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Down side of borrowing more than needed to buy an IP?

Discussion in 'Accounting & Tax' started by doubletoplei, 23rd Jun, 2016.

  1. doubletoplei

    doubletoplei Well-Known Member

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    Signed contract on an IP for 355K, estimate cost of stamp duty and other cost 15K, so the total cost would be around 370K. Based on one of Terry's tip of borrowing 105% and use term deposit as security, we applied to borrow from bank X the full 370K and plan to contribute own cash (as term deposit) for the part over 80% of the purchase price.

    So theoretically the final components of the purchase will be like below:

    80% of 355K = 284K, funded by bank X.
    25% = 86K also funded by bank X but actually funded by ourselves through term deposit.

    Now we have also got approval of a 32K equity loan (new loan separated from OO loan)from our PPOR.
    What we can do now is:

    80% of 355K = 284K, funded by bank X.
    32K out of the remaining 86K funded by bank Y who holds our PPOR.
    remaining 54K funded by bank X but actually funded by ourselves through term deposit.

    In this case, we are only borrowing 284 + 54 = 338K from bank Y. Compared to what we applied for of 370K, there will be extra money sitting idle from the new borrowing account.

    Would this cause any issues when refinancing in 2 years time when the IP grows in equity? Or should we just call bank Y to borrow less at 338K?
     
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  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Why not just put down 20% deposit?
     
  3. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Good thread. Many investors over estimate their expected finance which makes sense. Then they fall for the trap of later using the extra funds for a slightly different purpose ie a different property. Bad idea. You end up with a blended loan.

    If its small $... Say under $20K one way to use it up is to pay some outgoings for the same property. (Not loan repayments or paying loan interest!)

    Plan B is to pay the $ back to the loan. It builds equity.

    Plan C see if you can create a split for the undrawn amount and use it later form next IP or an improvement. The split avoids blending the loan/s
     
    Last edited: 23rd Jun, 2016
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  4. doubletoplei

    doubletoplei Well-Known Member

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    Hi Terry,
    Wouldn't putting down 20% deposit against your previous tip of borrowing 105%? My thoughts are to keep good cashflow and put as little as my own money (term deposit) as possible so that if equity grows, I can get my cash back earlier. Am I getting your idea right or I missed something in the middle? Many thanks.
     
  5. doubletoplei

    doubletoplei Well-Known Member

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    Hi Paul,

    Thanks for the advice. Of the 3 plans you proposed, which one do you think is the best from tax perspectives? Or there are no real differences?

    Also, how do you feel about the idea of borrowing the right amount (338K) rather than too much? Does it have any down sides?

    Final question, I always hear it's better to invest using the equity built up from PPOR (in this case the 32K loan) than the cash in hand. Why in my case I feel the 32K loan a bit redundant and actually brings more troubles than benefits? I could have put in all cash for the 20%, then I think it would be better to put them in as term deposit, and then I think it would be even better to use 32K equity loan first and put less money into term deposit. Are my thoughts straight or just going sideways?
     
  6. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    That is the idea generally. But if you have paid off your home and have excess cash you have to consider if it is worth the expense and hassle to set up like this.
     
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  7. Perthguy

    Perthguy Well-Known Member

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    @doubletoplei The other thing to consider is why you are structuring your lending this way. I looked at something similar but in my case my personal funds were for a PPoR. I wanted to use the funds temporarily for an investment build but later use them for a PPoR.

    If you are setting up a scheme with the predominant purpose of obtaining a tax benefit, you could have some problems down the track. You really need a good, non tax, reason, for structuring your loans in this way.
     
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  8. doubletoplei

    doubletoplei Well-Known Member

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    @Perthguy Thanks very much for your input. My supposed non-tax reason for such a scheme is to have a way to keep my cash handy and in the hope that when the IP has some equity, my cash can be released. If I put my cash directly in as deposit, the only way I can use these money is when I borrow against the equity, i.e. LOC, which has a number of drawbacks compared to using my own money. That said, this is not my main concern here. I am more worried about the extra borrowing, and how would I structure this 3-component borrowing: new IP loan, existing IP loan, and cash.
     
  9. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    I can't see any reasons to think Part IVA could be applied for this sort of thing.
     
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  10. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    It doesnt enhance any deductions. It keeps them clean and not blended.
    Borrowing too much does not give any more deduction than borrowing the exact amount. Remember the borrowing must be USED to acquire, maintain, improve or ownership costs.

    Some investors do very well from not borrowing. Each investor has different means...Many need to borrow. Some seek neutral gearing too. Term Deposit rates at 3% are not attractive to anyone.
     
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  11. blue behaviour

    blue behaviour Member

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    This is a very good thread. I would like to ask question based on my situation now.

    I have IP 1 that got equity of 30k + 80k (separate account and funds are in offset + not mixed) all of this IP1 loan are with Bank A and I purchased IP2 that is going to settle next month. IP2 has loan 80% lvr and amount of $200k and I am planning to get the remaining fund 50k + 14k (stamp duty, conveyancer fee, etc) from equity in IP1. Is this structure okay ? If not what would be the best way to structure this IP2 loan ? The remaining equity from IP1 will be separated to avoid blended funds and will be used for future IP3.
     
  12. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    See my Tax Tip 1