Have IPs, want to buy PPOR - help with structure

Discussion in 'Loans & Mortgage Brokers' started by qikiqtarjuaq, 20th Sep, 2017.

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  1. qikiqtarjuaq

    qikiqtarjuaq Member

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    Hi there, I've just joined PC, but long time lurker and was also on Somersoft way back when.

    I have a structuring question that I've been tying myself in knots trying to work out, so I thought I'd ask for help. This is not a completely accurate summary of my position, because I don't like putting too much personal stuff online, but hopefully shows the idea of the situation.

    Let's say I have two IPs - one in partner's name, one in mine. No PPOR - we rent.

    One IP in the name of the lower income earner pays for itself and more under P&I, so it is generating income.

    The second IP in the name of the higher income earner is roughly cashflow neutral on an interest basis (although it is a P&I loan). Even with depreciation there's not much tax deduction claimable any more.

    In the future we would like to buy a PPOR without selling either IP. They both have redraw AND offset accounts, because we kept paying into the loans when interest rates dropped. And also because the first IP did not originally have an offset account at all (it does now).

    In hindsight this was not a good move, and we should have kept everything in offset, I realise that now. Because if we used any of the redraw to buy the PPOR, the interest would become non-deductible and it's a mess. My question is - how do I maximise the amount of funds available to act as a deposit on a PPOR while maximising remaining tax deductibility? We can use the offset as a deposit, but is that redraw amount now permanently unavailable? Would it be better to pay off one IP entirely - we can just about do that - and use it as security on a PPOR loan? But then there's a massive non-deductible loan which is really not ideal.

    I suspect this is an unusual situation because most people start with the PPOR and move onto IPs. Thanks in advance for any helpful advice.
     
  2. Jess Peletier

    Jess Peletier Mortgage Broker & Finance Strategy, Aus Wide! Business Member

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    This is not unusual at all. :). We're seeing it more and more.

    Your best bet is to split off all the investment loans and use redraw and offset for your PPOR deposit. You can't increase deductions but you can preserve what you currently have.

    You can then change your IPs to IO to increase cashflow (get specific advice for this) and use the cash to pay down the OO debt. You can also look at recycling the OO debt into income producing shares etc, which will further increase your ability to pay down the non-deductible OO debt.
     
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  3. Marty McDonald

    Marty McDonald Mortgage broker Business Member

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    I would suggest you could...

    1) Stop paying extra into the loans.Pay into the offset instead.
    2) Get the properties revalued in the future when you want to buy the PPR.
    3) Do a restructure of the loans at that time with a view to creating 2 loan splits on each property. Split 1 based on the loan amounts owing at that time (which become the ongoing investment loans) and a new split loan for the deposit required for the PPR. Loan amounts for the 2nd splits TBC based on what you need at that time, LVR constraints and valuation amounts.
     
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  4. qikiqtarjuaq

    qikiqtarjuaq Member

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    Thanks Jess and Marty for the comments.

    Jess, when you say "and use redraw and offset for the deposit" does this mean I can use the redraw, or not?

    Say I have:
    Property value = $500,000
    Loan remaining = $200,000
    Redraw = $10,000
    Offset = $80,000

    In this scenario I would have thought I can only use the $80,000? Or is there some way of accessing the redraw without contaminating the loan? I appreciate your points about IO (I dislike the higher interest rates, but can see that it may still work out better to pay down non-deductible debt) and debt recycling.

    Marty, you're right and I have reduced my payments to minimum already. Appreciate the other advice also.
     
  5. Jess Peletier

    Jess Peletier Mortgage Broker & Finance Strategy, Aus Wide! Business Member

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    Depending on the banks minimum loan size, you should be able to split the $10k redraw into a separate loan so it won't be contaminated when you use it.
     
  6. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    I have written a posted on about 12 strategies you could potentially use. See the link in my signature to strategies
     
  7. qikiqtarjuaq

    qikiqtarjuaq Member

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    Thanks Jess and Terry.

    Terry, your strategies look very interesting, but the only one I found that seemed directly relevant to my situation was perhaps debt recycling? But the tax tips look like they could be extremely useful too, so I'll be having a good read. Better late than never...
     
  8. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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  9. qikiqtarjuaq

    qikiqtarjuaq Member

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    Well, this has been an education in How I'm Doing It Wrong.

    I haven't seen a lot on the use of debt recycling on investment properties, but now I'm thinking I could do the following:

    - refinance loan one, which is <20% LVR, up to say 60% LVR (conservative), and use this equity to invest in shares (I am comfortable with the risks this would entail regarding the share market). Change loan to IO while doing so. Split the loan to avoid contamination

    - pay the dividends and increased cash previously used to pay principal into loan two's offset account, thereby reducing interest payable while maintaining deductibility on all interest

    - in theory the offset cash would increase to facilitate a PPOR purchase (although this might take a while)

    Any comments on the feasibility of this strategy and any things to be careful of would be greatly appreciated.
     
  10. Colin Rice

    Colin Rice Mortgage Broker Business Member

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    Looks sound to me.
     
  11. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    A step in right direction just get some tax advice before implementing
     
  12. Jess Peletier

    Jess Peletier Mortgage Broker & Finance Strategy, Aus Wide! Business Member

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    Looks sound to me too. Bear in mind that the increased debt for the shares will affect your borrowing capacity so make sure the banks will lend you enough to do both.
     
  13. qikiqtarjuaq

    qikiqtarjuaq Member

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    Thanks all for the feedback - we've obviously been very conservative in our approach. Just one last question for Terry, if he's around - is the tax advice to do with legality, or to do with other issues?
     
  14. Marty McDonald

    Marty McDonald Mortgage broker Business Member

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    While debt recycling may be be flavour of the month let's not forget buying shares using your home / IP as security can definitely end in tears. If the stock market tanks you still have the debt don't forget. Shares have a possibly to become worthless (Channel Ten, ABC Learning etc etc anyone?). Land doesn't.

    Im not saying its not a good idea just beware of the risk.
     
  15. qikiqtarjuaq

    qikiqtarjuaq Member

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    Hi Marty, absolutely, I do appreciate the warning and am aware of the risks - I was thinking about this more last night and may not go to such extremes but start by switching to interest only on one loan just to free up the principal. But it's been good to get more ideas to consider for the future.
     
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  16. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    you would want to set it up in a way that the interest is deductible and to maximise deductions.

    You should probably get some financial advice too on whether or not to buy shares and timing issues,