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Loan Structure : Split Loans vs LOC

Discussion in 'Property Finance' started by Benson, 7th Jun, 2016.

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Split Loans VS LOC

  1. Split Loans

    63.6%
  2. LOC

    36.4%
  1. Benson

    Benson Active Member

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    Hi All

    Have asked my current broker some questions, but his answers leave me confused ...?

    We currently have our IP loan of $392k with NAB at 80% LVR.
    Markets increased and our valuation has come back at $520k so we're looking to go up to 88% LVR + Capitalise LMI and refinance with ANZ.

    Available funds through equity release:
    New available borrowings @ 88% of $520,000 = $457,600
    less existing borrowings $392,000
    = $65,600

    Of this $65,600, we plan to use:
    1) $35,000 for renos to same IP
    2) $30,600 for next IP deposit & costs OR emergency back up funds

    We want to ensure the loans are:
    - Not cross collateralised
    - We can claim deductions for 5 yrs on LMI and interest payable on the LMI and
    - There is no contaminiation to any of the funds.

    We're thinking perhaps 3 split loans -
    A) 392k for IP loan
    B) 35k for reno + (LMI Charge added on here ? )
    C) remaining funds for next IP deposit / emergency funds

    OR would it be advisable to get seperate LOC's for (B) & (C) as we do not know how exactly 'how much' and 'when' we require these funds for reno & future deposit for next IP.

    Any suggestions would be appreciated!
    Cheers
     
  2. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    You don't need a separate split for the reno, as the purpose relates to the current IP. I would just do 2 splits, one for the IP plus reno, and one for the next deposit.
    Bear in mind that with ANZ the account will close if it's undrawn, so make sure the offset account is attached to the deposit split, or use a LOC.
     
  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    This is really a tax question and a credit question.

    You would have to apportion the LMI over the purpose the funds are used for. The problem is that the future use may not happen this financial year so where do you claim the LMI?

    Do you have to use ANZ? Someone like Westpac with their Roket Investment loan would be good as the loan can be easily readjusted after settlement. You would split the loan and use it for what you want to and then what is left you split off as a second split so it is segregated. This can be done with several banks - in fact ANZ could do it too I think but more clumsily.

    Tax Tip 33: Deductibility of LMI Tax Tip 33: Deductibility of LMI

    Tax Tip 34: Deductibility of LMI on loan increases Tax Tip 34: Deductibility of LMI on loan increases

    Tax Tip 35: Is LMI Deductible in These Situations? Tax Tip 35: Is LMI Deductible in These Situations?
     
  4. Benson

    Benson Active Member

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    Thanks Jess

    So I could do a split for the existing IP and reno funds combined and add the capitalised LMI to this without effecting the 5 year deductibility and claiming interest on the LMI?

    Then set up a LOC for the deposit? Or separate split with offset linked and deposit funds into offset?

    Is the main difference with split and LOC, you pay a lower rate for the split but less flexibility than a LOC?

    Do you think LOC is more suitable due to my points (B) and (C) above?
     
  5. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    A LOC is simply another product, the same way a variable loan or fixed loan is essentially a product. You can combine a combination of all three in a split arrangement against a single property (or multiple properties if you cross collateralise, but don't do this).

    The LOC simply has some different features to most other variable loans. They tend to be interest only indefinitely and are fully transactional (you can pay money out of them directly). They don't allow offset accounts. You tend to pay a premium rate for all this.

    In most situations there's very little need for a LOC, a variable loan can usually do the same job just as well and tend to be significnatly cheaper. Keep in mind that variable loans generally have a redraw facility. You don't need to put the funds into an offset account (in fact it's generally not recommended if it's an equity release). This tends to acheive the same outcome as a LOC.


    Paying the LMI from any particular split portion is fairly straight foward to implement. The deductibility of the LMI is a question for your accountant.
     
  6. Benson

    Benson Active Member

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    My accountant said I can just add the LMI onto the reno split loan and claim it that way, is that not correct?

    We're going with ANZ as they gave us a decent val

    So you would recommend splits over LOC'S?
    Any disadvantages to LOCs apart from slightly higher rate?

    Ok so looks like your both recommending:
    Loan 1. Exisitng loan + reno + LMI
    Loan 2. Deposit funds
    And anything left over from each of the above to split off to another new split to segregate the left over funds?
     
  7. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    .You may not have a choice re where the LMI goes, it often gets pro-rata'd between the splits.
    You may or may not be able to split off the remainder, depending how big/small it is.

    If it's only a small amount, you could use it to pay for IP expenses rather than paying in cash - speak to your accountant about that.
     
  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    See my posts linked about re the LMI being deductible.

    a LOC is a split!

    I am not recommending anything as I don't know your full situation, but you don't have to use a LOC if you can use a IO instead.

    I don't think you can claim the LMI in full, and certainly not against the existing property.

    Which bank are you using?
     
  9. S0805

    S0805 Well-Known Member

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    As Jess said,
    My exp with ANZ few years back (unless they've changed the policy) you'll not have say on which split gets LMI....It gets apportioned between splits. reconfirm this if you relying on that....Letter of offers will cover this...
     
  10. Benson

    Benson Active Member

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    Wouldnt there be fixed repayments on variable loan option agreed at time of signing the loan contract?
    Whereas LOC you only pay interest on what you have used?

    Also variable loans only have a fixed term of IO, then revert to PI, whereas LOC is indefinite IO, so advantageous for serviceability?

    So if using a variable loan, would the strategy be to pay the loan straight back in full then just redraw as you need it?
     
  11. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    LOCs are generally at call.
     
  12. Benson

    Benson Active Member

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    ANZ
     
  13. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    They are not very good for rearranging things. I have never tried to split and existing loan into 2 with them so not sure how it would work. But their LOC is good and this could be converted into a LOC after being used, without a reassessment - from memory - and at a lower interest rate.
     
  14. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Consider multiple splits too
    Tax Tip 13: Simple Loan Structuring Strategy

    set up multiple smaller splits, up to 6, and then there may be no reason to need to split loans down the track.

    You can pay one loan off in full then redraw the full amount into a clean account and use from there without contaminating.
     
  15. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    Any interest only loan only requires payment on the portion of the loan used. This is the same for a variable loan or LOC.

    Yes, a LOC is interest only for the term of the loan, whilst a variable loan has a defined IO period (usually 5 years, but it can be as long as 15 years with some lenders including ANZ).

    In most cases your serviceability (from the banks perspective) is actually better with a P&I loan. A LOC doesn't give you any advantages here, it's actually the opposite. With most lenders, a LOC product is going to be worse for your serviceability than a regular variable loan.
     
  16. S0805

    S0805 Well-Known Member

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    Interested to know, if any one had exp with ANZ doing the split on existing loan....is that new application or done over the phone??
     
  17. albanga

    albanga Well-Known Member

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    Quick question regarding a variable split.
    Say you have 150k equity that you release as a single variable split.

    You then find an IP and pay costs of 80k from the split.

    Is it as simple now as calling the lender and having them seperate those loans?

    So you now have:
    Split A - 80k fully drawn
    Split B - 70k in redraw

    If not then what do you do? Reading a previous @Terry_w tip it's not ideal to leave them combined, even if the next 70k is used for another investment.
     
  18. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    It depends on the lender.

    If NAB it is a full blown loan application (to split a loan and change product) - that drags on for 3 months.

    With Westpac it is a phone call followed by a simple form to sign.
     
  19. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    I think NAB may have changed this recently - not a full app to change product.
     
  20. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Yeah, I heard this was coming i
    n sept