Loan Tip: How do You Pay One Loan With Another Loan?

Some borrowers want to borrow to pay a loan. Putting the tax issues aside for a moment, how could a loan be set up to do this?

The lender will generally not allow a repayment to come from a loan. They will also now allow the loan interest to capitalise. Not paying a loan’s monthly repayment will be capitalising the interest – but it will be a breach of the loan agreement. A default.

The easiest way borrow to pay a loan would be to borrow extra and put that borrowed money into an empty offset account and to have the loan direct debt taken from there.


Example

Chief Wiggins has a loan with a monthly repayment of $1,000 – both principal and interest.

He has equity in the property which secures that loan, so he goes and borrows another $20,000 under a new loan split, ideally, and gets a new offset account set up.

The bank can then take the monthly repayment for the main loan from this offset account. It will take 20 months before all the money is used up. The chief would have to pay the monthly repayment on the $20,000 split – which might be say $50 per month, but this could also come from the offset account.

After the extra borrowed money runs out, they would have higher repayments and this would be increasing interest payable.

Why the heck would someone want to do this?

It could be for cash flow reasons – someone might be going on a holiday for a year, taking maternity leave, or other reason. It can also increase tax deductions – but careful tax advice is essential.

On the tax side see my Tax Tip 16.

 

Hmmm interesting subject to think about...maybe as you said the tax deductions are the answer, but why...

 

as a retirement strategy, tax strategy or to improve cashflow - plus more potentially.

Another I just thought of:

Prepaying interest for a year - borrow from one loan to prepay up front.

 

oh thanks! I will make some time to read more about this subject, seems interesting

 

And as a way to pay IO on a PI loan
Tax Tip 46: Want to Pay IO on a PI loan? Tax Tip 46: Want to Pay IO on a PI loan?