Have I Mixed the Loan Purpose

Hi All

I had a CBA LOC against my PPR for $700k and have drawn down $600k to form the deposit on a handful of IPs, and a $100k balance remaining. The interest on the $600k was deductible.

I've just refinanced the LOC with the bank as it had a high interest rate. I wanted to keep the remaining $100k to potentially use in the future the same way. The CBA set it up that I now have a $700k debt and $100k (MISA) credit as a partial offset. However the unused $100k is now incurring interest of 2.64% as a partial offset.

Can I check with you that this refinancing hasn't changed purpose or deductibility of interest?

Thanks

 

Weird - why partial offset?

If you pay the $100k back into the loan you should be sweet, but confirm with your accountant.

 

What you should have done is split the loan with $600,000 as a term loan and $100,000 as an unused LOC.

Now you have borrowed to deposit into an offset account and being charged interest - which could not be deductible.

Best to change before use.

 

In which case it's going to be pricey to sort out, possibly.

That said, I had a client break a fixed rate recently for no cost, so might be a good idea to sort it asap.

 

Hi, thanks for feedback. Yes, the $700k is fixed

 

I am a tax guy and think this would have issues.

 

Hi All

I felt a bit stitched up by the bank as the partial offset thing was not what I had requested and I’m now incurring a (reduced) interest on money I have effectively not borrowed. Because the main loan is fixed I couldn’t simply remove it without incurring their arbitrary penalty charge.

At the same time, post APRA, I didn’t want to make a song and dance and demand a full review when very possibly I wouldn’t stack up for the full loan I already have.

Thankfully my accountant views the interest payable on the MISA is deductable given the intention and purpose is for investment – which it is. He mentions that as long as there is not a substantial lag time to use it for its purpose.

There you go – compelled by the bank to buy another IP. Sweet!

 

I don't know about that. I personally don't think it could be deductible as the interest doesn't relate to any property at the moment. But hopefully the ATO won't be hard arses about it.