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Making a p&i loan like an io loan by redrawing consistently

Discussion in 'Property Finance' started by Whitecat, 6th Oct, 2016.

  1. Whitecat

    Whitecat Well-Known Member

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    I am looking at refinancing my ppor home loan. Currently io with offset but rate not as good as others that are around and will service.

    In order to get a lower rate, p&i with offset is lower than io with offset.
    In the future (but a number of years away) it is possible, but really not certain, that this house may become an IP (may actually just sell it if I upgrade). In the scenario that it became an IP, I would just make sure I had been consistently redrawing from the loan account and putting the money into the offset and I shouldn't have any issues with the deductibility of the interest if taken from the offset to buy a new ppor. Would that be correct?

    Or could just go without an offset (even cheaper rate) and refinance (to 100% or thereabouts) to an offset closer to the time that (but not directly before) I was had confirmed plans to make it an IP in the future. My personal circumstances (not huge income or expenses) mean that a transactable offset wont make too much difference to interest paid.

    Seeking feedback as the loan is fairly large and I would appreciate the savings, because I am not certain if it will be an ip in the future (given the property's characteristics also), I don't want to just default to an expensive offset arrangement.

    Comments on this?
     
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    No that would not be correct. everytime you redraw you are borrowing money and so at the end of the day you will have a mixed loan - with a large balance but only a small fraction deductible.
     
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  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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  4. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    You've indicated that equity release will be used to purchase your new home, which is a non-deductible purpose. Those funds would not be tax deductible even though (what is now) an IP is used to secure the equity release.

    It seems you can have a cheaper rate, or extra tax deductions. Not both. You'll need to figure out which is worth more. Talking to your accountant might help.

    In most cases, the rate difference between P&I and I/O is 0.1%. It's probably not worth compromising the tax deductability of the entire loan for.
     
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  5. Sonamic

    Sonamic Well-Known Member

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    Once Principal has been paid it's been paid. Just make minimum repayments and load up your offset if you go to P&I. Might make it easier to manage the loan down the track. Deductions aren't the be all and end all.
     
  6. Whitecat

    Whitecat Well-Known Member

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    I don't have the money to be able to do that. After paying P&I I wont have much left over.
     
  7. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    All the more reason to use an offset - if some thing comes from left field you definitely do not want to have no financial wiggle room.
    It sounds like the benefits of IO with offset are going to outweigh P&I by far.
     
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  8. Colin Rice

    Colin Rice Mortgage Broker Australia Wide Business Member

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    Better of going IO with a linked offset IMO and treat it like an IP structure wise and load up the offset. You hedge your bets this way and the nett effect is the same but with many more advantageous.

    You could look at debt recycling using funds in the offset to convert the non deductible PPOR debt to deductible debt. Get advice and guidance from a savvy broker in conjunction with your accountant rather than DIY.
     
  9. Greyghost

    Greyghost Well-Known Member

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    Ruin tax deductibility of thousands of dollars to save a few hundred in interest?
     
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  10. Whitecat

    Whitecat Well-Known Member

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    Tell me more
     
  11. Whitecat

    Whitecat Well-Known Member

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    I'm not sure this property will ever be an ip
     
  12. Whitecat

    Whitecat Well-Known Member

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    At the moment i have io with offset at 4.09 with liberty.
    Problem is:
    1. Loan is at 70% lvr to get that rate.
    2. Their interest only repayments are not calculated on loan balance less offset. The repayment amount is calculated based on the loan balance only so any extra money that comes in from repayments (that are not adjusted for the offset) actually pays down the principal. You have to call them to manually adjust the repayment amount to reflect the loan amount less the offset! In theory you would have to keep doing this whenever additional funds go into the offset so it's a really stupid io/offset loan.
    I went with them because they were the only ones apart from NAB (i think the same anyway) that would service me at a reasonable rate. However I'm going to be getting $100K in 5mths from an inheritance so then I will look at refinancing
    However I have learnt today from Terry's advice if I understand it correctly that if I refinance past 70% that additional amount wouldn't be deductible later anyway because the purpose of the refinance is not to acquire this property nor for any investment.
     
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  13. JacM

    JacM VIC Buyer's Agent Business Member

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    This made my brain hurt.
     
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  14. Whitecat

    Whitecat Well-Known Member

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    Yeah its totally stupid. Looking forward to changing. In retrospect i should have just gone with NAB paid a higher rate and gone to 80% (then refinanced that 80% later) because now 10% is kind of written off from ever being deductible if I'm correct in my understanding of terry's tax tips
     
  15. Colin Rice

    Colin Rice Mortgage Broker Australia Wide Business Member

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    Example;

    - 500k PPOR value
    - 400k oweing with 150k in offset
    - pay down the 400k debt to 300k using 100k from offset and leaving 50k as a cash buffer.
    - reborrow the 100k and place in a seperate loan split.
    - New structure as follows;

    Spit 1: 300k new non deductable debt total
    Spilt 2: 100k funds used for investment therefore converted to deductible debt once utilised.
    Total: 400k

    There are a couple of other methods as well.
     
  16. Greyghost

    Greyghost Well-Known Member

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    How can it be an offset if it doesn't function as one?
     
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  17. Sonamic

    Sonamic Well-Known Member

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    Agreed.

    Or I/O if it's paying off Principal? Weird.
     
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  18. Whitecat

    Whitecat Well-Known Member

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    It does. Partly. The offset balance counts because any amount of repayment that is in excess of what loan-less-offset io amount should be, pays down principle (not that i want that).

    Maybe brokers can explain this rationale behind this frankenloan. Liberty is not totally uncommon.
     
  19. Whitecat

    Whitecat Well-Known Member

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    Where does the 100k go when you say its "placed"? Do you mean you have a loan split into 300k and 100k? I'm assuming i have to buy a 100k investment? Could I buy a 400k investment and 'recycle' the lot?
    What is the difference between that method and going and getting a new investment loan which would be deductable?
     
  20. York

    York Finance Broker Business Member

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    The 100k is taken from the offset and paid into the loan. Reducing the balance to 300k. Then you pull out 100k as new borrowings for investment purposes which makes the 100k deductible. So the loans would look like:

    Loan A 300k (non-deductible)
    Loan B 100k (investment purpose - deductible)

    The purpose of debt recycling to is the turn non-deductible debt into deductible debt. If you don't pay down the non-deductible debt, you haven't recycled the debt.