Is this mixing loan for debt recycling?

Hi

I just recently refinanced and have set up my loans ready for debt recycling. Say the set up is below:

Initial setup:

Loan 1 : $50k (PPOR linked to Offset 1)

Loan 2 : $10k (P+I variable - Debt recycling for 2 month later)

Loan 3 : $30k (P+I variable - Debt recycling for 3 months later)

After 2 months I finally have the funds to execute debt recycling on Loan 2. But now the loan amount is lower since there were some repayments to the principal.

2 months later:

Loan 1 : $49.5k (PPOR linked to Offset 1)

Loan 2: $9.5k (ready for debt recycling)

Loan 3: $29.5k (dont have funds yet for debt recycling)

If I pay off Loan 2 and then redraw + debt recycle - would there be any issues with mixing loans?

 

Paying off principal via regular repayments is no different to paying off principal via extra repayments. Debt recycling is the act of borrowing the money back for a deductible purpose after paying it off. So what's occured so far is no big deal.

Just be aware that with most loan products, if you pay off the loan completely, the account will be automatically shut and there will be no loan to recycle. You need to leave a small amount owing to keep the funds available.

Strickly speaking this might create a deduction problem, but theory and the real world never seem to perfectly align.

 

The question you have to ask yourself is
"has the loan solely been used to produce income?"

if the answer is no then it is mixed or no deductible interest at all

 

thanks Terry then there's not much point to set up the loan splits ready for debt recycling at the start then? (since it will have some principal and interest repayments) unless someone is debt recycling straight away

 

Not sure you have understood the concept. It is perfectly fine to set up splits in advance, even if PI. We do that for clients daily. 100% of the interest can still be deductible.

See
Tax Tip 13: Simple Loan Structuring Strategy Tax Tip 13: Simple Loan Structuring Strategy

 

Hmm say situation below:

Bob refinances to CBA from St. George in January 2022. He has $150k loan in total split below.

Loan 1: $100k PPOR loan fixed at 2%. It is fixed, principal and interest

Loan 2: $50k at 2.5% variable principal and interest. (Bob will debt recycle this loan in June 2022 when Bob saves up $50k)

June 2022 comes along and now Bob has $50k ready to debt recycle. He checks his CBA account and sees updated balances below:

Loan 1 updated balance: $99k Fixed Loan (PPOR)

Loan 2 updated balance: $49k Variable Loan. From Jan 2022 to June 2022, Loan 2's balance reduced by $1k and paid $600 in interest.

So now Bob has $50k in his hands ready to debt recycle. Can Bob:

1. Pay off $49k off Loan 2 (leave $1 for argument sake so that the loan account doesnt close) and redraw the $49k and transfer to his share brokerage account and invest in the sharemarket and start claiming the interest expense as tax deductions

Or does Bob need to:

2. Create a new split of $49k from Loan 2 since from January 2022 to June 2022 there were interest expense / principal repayment while Bob was working hard to save $50k

Thanks!

 

it only matters on the date of the withdrawal. If the full amount of the loan is redrawn and used to invest in income producing assets the interest could be deductible in full because it would not relate to anything else.