HELP me repay my parents!

When I purchased my first property to live in - 350K, I took out a loan for 255K. This is a principle and interest loan. I have a savings account which offsets my home loan account. My parents gave me 100K and they put it in the home loan account back then. The loan was reduced down to 155K. Throughout the years, I have been putting extra money into the home loan account. The extra money was about 73K, which meant I still owe the bank about 81K to date.

I have moved out and living with my partner. I want to change my PPOR into an IP. Unfortunately, I have been advised not to redraw the 100K to pay back my parents as it causes a mixed purpose loan and interest won’t be tax deductible.

Is there any way that I can pull out the money that I have put in to pay back my parents 100K? And also pull out the 73K that I didn’t need to pay down, so I can use this as a deposit for a new PPOR in the future?

I have asked the bank to change my property loan to an interest only loan. I have also asked for a new loan for 180K against my property for (renovation purposes), but now they are asking me for quotes and list all to equal to 180K. I am factoring in paying back my parents, also for future renovations, repairs etc.
How do I list this? Why do the bank need to know what I am doing with the money?
Is this the best way to go about accessing equity? Are there better products? I just don't want the 180K sitting in 'now' investment loan not doing anything.
Is refinance better?
PS. I am in Melbourne.

Thanks.

 

Who advised you that?

If you are paying back your parents it is presumably a loan. Redrawing and repaying them may be just a refinance from one lender to another.

I suggest you seek legal advice.

 

You’ll likely find approval for this easier with a different lender, if there asking for quotes for 180k, it may be difficult to obtain. Cash out policies differ bank to bank and some make it easier than others.

Overall finance wise, it looks possible (pending serviceability) - equity is there and your simply trying to release it. You may need some specific advice re tax consequences though.

 

Hi Terry,

It is not a formal loan, it's just they parked 100K to help me out initially. Apparently I should have put it in an offset account to begin with and not the home loan. Advise was from an accountant.

 

Sounds like a loan to me.
Your accountant is probably incorrect.

 

ok so you mean I can redraw the 100K that my parents put in there and the loan stays tax deductible? What about the 73K that I put in which was my own money? How do I take that out?

 

You need specific advice. You could potentially borrow to refinance your parents loan and maintain deductibility of interest.

The $73k is a different matter. You have paid down the loan with this

 

Did rtg extra money go into redraw

 

You could likely just redraw it and create a deductibility mess. The reality though is only 81k of your loan is deductible so it’s not a significant amount anyway. If you don’t have long term plans to hold this property then it might not be much of a problem at all.

The correct way is refinance and restructure to correctly split the loans between the 3 purposes (81k investment, 73k personal used for owner occ, 100k used for parents). Technically the entire 173k is non deductible but might as well do it right Incase that ever becomes an investment.

Still though for me I would be weighing up the cost of refinancing against the value that deductibility is for the period you plan on holding it. Secondly i would be considering if it’s a good long term investment. Your in a position now you could sell it CGT exempt.

 

RE "Why do the bank need to know what I am doing with the money"

Because it changes the LVR ie the banks security.

Also did you reveal the initial 100k Loan to the bank at the time? If not they may not be happy if you reveal this to them - however i really have no idea , hence the workd "may"

 

Perhaps. BUT the terms may have been at best without interest. To refinance that now with interest is a possible concern. Thats quite different to the position of changing or refinancing for a different rate etc. ATO could argue that the absence of all evidence of the money being on terms of a loan are absent and it was a temporary gift. Not unlike say a guarantee that is later lifted. A matter of a private nature rather than one of obtaining finance from the parents.

Definitely a concern that the original bank loan was paid down as this evidences a intention to retain the $100K funds rather than to set them aside for later repayment for the parents if an alleged loan is argued.

The ATO would be likely seek:
- Evidence in writing of the original parents loan and the agreed terms at that time to evidence it was not a gift AND the deferred nature of the expected repayment/s,
- Likely to consider the bank assets and liabilities disclosure at time of that loan AND all refinances since to determine if the parental loan was a disclosure item in the period. Hard to argue something is a loan when you never disclose it in an assets and liabilities position until the time when you suddenly want to create a new deductible refinance.

Not obtaining a (favourable) binding private ruling could expose serious concerns that at any future date some or all interest could be denied

 

Just because they could doesn't mean they would. The taxpayer may have a reasonable counter argument in situations like this. An oral contract is still a contract that is enforceable at law.

This is why specific legal advice is needed.

But in this case even if it was a loan it is still a bit of a mess as there are a few happening here.

 

Was it a loan or a gift?

 

Love to see what is presented for a binding private ruling. Its not just the agreement issue to rely upon for refinance. If there was a contemplated repayment there is no evidence beyond that of the parties seeking to reconstruct a position now.

Oral agreement could easily be contradicted by the nature of loan application disclosures since with no disclosure of the related party "loan". ATO can do a credit check. And then s264 notice to any lenders on file. Legal advice would need to consider if any disclosures on this basis have ever occurred right ? Its fairly harmful to seek to rely on the nature of a oral agreement that is then disregarded by the borrower in the subsequent time periods.

And then there could be a statute barred loan issue depending when mum and Dad advanced the loan.

 

first you would need to consider whether it would be wise to even do a PBR or not. I probably wouldn't recommend one for a situation like this.

I don't know the full details of this case so can't comment on whether the terms of the oral agreement may or may not contradict any other potential evidence out there. We don't even know if there are other loan applications. In fact we don't even know if there is a loan agreement in place or whether it was a gift.

Limitations act would also need to be considered as well as the estate planning aspects.

 

Haven’t you been reading the reports from the Banking enquiry?

Banks are being blasted for not taking enough notice of the financial circumstances of borrowers!

Banks have a duty of care, they need to know how you are going to use THEIR money if they lend it to you.
Marg