Help with Offset and understanding Equity

Hi all,

First time poster here and a newbie trying to build my knowledge on property investment and how I can apply it to my current scenario. Apologies if my questions may be stupid, I've only recently seen the light and started taking interest so I'm coming from a long way back.

Bit of background information:

• Bought an IP 5+ years ago with the savings I accrued.
• Original Loan $335,000 (first 2 years IO, now P&I) down to $295,000 approx.
• No PPOR, currently renting.

Regarding my loan, when I first purchased my IP I had limited knowledge of loan structuring and the basics of property investing. I may have been best to go with IO and an offset. I have been paying down the loan directly into the HL account. After reading the benefits of having an offset account, is it possible to pull the 40k from the loan and setting up an offset account linked to the loan and depositing it into there? Is this possible and would people recommend doing this? What are the ramifications? My long term plan is that I will one day extract some equity from this IP to use towards either a PPOR or IP - most likely a PPOR. What are people's thoughts on reverting to IO only and then putting surplus cash into the offset, is this the best way?

This leads to my next question regarding equity. Is my understanding of the below correct?

For example:

• Loan = $295,000 @ 4.06%
• Valuation = $600,000
• Max equity available = $185,000 (600,00*0.80-295,000)
• Equity pull $100,000

In this case, if I were to extract 100k equity from the IP1 to go towards a deposit on a PPOR or IP2, the IP1 loan will increase to $395,000 @ 4.06% to service?

Appreciate any feedback.

 

This would contaminate the purpose of the loan - the new $40k drawdown is for a new purpose and if you are just sticking it in a offset account the loan interest (on the $40k) would not be tax deductible.

Yes - do it immediately if you can. Start putting any additional repayments into the offset account.

Assuming you are good with money and won't waste funds you have access to, you could do something like:

Security IP1:
Loan 1a - $295k (purpose was buying IP1)
Loan 1b - $100k (purpose is to buy PPOR/IP)
Loan 1c - $85k (purpose yet to be determined)
Security PPOR/IP2:
Loan 2 - rest of property value

Given your equity and that your next aim to is to buy a PPOR, you may want to run the numbers on selling your IP and using the proceeds to buy your PPOR. Buying a PPOR now will give you a large non-deductible debt - especially if you use equity to fund the deposit and loans for the rest of the funds. Maybe look into spousal sale or sale to a trust for your IP??

Not advise, just my opinion.

Regards,

Jason

 

Q1 - it is possible but not recommended - Jason has covered the reasons.

 

Definitely don't transfer the redraw out to the offset, that will just make the deductibility murkey through a potentially mixed purpose loan.

With extracting any equity, should this be done ensure this is done as a separate split to avoid any mixed purposes issues for tax.

Otherwise Jason has given a reasonable run down on options - including whether to consider selling the existing PPOR to a related entity to claw out cash funds for a potential PPOR purchase should that eventuate.