Buy an IP before restructuring loan - bad idea?

Having launched into my research for buying my first IP - I'm now keen to get in and purchase as soon as I'm sure of my choice. Except...I have only just engaged an MB and so I won't have confirmation of the refinancing at the point I would like to make an offer.

I'm reasonably comfortable with the risk as the equity in my PPOR is conservatively 600k vs expected spend of 350-400k on an IP, plus I can comfortably service the loan. I have plenty of spare funds in an offset account for the deposit, but this is non-deductible, which appears to be a big no-no:

Tax Tip 53: Paid Deposit with cash - how to fix big mistake before settlement

My accountant seemed to think it would be easy to sort this out later and it would be easily cleared up by the banks when it came to settlement, but this doesn't quite seem consistent with what I've read from Terry.

Any pointers about whether I'm OK to plough in with a cash deposit first, or whether it would be unwise to assume this is easily unwound once the new loan is approved?

As background, the refinanced loan will be as per Terry's ideal structure (1. Home loan + offset, 2. Deductible sub-loan for deposit + stamp duty, 3. IP loan)

 

If you pay a cash deposit you cant refinance that later.
Does you accountant have any idea about property taxes ? That guidance seems wrong.

 

Thanks Paul - I can't really vouch for the accountant as it was the first time I met him and my knowledge is too limited to be able to challenge this.

I just spoke to my MB who is colleagues with Peter_Tersteeg and although he hasn't had time to review my entire request, his suggestion was to contact my bank to immediately split the loan and redraw enough for the deposit, which would then be deductible as it is for investment purposes.

 

Thats right - Generally you would credit the loan with the offset, split it and draw the new loan. Thats the joy of using a good broker. They will set up the small details like that.

But it cant always be corrected later if you dont do that. In some cases if you have a existing redraw you could add the offset and redraw it (assuming the redraw is OK) - This would be a blended loan BUT that new portion is still deductible if its done properly (dont put the new funds into a offset or a savings account with other money !!)...Correct the loan splits soon afterwards. That works too.

 

Thanks for your help Paul - I'll be working with the MB to make sure the deposit is deductible up front. Sounds like it was bad advice to just pay cash and sort it out after the fact.

 

Its very logical really. If you pay for something you cannot later borrow to acquire it as you have already acquired it.

The solution is to borrow. if there is no time then paying down debt and redrawing is better than nothing. This may create a mixed purpose loan if you don't split, but this can be fixed later.

Another option may be to borrow from a 3rd party and then later refinance this loan.

 

Part IVA may apply to a scheme to obtain a tax benefit too

 

Thanks Paul@PFI and Terry_w for your advice. In the end I wasn't able to find anything that quickly anyway, the silver lining being that finance will now be lined up so I won't have any problems re-borrowing for the deposit.

Thanks also Terry for the information you have made available around loan structures and other tax considerations - very helpful to a beginner.

One other question if anyone has a view - there is a maximum amount I can borrow against my PPOR (to fund deposit + buying costs) which is considerably more than I will initially need to purchase this IP. I'm not sure when I will be going in for my next IP. So should I just borrow as much as I comfortably need for this purpose then refinance later, or borrow the max available so it's locked in now.

Is there much additional cost/risk in borrowing the max?

Cheers, Dan

 

Get it while you can is my philosophy.