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Advice re debt recycling and security

Discussion in 'Property Finance' started by JamesP, 27th Oct, 2015.

  1. JamesP

    JamesP Well-Known Member

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    Melbourne
    Hey all, my parents have just bought their first IP and my father is looking to restructure his finance. He currently has his ppor recently revalued at 800k with a 90k mortgage remaining. Recently purchased their first IP last month for 507k (535k end costs inc stamp duty etc), the loan for that IP is 570k with 35k in it's own offset for renovations. buffers and so on. There's also 50k in savings in the ppor offset account. Salaries combined are 180k.

    He's finding it rather difficult on how structure the two properties. So far we've come up with

    PPOR 800k (90k mortgage remaining)
    IP 570k (around 105% LVR)
    (Offsets 85k saved/liquid cash 50k for ppor, 35k for IP)

    Our initial plan was to put the 35k in the IP's offset against the PPOR's mortgage, ala reduce the 90k mortgage to 55k. Then borrow it back via a 35k line of credit (that is now tax deductible). There's also their 50k in savings they could also utilize effectively only leaving a 5k PPOR mortgage, and borrowing back an 85k line of credit. But from what I understand the LOC is for investment purposes only, meaning they would have no accessible savings, and they definitely need some for lifestyle purposes.

    I'm not to sure what they want to do, whether it's leave say 20k savings, and use 30k savings along with the 35k in the IP offset, and essentially maximize their conversion of non-deductable to deductible income. Or just simply leave the 50k savings alone and only recycle a portion of their debt (the 35k in the IP offset). That's something they'll have to sort out, I'm mainly hoping to get a greater comprehension of this myself and explain it to them so they can make a more confident and informed decision.

    Further regarding security, unfortunately the IP is cross collateralized with his ppor (I advised strongly against this but he said had no choice). He doesn't want to put down a deposit (mainly/only to claim the full 100% in tax exemptions) and the banks wouldn't lend otherwise. Required a deposit I've heard it is infact possible to still borrow 100% (or over) without having to tie your ppor to it? Obviously the banks would prefer less risk and will negotiate what they can.

    Am I correct in understanding once converted into a LOC, the IP can be secured against that instead of the ppor? But I assume for this to work the LOC would have to be converted from liquid cash and not mortgage debt!

    Cheers
     
    Last edited: 27th Oct, 2015
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Of course he had a choice regarding cross coll - he just chose not to exercise it.

    He is living dangerously parking borrowed money in the offset.

    I would just keep the existing PPOR offset full of as much cash as they have - excluding the borrowed cash.

    Borrow to pay all investment expenses other than interest. Use the IP offset with borrowed funds for this.

    Optionally he could uncross by setting up a separate loan on the PPOR and using this to pay down the existing IP loan so its is 80% of the value of the property and then uncross.
     
    Perthguy and JamesP like this.
  3. JamesP

    JamesP Well-Known Member

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    Thank you Terry! I can't express how much an outside opinion helps. All 3 of us are essentially new/completely unskilled at investing. I'll run it by my father next time I see him, although he's a very opinionated person frustratingly!

    If you don't mind.. why would you say he's living dangerously? The concept of it never sat well with me either.. He was also explaining how he wanted to redraw additional money on the IP loan (extend the 570k) then use that on his mortgage. This was his direct response to me explaining the method I learned (converting liquid savings into essentially... a deductible line of credit). He took the redraw method as a better idea. Probably as he's converting debt and not liquid, I found it hard to completely follow what he meant.. something along the lines of increasing IP loan to decrease PPOR loan, without an independent LOC aka no liquid. But I've lost myself now!
     
    Last edited: 27th Oct, 2015
  4. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    He's been misinformed :(

    You can't draw funds out of an IP to pay off a PPOR, it doesn't make the loan deductible. Using a LoC is a much better way to recycle debt by using it for IP expenses then paying down his non-deductible debt with cash.

    It's also completely possible to not x-coll, and if he's thinking about retiring in the next few years I would fix that asap - you don't want to be at the mercy of the bank ever but particularly when retiring.
     
  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    see
    Tax Tip 1: Parking borrowed money in an offset account https://propertychat.com.au/communi...ing-borrowed-money-in-an-offset-account.1313/

    But it now sounds like he thinks he can borrow against the investment and pay off the private debt and claim the interest - he cannot and further he will be contaminating the investment loans

    see
    Tax Tip 3: Mixing Loans - Don’t do it https://propertychat.com.au/community/threads/tax-tip-3-mixing-loans-dont-do-it.1517/
     
  6. tobe

    tobe Well-Known Member

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    The purpose of the borrowings determines whether the interest is deductible. the purpose is to buy an investment property that produces rent? Deductible. The purpose is to borrow funds to pay maintenance, rates, costs etc to do with an investment property? deductible. The purpose is to borrow funds to pay out the mortgage on the PPOR? not deductible, because the PPOR doesn't produce an income.