Best method to turn PPOR with redraw into IP?

Hi all,

For a few weeks I've been trying to educate myself by reading this forum almost everyday (thank you all for the excellent information) as well as reading other sources, listening to podcasts and talking anyone and everyone I know that has property experience. Still lots of research and learning to do before I make any moves and before I wanted to start asking any questions on here. But I would like to get my head around this first. I know this issue has been covered a lot and I have read those threads multiple times, but would greatly appreciate some clarification on some things if possible. Hopefully this thread can be a summary for future people in my situation too.

The title sums up my question in a nutshell. But in detail:

My wife and I are looking at converting our PPOR into IP and buying a new PPOR.
Current situation with PPOR:
House Value: 900k
Redraw available: 250k
Remaining amount owing on mortgage: 200k

The most clear thing is that we should immediately stopping paying excess funds into the mortgage/redraw and switch to IO with an offset. I also understand that even if we redraw the 250k for a new PPOR the interest charged on that amount will still not be tax deductible on the now IP (current PPOR).

We have also used the redraw many times over the past 5 years, as we usually park all of our income in it and use it to pay off credit cards each month. Is this what constitutes a contaminated or mixed purpose loan? From what I can gather, this means the current amount (200k) owing on the mortgage (or at least most of it) will also not be tax deductible. Is this correct?

I’ll assume redrawing the money, moving it to another bank, refinancing to IO with offset with a third bank and then depositing the redrawn funds from the 2nd bank into the offset with the 3rd bank (or some variation of this) wouldn’t work?

From what I've read we may be better off leaving the redraw where it is and using these funds for maintenance, council rates etc on the property, which would then make that money tax deductible. Is this correct? Long term, we could also use the redraw for another IP to make it tax deductible again.

Instead, should we use the equity we have in our current property to purchase the new PPOR? And obviously set this up with an offset in case we find ourselves in a similar situation again.

I have also read about splitting the loan and that this could help my situation. But I am very confused by this and how it works. Could anyone explain please? Or let me know if there are any other better options.

Any help with any of my above questions would be greatly appreciated. But I’m also aware I would be best off paying for personal, professional advice. Although the question is then who should I see, a tax accountant, FP, QIPA, mortgage broker or someone else?

 

Yes you are correct on the tax side of things. you would need to work out what, if any, portion of the existing loan relates to the purchase or improvement of the property purchased. Once this is worked out you can then refinance that loan into 2 or more loans and then potentially deduct one of them.

Only registered tax agents or solicitors can advise on tax. Once you know the relevant amounts you could then get a broker to help with splitting the loan.

 

Thanks for the quick reply @Terry_w

By "work out what, if any, portion of the existing loan relates to the purchase or improvement of the property purchased." I think you mean, if we say redrew $1000 a month to pay for a credit card each month for a year, then $12k of the loan woud not be considered to be for the puorpose of the property and therefore could not be tax deductible. Is this correct?

Then with the 200k owing I would be able to split into 188k and 12k, with the 188k deductible?

Once I posted I realised it was a silly question asking which professional to see and that I already knew the answer. Thanks anyway.

 

It’s not that simple because in addition to redrawing you would have made deposits. See my tip about unmixing a mixed loan

 

Thanks Terry. I will have a read of them. Your feedback and tips are much appreciated.

 

Thanks Rolf. I'm currently recieving Terryw's debt recycling email series, so will have a read through that and more info. I think I'll definitely need to get professional help when I'm closer to being ready to make a purchase.