Can't see why I shouldn't go with Redraw Facility

Hi everyone,

My first post on this forum after a long time of lurking. Please go easy on me.

I am about to buy my first PPOR, a 3br in a suburban area of Victoria. I currently have the pre-approval from NAB for a base variable home loan. The interest rate for this product is 3.69%. With this product, there is no offset account but a redraw facility.

I have a lump sum of money (about 40% of my loan amount) that I am planning to leave in the redraw account before I settle in the new home and take out this sum to buy other IPs. In order to buy these new IPs, I would of course go with an offset account loan.

If I were to go with a choice package that features an offset account, the interest rate would then be 4.29% (0.6% increase). My mortgage broker has also advised that because the pre-app is based on the product selection of base variable home loan, If I were to change my mind now, I would have to start the progress of home loan application from scratch.

After reading on the very useful and detailed posts on this forum and various others, I understand the usefulness of offset accounts where loans are for investment purposes whereas the interests are tax-deducible. Offset accounts provide the flexibility where investors can turn their PPOR into IP anytime, still maximising their tax-deducible interests without the risk of loan contamination. However it offers no benefit for people that don't plan to rent out their PPOR before they resell it.

Please correct me if I misunderstand this in anyway. If the following is my future plan, shouldn't I just go with a redraw facility only home loan?

1. I am planning to stay in this PPOR, before selling for a new future more suitable PPOR.
2. I am not going to rent this house out
3. I am going to use the redraw facility to get new IPs.

From the points above (1 and 2), my home loan will be for the solely for residential purpose. Therefore, the faster I pay this off the better for me because it would mean I'm decreasing my non tax-deducible.

Is my current understanding correct i.e I should just go with the redraw account? This is assuming that I will stick with point 1,2 and 3.

Thank you for your time.

 

You will still need to split off your loans so that the loan is not contaminated once you buy the IP's - check the costs of doing this as things like that can be costly on a basic loan.

It's also super important that you don't redraw for anything at all other than INV purpose. No personal use at all. Get a broker who knows what they're doing to set this up for you or you'll end up with a horrific mess.

 

The problem is evident if you use a redraw. Lets use a silly example. You grt paid 100k a week. You deposit your pay each week to the loan a redraw 800 a week in living costs.

In no time you have destroyed your loan and the deductible purpose is gone. After 6 months you decide to rent your home. Almost none is deductibe since your borrowing relates to mixed use. If you used a offset all the original loan would still b deductible.

Get a broker to guide you.

Redraws are a lender trap

 

Based on your stated goal of buying investment properties using the funds you currently have, redraw doesn't appear to be the most optimal option.

By pulling money out of the redraw - e.g. you wanted to redraw $100,000 for a $400,000 property, you will be effectively increasing your non tax deductible debt for your home and using a cash deposit for your investment property. Please seek specific tax advice on this.

There are large benefits associated with offset accounts, including the flexibility you call out in your post.

Additionally, you may want to consider if this lender allows you the flexibility to make changes to the loan structure easily enough to enable you to move forward with your goal of acquiring investment properties.

 

Thank you for your detailed response. However, could you clarify on this please? Please look at my example below and correct me if I'm wrong in anyway.

For example: The PPOR house is 500k and I would like to borrow 400k (80%). I have 200k of fund available.

I get the loan for 400k. I then decide to park the 200k in this redraw account for 1 year.
After that I take the 200k out and use it as a deposit for a new investment property.

This means that in the end, my PPOR home loan is still 400k (and of course less the amount that I have already paid via monthly repayments), which is still what I originally planned for, i.e a home loan of 400k.

 

Do you have this week's Powerball numbers too? But seriously, if you can swing a loan that includes it for "free" you're better off with an offset.

 

The reason I'm asking is that my mortgage broker (ex-banker) is pretty insistent that I go with a basic variable home loan, park my money in the redraw account then take out this money later for other IP.

 

The twinnies have the wrong end of the stick there. If you redraw out the $200k to use as a deposit and split the loan, the $200k you have redrawn for investment will now be deductible - as long as you haven't stuffed it up by drawing in and out for personal expenses.

 

You can do this but the risk for debt contamination is high. Just get someone who understands the tax side of things to help you - many brokers/bankers have no idea in this regard.

 

As I understand it you would want to take a loan for the deposit out of ppor (split) then get another loan for the remainding 85% . This way all interest is deductible and your 200k is still working in your non-deductible. Speak to a professional, **** it up and it can be an expensive lesson.

 

Yes, whereas if I decide to go with an offset account and park this 200k in the offset then withdraw it, this money is still my money and it's non deductible. In this case, wouldn't redraw be better?

 

Yes - but again you need to do it properly. Fairly high risk of inadvertently stuffing it up.

 

Hi Jess,

From my tax accounting days, this is what my understanding is but as I said - always seek professional tax advice

Splitting is all fine - but if that option is unavailable.....especially if the OP just pulls out money from the redraw. I believe that is what they were referring to

 

it is non deductible when it is not used for investment purpose ( income producing). when you use it, it will be. But again run it pass your accountant.

 

{By pulling money out of the redraw - e.g. you wanted to redraw $100,000 for a $400,000 property, you will be effectively increasing your non tax deductible debt for your home and using a cash deposit for your investment property.}
Realistically, worst case he'd be keeping his non-eductible debt the same, not increasing it. He'd be losing the opportunity for additional deductions if he didn't split it. And you can split the NAB basic loan so shouldn't be too much of an issue there.

 

Again, I would like to thank you both for the time and effort with this.

I am reviewing the product disclosure for the Base Variable Home Loan product that I have been pre-approved for. It lists:

- Cash Out/ Equity Release: Available (up to 80% LVR)
- Ability to Split Loan: Available (Fee = $0)

Does that mean I have my bases covered?

 

I think a basic loan will probably be the better option - based on what you said.

But why don't you plan ahead a bit and split it from the start. NAB can be a very painful lender at times.

Tax Tip 13: Simple Loan Structuring Strategy Tax Tip 13: Simple Loan Structuring Strategy

 

The risk is on the op. Youll probably save everything into the loan. What happens when you want to go for a holiday, need a new car, furniture, renos?

 

Yep that is right - so he/she will be using cash for the IP.

 

that will be messy