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consolidation of equity loan?

Discussion in 'Property Finance' started by bazza1234, 1st Aug, 2016.

  1. bazza1234

    bazza1234 Member

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    Hi there, long time stalker of PC. Am so grateful for everyone's advice and information regarding property investment. So our situation is as follows:

    We have a PPOR loan (A) with an split loan (B) that was used to pay the deposit and stamp duty/costs for purchasing an IP. And then loan C secured against the IP.

    We are selling the IP soon and am wondering what happens to the equity loan B? Does that get paid off? Is it possible to consolidate equity loan B back into PPOR loan A ie. increase the home loan amt and put the loan B amt in the offset account (which is attached to loan A).
    We are thinking of converting the PPOR into an IP as might be close to getting an interstate job, we are keen to buy there if the job becomes a long term prospect.
    Loan A+B would be the original 80% LVR of the original PPOR loan. Would this be considered a refinance then?

    If consolidation is not possible, what would be the next best thing to do to maximise the tax deduction for the converted PPOR to IP. We would like access to the money in loan B for deposit/stamp duty costs for the new interstate PPOR if it eventuates.

    Hope the above makes some sense and thanks everyone for their thoughts!
     
  2. D.T.

    D.T. Adelaide Property Manager Business Member

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    When selling the IP, C definitely gets paid off because its secured by it. Paying B off is optional, but recommended. After settlement, you could potentially setup a new loan B in its place, which you use for future investment purposes with.

    I'd not consolidate B into A as they have different purposes and different deductibleness, if thats a word.
     
  3. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    When you sell the IP, you don't have to pay down the split loan B, but you can no longer deduct the interest as the income producing asset has been sold.

    I would pay the split off but not close the account, and re-use the facility for deposits on the next IP. Or, for IP related expenses.
     
  4. bazza1234

    bazza1234 Member

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    Thanks for such prompt answers!!! So even if PPOR becomes an IP down the track, it's not worth combining the split loan B back into the original loan A since it will become an investment?? or its just not something that can/should be done?
     
  5. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    It can be done, but you shouldn't do it as the two loans have different purposes (in the past and likely moving forward).

    When you sell the IP, you don't have to pay off loan B but as it's not tax deductible, I would strongly recommend paying it off (but don't close it as you can use it as an equity loan again in the future).

    When your PPOR becomes and IP, loan A will likely be deductible as its purpose was to buy that property.

    The future destructibility of loan B will depend on what that money is used for in the future. If you buy a new PPOR using that money, it's not going to be deductible but it would be if you use funds from there to purchase a new IP.

    If you don't pay off loan B from the sale of the IP, I doubt that loan would ever be deductible again regardless of what you do in the future.
     
  6. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    I think you are confusing borrowed money with equity.

    If loan B no longer relates to the production of income the interest cannot be deductible. Since the property it was used for was sold this is the case.

    You can keep B open, but cannot claim the interest (unless you have sold at a loss perhaps).

    This is the case even if you rent out the PPOR. Loan B is secured by the PPOR but the borrowings don't relate to this property.

    Best thing to do would be to pay back loan B and then consider using it for debt recycling on the PPOR once it becomes an investment property.

    Seek specific tax advice.
     
  7. bazza1234

    bazza1234 Member

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    Would it be better to have an offset for loan B and put the money in that or pay it off but not close it??? Any difference in terms of taxation in future??
     
  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Why would it be better?

    It could be if you no longer qualify for further bororwings. But if you did not pay it off the interest would not be deductible when funds are drawn out of the offset - because the money borrowed from B was used for a property which no longer is owned.
     
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  9. bazza1234

    bazza1234 Member

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    Thanks very much Terry, that makes sense..will be paying it off but keeping it open then. So does that still mean easy access to that same amount if required? I was just thinking the offset allows easier access conpared to paying the loan down
     
  10. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    Depending which lender you're with, you could convert it to a Line of Credit which makes it easy. Or you may be able to pay straight out of the account as is with some lenders, which is even better.
     
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  11. kr11

    kr11 Well-Known Member

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    If we had the same scenario of ppor loan A and a split loan B of say 100k ,but had 2 investment properties deposits of 50k each from loan B, and we sold one ip, for tax purposes could we put 50k back into loan B(100k loan) and redraw that out for deposit for the next ip leaving the original 100k loan intact OR would we need to split loan B into two 50k loans and draw out from the one where the loan was paid back?

    thanks in advance
     
  12. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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  13. kr11

    kr11 Well-Known Member

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    thanks terry
    so does that mean i can keep the original split loan B of 100k as they will both still be for 2 investment properties(after 50k has been paid into loan and redrawn for investment purposes) rather than needing to split it to two seperate 50k loans
    thanks again
     
  14. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    I am not sure what you mean.
     
  15. kr11

    kr11 Well-Known Member

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    Sorry if i was confusing
    So if you have a split loan B from your ppor
    Loan B 100k for example but you have 2 deposits of 50k that you have used from here for 2 investment properties
    Later on when you sell one of the investment properties, you deposit 50k back into the loan
    If you buy another investment property with those proceeds that you have paid back into the loan, do u need to split that loan B into 2more loans of 50k or can you keep it as one loan(100k), so that it is still all tax deductible
    thanks
     
  16. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    No need to split, but it would be a good idea generally.
     
  17. kr11

    kr11 Well-Known Member

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    thanks terry
    its easier with some banks than others i hear
     
  18. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Easy to split? Yes some are just a phone call - westpac for example.

    Which bank?
     
  19. kr11

    kr11 Well-Known Member

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    thats good to know
    cba when i spoke to a guy before on the phone wanted to go thru my details again, even though he had them on file, almost like a new application
    I told him, dont bother

    thanks again terry
     
  20. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    There is a simple form to fill in with CBA - they were probably intending to try to market something to you.