Best way to fix up our mistake please

Hi Everyone,

First post, thanks for letting me join the forum

Can I please tap into your collective knowledge and experience and ask what you would do in our situation?

We are fortunate enough to almost own an IP: value $900k ish, loan $150k. I made a mistake with this loan and made additional payments onto that loan when we sold our PPOR. It was a loan without an offset account and I learnt the hard way that paying money onto a loan and then redrawing it is different to putting money into an offset account and then withdrawing it. So we now owe only $150k and the interest on that loan balance is deductible (if I’d been smarter the deductible balance would be about $400k).

We own our PPOR and are looking at what’s the best next step. We have saved some funds over the last few years and have set up a Family Trust.

We would like to make amends for my mistake with our IP mortgage situation and we have a couple of ideas to move forward from here. Yes, we do have an accountant and a financial adviser but our FP is probably more focussed on shares due to the trailing commission that he earns which is fair enough, hence asking the question here.

Could we:

1. Refinance our IP, value $900k, borrow 80% of the current value. $150k of that would be the current loan and then $570k would sit in an offset account. Then buy another IP for say $500k, get the 20% deposit + buying costs from the offset account and get another mortgage for 80% of the new IP. The reason for doing this would be to have another IP and also partially fix up my mistake by now having about $300k of deductible loans secured by our first IP. Please point out the flaws in my logic!!

2. Refinance the IP as above but use the borrowed funds to buy shares? Could we use these funds for the trust to buy shares? Otherwise buy shares outside of the trust? I guess buying outside of the trust has different tax implications with deductibility of interest and also interest paid on income/gains? Sorry I know it’s complicated and we would run all this by our accountant but we’d like to have a rough idea to present the accountant with first.

Either way we could use some funds that are “trapped” in our current IP mortgage (not trapped but one of the above plans could make those funds accessible and tax deductible I believe?).

I assume that if Labor gets in they will stop negative gearing but allow it to continue on a grandfather clause for any existing IPs at the time the legislation is passed? Does anyone have any thoughts about this please? It’s another reason we are considering buying another IP now before the rules change.

If anyone has a minute to point out my errors and let us know their thoughts we’d be very grateful!

 

Why do you think that was a mistake?

You could borrow to invest - either in shares or property. If you want to buy something in the trust you would either have to borrow and onlend to the trustee or let the trustee borrow using your property as security.

Financial planners do not receive trail commissions from shares - banned for about 10 years now.

 

Hi Terry,

Thanks for your reply. I consider it to be a mistake as it altered our finances at the time significantly. Initially I was more concerned but as time passed the benefit has been having an IP that is positively geared and we are trying to work out the best next step given the current situation.

Sorry, trailing commission must be the wrong terminology but he is paid a percentage of the funds invested.

Thanks again.

 

Paying down debt is never a mistake.

 

the planner probably wants to charge a % of funds under management. Simply refuse to pay on this basis - tell him you would pay an hourly rate.