How to go about Redraw on a PPOR loan for an IP purchase

Discussion in 'Loans & Mortgage Brokers' started by Ouga, 18th Dec, 2019.

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  1. Ouga

    Ouga Well-Known Member

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    "Trying is the first step towards failure" Homer
    Hi guys,

    So I have a scenario and I am hoping you guys can help clarify the practical details:

    I have a PPOR P+I loan into which I have made additional repayments and as such I have redraw available. I have never touched it having learned it can create mixed purpose loans and create headaches regarding taxation.

    Now I am considering purchasing another IP and would like to access the funds in redraw to finance that purchase with the goal of - of course - being able to claim the interest on that loan which will be used for investment purposes.

    My question is what is the process of it all?

    Should I first ask the bank to split the loan for the portion I want to redraw?
    What happens then? I get 2 loans with each their monthly P+I repayments setup?

    Do I then draw a bank cheque for the payment?

    Any practical feedback you can provide would be greatly appreciated

    Chees
     
  2. Shazz@

    [email protected] Well-Known Member

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    If it was me, I would set up a line of credit- ask for the maximum amount possible. Don’t give the bank any details on how you want to spend it, just say that you’re thinking of buying a car, renovating your house, going on a holiday etc.
    Once you buy your property, draw down your loan to what you need and then convert into a home loan (this is your best chance of keeping your OO rate). Worked for me and I went direct- with CBA.
    They will try an talk you out of a line of credit, but tell them that once you draw down the loan, you will convert to home loan.
     
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  3. Terry_w

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

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    See my tax tips, many on this topic

    Split loan first
    Then pull the money out and directly pay for the investment.
     
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  4. Ouga

    Ouga Well-Known Member

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    Thanks guys!
    I know this must have discussed already to death in the tax tips, I need to go dig and read. @Terry_w you have put so much content out there! Thanks :)

    not sure I really get your strategy @[email protected] - again probably need to go read more.

    When I split the loan, is the new split going to be on a PI rate? I would assume so.
    Do I need to specify the purpose of the loan with the bank when splitting? I suppose I’ll then get 2 repayments, each P+I, so I should only do the split a bit before settlement so that I don’t repay too much of the principal looking for a property- do I get this right?

    Should I also move the redraw to a brand new transaction account to avoid any mixing of the funds?
    Would that be best practice?

    off to read some more thanks guys!
     
  5. Terry_w

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

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    1. that is up to you and the bank. Generally it will be the same as the loan is now unless you want to go thru a reassessment.

    2. not when splitting. you would want to split in time to be able to pay the deposit wouldn't you?

    3. prob not
    Tax Tip 1: Parking borrowed money in an offset account Tax Tip 1: Parking borrowed money in an offset account
     
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  6. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

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    Hiya

    That’s pretty much it.

    Just set up a second loan split for the amount going towards the investment.

    At tax time - let your accountant know that the loan was used for investment purposes and claim the interest.

    Cheers

    Jamie
     
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  7. Ouga

    Ouga Well-Known Member

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    Hi guys,

    Thank you so much for your replies.
    I have been reading the Tax tips. Crazy good info in there, amazing, thank you again @Terry_w .
    Stil wrapping my head around it, but getting the general idea.

    A couple more questions I hope you can shed some light onto:

    1. When splitting a $100K loan with an available redraw of say $70K, what does the new $70 split look like? Is it in the form of a loan account with $70K available as redraw or is the $70K moved into an offset account linked to the loan? Or perhaps the $70K is even moved to a transaction/savings account (and then mixing its purpose)? From reading tax tip 1, I understand the importance of leaving segregating the split (that is the whole point of the exercice), but in practice how can I ensure this is the case? The best would be if the split was a loan account with available redraw from which I can then get a bank cheque drawn. But not sure if this is how they do it in practice?

    2. In the following scenario:

    PPOR loan: $100K
    Available redraw: $70K
    Offset: $30K

    I could pay back the $30K into the loan - making sure not to close it, so say paying $29K into it, then asking the bank to split the loan into a $99K and $1K splits with the goal of maximising the deductible funds for the IP - but does that even make sense?

    From then, I could use the $99k towards an IP, provided I understand the specifics as per question 1.

    I'll try and post a list of the relevant tax tips later, as it may be useful for others as well to have them grouped under this topic. So much info in them !
     
  8. Terry_w

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

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    Just keep the loans segregated. Investment in one and non investment in another.
     
  9. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    All well answered.

    I have a point more than a question

    Where is your banker or broker in the context of advisingf you on this ???

    ta
    rolf
     
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  10. Ouga

    Ouga Well-Known Member

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    Hi again guys,

    Thank you all for your feedback and your time!
    Good point Rolf: I am in a situation where I have done things in years past without a broker (not well informed back then!), and given I am now not going to be able to get another fresh loan serviceability wise for the foreseeable future, I have not engaged one.
    I did have a chat with the bank, but as I expected they were not much help in answering some of my questions - I have found over the years that once you start asking questions about things slightly out of the ordinary, more often than not they are unable to help.

    I have been doing some more reading and I am wondering if I've got this point correct:

    If I am going to redraw the full amount of the loan, then I don't really need to split the loan, do I?
    So let's say $100K PPOR loan, I pay $99.9K into the loan, leaving $100 to keep the loan open.
    I then redraw the whole $99.9K to pay for an IP (drawing a bank cheque from the loan account directly) - I have now used the funds for investment purposes in an income generating asset and should be able to claim the interest. Am I missing something here?

    Appreciate your feedback guys! @Terry_w @Jamie Moore
     
  11. thatbum

    thatbum Well-Known Member

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    Why not just make a split or a new loan like everyone has pretty much suggested?
     
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  12. Ouga

    Ouga Well-Known Member

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    "Trying is the first step towards failure" Homer
    Hi,

    Thank you for your question - fair point!I do realise this makes me look like a massive douche that won't listen! But there is some meaning (hopefully!) behind this.

    The first thing was reading the thread "Tax Tip 19: Avoid Using Redraw on an Owner Occupied Loan" and especially the following on page 5/6:

    Poster:
    and Terry's reply:

    Poster:
    Terry:
    This last one especially resonates since this totally represents my situation.

    I guess I could split the loan in 2, with one slice being at least $10K (this seems to be the minimum), but then that's $10K less I cannot claim interest on. So unless I really need to, I might as well try and claim as much interest as possible.

    The second thing is I cannot figure for the life of me what happens to the funds in redraw once the loan is split. The bank does not seem to know whether they go into a funded loan account (with redraw available), an offset account, a transactional account, several offsets or a combination of the above!
    What I gathered from talking to them is that it may go into a couple of new offset accounts they'll create for the occasion, with one linked to each split. But there is nothing on the form to specify what and how. So this seems very much that I'll apply, send the form in and see what happens then - not my favourite way of going about this. Plus, having funds in offset accounts does not seem optimal for deductibility.

    I feel if I can simply redraw from the existing loan by drawing a bank cheque directly from the loan account to pay for the IP - and still be able to claim the interest, this is a clean and efficient way of going about this where I can actually control what happens and ensure the redrawn dollars don't get mixed up.
     
  13. Archaon

    Archaon Well-Known Member

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    If there is only the single 100k amount owing, and you need pretty much all of that amount for a deposit, then debt recycling would be the way to go as you suggested.

    Minimum splits are around the 25k mark i've heard.
     
  14. Terry_w

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

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    bank cheque should be ok
     
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  15. Terry_w

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

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    Depends on the bank, some are ok with $10k

    I think ANZ doesn't have a limit.
     
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  16. Ouga

    Ouga Well-Known Member

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    "Trying is the first step towards failure" Homer
    Yes I am in this situation where I will need the full amount of the loan + some additional cash for the IP purchase. The redraw will cover about 70% of the total purchase cost, so I want to have as much of it deductible as possible - all of it really.

    Thanks Terry. Bank said this "should be ok" - I'll double check with them.
    Is the next best thing a brand new transaction account open for the redraw and closed right after cheques have been drawn without putting any other $ in?

    Thanks guys for your patience with me :)
     
  17. Terry_w

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

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    Tax Tip 1: Parking borrowed money in an offset account Tax Tip 1: Parking borrowed money in an offset account