. We have never placed any of our own cash into the offset.

    The banks are reverting our loans from interest only to principal and interest and thus the repayments are going to grow. We are exploring options. One of them might be to refinance back to an interest only loan.

    To increase the chances of having our refinance application accepted, we would need to reduce our debt. So, we were thinking of taking the excess funds sitting in the offset of investment property 2 loan and putting them back in the loan. I believe that this would reduce our debt and increase our lending capacity (would you agree with that proposition?).

    To highlight what I mean, consider the example below:

    $200,000 borrowed, sitting in offset.
    $100,000 of borrowed funds were then used to purchase an investment property.
    $100,000 currently sitting in offset.

    So, the $100,000 funds of equity drawn from investment property one, sitting in offset: can we put it back into that loan, and reduce the loan? And then continue to claim the outstanding loan on our investment property as a legitimate tax deduction, on the interest paid?

    I hope this makes sense.

    Leilah
     
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
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    Australia wide
    Brokers cannot do this. Do you mean you borrowed money?

    If you have borrowed and place the borrowed money in an offset account and partially used some of it you technically have a mixed loan. If you have a mixed loan you would need to split it before you could repay a portion of it otherwise a repayment would be reducing the deductible portion too.

    But the ATO may not be so strict about it and may consider the offset as being part of the loan itself. There is no ATO publication covering this issue that i know of, no private rulings even.

    You can apply for a private ruling to find out, or take a punt.