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Advice on changing loan set up

Discussion in 'Property Finance' started by KJB, 8th Jan, 2016.

  1. KJB

    KJB Well-Known Member

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    Hi,

    Currently I have 2 IP's, (neg. geared by $300ish p/m) I have them on I/O loans with all rents and interest payments going through my investment LOC. the Loc (secured against IP#1)

    The plan was to do this until EOFY while I paid down personal debts (I live/rent abroad so no PPOR debt) however by mid February I should have paid off my 2x credit cards and 1 personal loan - yay me :) so now I'm looking to reduce other (deductible debt)

    I was going to follow Terry's ideal loan structure (change all rents and IP interest to go in/out of offset that is offsetting IP#1, plus have all pays, tax credits etc. payed into this) additionally I was going to change repayments on IP#1 to P&I

    Notes on IP#1 and me

    -Rent nearly covers all interest so any extra comes off principle
    -I earn a good salary and was going to divert all xtra monies (apart from the $300 or so to cover IP#2) to paying down principle as no other debt left
    -LOC is secured against IP#1 so I can just increase the limit as I pay down the principle
    -once I have suffiecient funds I will buy IP#3

    I was going to talk to my accountant on Monday regarding this, just wanted the collective Wisdom of this forum in the meantime. That and I have basically no one to talk about investing with apart from people here lol


    Is this a sensible approach

    &

    Just to re-confirm to - is this all kosher tax wise?

    Appriciate your thoughts :)
     
  2. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    If you're going to buy a ppor at some point, I'd be saving into an offset rather than paying down principle.

    Much better outcome tax wise.
     
  3. Gockie

    Gockie Be the change you want to see in the world Premium Member

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    Offset would be the go for me too. Because you'll lose tax deductibility if you start paying the principal.
    You can always pull your money out from the offset account for any situation too which is very handy if an emergency comes up.
     
  4. Steven Ryan

    Steven Ryan Mortgage Broker Business Plus Member

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    Well done on being close to extinguishing the nasty personal debt. Good move.

    As the wise ladies above have suggested, it probably makes a lot more sense to retain I/O repayments and ferret away surplus cash into offset accounts (unless you have zero self control). It's more flexible, potentially more favourable tax wise, has the same financial effect as paying the same amount off the principal and importantly, that pile of cash can work as your safety net/buffer as well as building your deposit for IP3 and beyond.

    I'm willing to bet you'll find this response to be the consensus, too :)
     
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  5. KJB

    KJB Well-Known Member

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    very nasty debt indeed 30 minutes of applications to get into, approx. 4+ years to get out of!!

    Thanks guys that does seem the best option

    Many Thanks

    :D
     
  6. pippen

    pippen Well-Known Member

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    Is it possible for a person who has a ppor with p+I with no offset to renegotiate or change the loan term and use the redraw facility and negotiate a offset account so they can place funds in the offset??

    A work mate has organised a work transfer and will have to find a new ppor and would like to take funds out and maybe make old ppor an IP or I think he would have to sell and place the funds into the new non deductible ppor?!!

    Do banks have the ability to renegotiate these loan terms?
     
  7. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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    Yes it is possible, but would cause a tax mess.
     
  8. pippen

    pippen Well-Known Member

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    Is it possible to expand on this point a little please?!
     
  9. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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    When money is taken from redraw it is new borrowings. This would mean the loan is now mixed purpose with some of it relating to the property and the redrawn amount not. It would not result in any increased tax deductions and cause a mixed loan to result.

    I've written several tax tips which cover these issues, such as:
    .
    Tax Tip 19: Avoid Using Redraw on an Owner Occupied Loan https://propertychat.com.au/community/threads/tax-tip-19-avoid-using-redraw-on-an-owner-occupied-loan.2898/

    Tax Tip 67: Using Redraw Facilities on loans and Tax Issues https://propertychat.com.au/communi...draw-facilities-on-loans-and-tax-issues.5108/

    Tax Tip 77: Redrawing Extra Repayments to Increase Deductions? https://propertychat.com.au/communi...extra-repayments-to-increase-deductions.5760/
     
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  10. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    Yes this is possible, and it's also possible to do it in a way that does not create a tax mess. Maybe direct him to this site - there's lots of knowledgeable brokers here who can make sure it's set up correctly.

    I would not assume that a broker down the road would necessarily get this right. There's plenty of wrong ways to do it :)
     
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