Loan Split for IP Security

Hi all,

I have a purely fictitious example that I would love to get some thought on from the many experts on this forum. Nothing discussed here will be considered advice or relied up for any decisions being made.

Person X owns two properties (Property A and B).

Property A was a previous PPOR that has recently become an IP. Property A has a parental guarantee securing the loan and the current LVR is above 80%. Property A is currently on a variable P&I loan with Wesbank (see fictitious).

Property B is person X's current PPOR. A recent valuation indicates that the LVR on this property is below 80%. This property is on a variable P&I loan also with Wesbank.

Person X wants to remove the parental guarantee from Property A (burden on parents, provides more control to person X for loan changes etc.). Person X considers drawing out the available equity from Property B into a separate loan split (call it Loan 1 and Loan 2).

Loan 1 does not change value and continues to be variable P&I securing the PPOR Property B.

Loan 2's value is such that when it pays down Property A's loan, the LVR of Property A becomes 80% and the parental guarantee is released. Loan 2 and the existing Property A loan are variable IO.

Loan 1 continues to be non-deductible. The Loan 2 becomes deductible as it is used for investment purposes. The existing Property A loan continues to be deductible.

Any thoughts would be appreciated.

 

Person X could set up a new split against Property B and borrow extra, up to 80%.
Then Person X could use this extra borrowings to pay down the loan on Property A so it is 80% LVR. Then the personal guarantee can be removed and parents security removed. Deductions still maintained.

 

Yes, this is how I thought it would work. Is that any different to the example?

 

Property B - loan 1 which is the current PPOR loan, loan 2 is a new split which will be the equity draw out up to 80%.

Use loan 2 (equtiy) from property B to pay down A to uncross the properties, assuming there's sufficient equity to pay it down to 80%.

 

Thanks Tony.

Are you aware whether Westpac offer the ability to split an existing loan in to 2. My understanding is they did provide this functionality, but getting some conflicting information from them.

 

Use a broker to stop getting conflicting information from the bank direct (if the bank staff can't even answer a simple question like that how do you think they'll go when you actually apply??)
Most lenders allow split loans there are very few who don't.

 

Yes, good point Lindsay, I was hoping for something as simple as this I could just go straight to my relationship manager, but clearly not as simple as that.

I get the feeling the response I got to top up the existing PPOR mortgage was to cross-collateralise the loans (which I get the bank wanting to do). I pushed back so will see what they come back with, but will look in to a broker.

 

How any bank staff could not answer that simple question is beyond me
Banks looking after their interest not yours - this is not new unfortunately

 

pretty much the same i think

 

On a related note, does removing a parental guarantee on a loan require the loan to be reoriginated? Westpac indicating it does.

 

no, but you should to make sure

 

I am just revisting this example to determine what makes the most financial sense.

That is, by not cross-collateralising the loans and creating a loan split from the PPOR, there is a net increase in total debt (albeit the interest of that increase may be deductible).

Is it possible to use the PPOR as security for the IP without increasing total debt? Using the theoretical equity in the PPOR rather than actually extracting it?

If not, after splitting the PPOR loan, can you use that split as security for the IP without actually paying down the IP loan?

 

First question- pretty much means crossing the properties

Second question- yes, just need to structure it so the loan is investment interest only.

 

how would it increase debt?

 

You are right. I have overcomplicated this. Increase on loan (via split that becomes deductible) and pay down the IP loan. No change in net debt position.

 

I have a clarification to make on the fictitious original example and would like some thoughts as to whether that changes anything.

Person X solely owns Property A (the investment property with a parental guarantee).

Property B (the current PPOR with equity to be released into a new loan) is jointly owned between Person X and spouse.

In creating the loan split secured by Property B, in the first instance it is anticipated that this loan would have the same ownership/liability structure as the existing loan (50/50 Person X and spouse). The question is, does this impact the deductibility of this new loan, or given its intended purpose (income producing asset solely owned by Person X), does it remain fully deductible for Person X?

I found this on the ATO website that appears of relevance with the key difference in my mind being that a new asset was being purchased, which is different to the situation above.

 

whose name is on the loan?
whose name is the investment in?
is any acting as trustee?

 

First thoughts are that the new loan will be in the same joint names of the PPOR loan (Person X and spouse).

The investment property and its loan is solely in Person X's name.

No trustees.

 

If that is the case would be borrowing and investing.

 

OK so even though the new loan is in joint names, the purpose of the loan being for income generating investment in a single persons name, the interest could be completely deductible for that person?