Loan Split/Contamination Question

Hi All,

Just a real quick one.
If you were to refinance and as part of that release some equity, say 50k and the bank put that into a new blank offset account, then at that stage the loan is not contaminated.

If you then however wanted to add more funds into the offset it would be contaminated so your best option from my understanding is to pay the funds back into the loan, leaving 50k in redraw?

If that is the case then my next question is what happens if the additional funds from settlement (say you had some money in redraw at the time of refinance) was also added into the offset loan?
Say for example and extra 1k, making the amount in the offset 51k?

If you pay it all into the loan then 1k is not offsetting anything?
If you transfer just the 50k and leave the 1k of borrowed funds in the offset and then transfer non borrowed money what happens? Is only that 1k now contaminated? Or is the entire 51k?

Sorry if this does not make sense?

 

Putting money back into a loan is repaying it. Taking it out again is reborrowing.

So it doesn't matter what the source of the deposit into the loan is

 

So if I am reading this correctly. If you have the 51k sitting in offset and you then go and add personal non-borrowed funds of say 50k (I read this is mixed, 50k borrowed and 50k non)
As long as you pay the 50k borrowed back into the loan split and redraw it for investment purposes it keeps its deduct-ability, even if contaminated initially?

 

yes.

 

Thanks @Terry_w
I had no idea it worked like that.

So sorry last thing, if I did this and then my funds built up in the offset (50k borrowed and 50k savings), I then found an investment property i liked and wanted to pay for a deposit.

If I just paid for the deposit directly via the funds in the offset I would have mixed the funds making the deduction hard to calculate (did the deposit come from loaned money, saved money or both?)

If I however pay 50k from offset into the loan and then redraw it via a bank cheque and pay the deposit, then the 50k deposit would be fully deductible?

 

Yes because you have borrowed to invest. It is as if you hada $50k loan which you fully paid off and then took out a new $50k loan.

Watch out for mixing issues though

 

Sorry what do you mean by "watch out for mixing issues" exactly?
What I have suggested above is to try and avoid that.
So what exactly with mixing in the above could you avoid?

 

If you pay $50k into $100k loan and redraw $50k it will be a mixed purpose loan. For example

 

Got it.
Thanks again @Terry_w, another very insightful conversation.
My understanding of loan contamination just got a little less muddied (I think )

 

Or a little less mixed

 

Sorry Terry last question, promise
So if you have split it correctly and then your now ready to pay for a deposit on an IP, you would transfer the 50k back into the 50k split.
You would then usually do what to pay the deposit? Get your lender to draw up a bank cheque? Or can your transfer from your redraw?

What is best practice?

 

Best practice is to use a LOC and pay directly from the loan. If you can do this with an IO loan that is probably better but if you have to cause the money to take a detour on the way you risk deductinility.

 

if you don't have a LOC or can't get it with your package what would be the next best thing?

 

Change lenders.

If you dont want to do that try an IO loan paying directly from the loan account.

 

what do you mean by that? you already would have original loan and 1 split and offset&redraw

 

Dont make borrowed money take a detour into an offset account. See tax tip 1

 

@Terry_w sorry to revive this old thread.

What's considered a detour?

I've got split loans - one for the PPR and another sitting there with cash for a future IP deposit. But the only way to withdraw the IP deposit is by transferring to a personal account (connected to the loan) and then writing a bank cheque from that account.

Is that ok? Or is detour only applicable for offsets?

Much thanks in advance to any who answer.

 

Who knows? It wasn't ok for Mrs Domjan. Doing just that ruined her deductibility.

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

and seek specific tax advice.

 

Yeh, I get it. Money is not fungible.

I think I read one of your other posts where you can rescue this but making sure the contaminated deposit is swapped over at settlement with a deposit sourced directly from the bank (along with the rest of the settlement)? @Terry_w

 

Tax Tip 53: Paid Deposit with cash - how to fix big mistake before settlement Tax Tip 53: Paid Deposit with cash - how to fix big mistake before settlement