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Mixing equity loan and cash deposit

Discussion in 'Property Finance' started by Madcatters, 7th Jan, 2017.

  1. Madcatters

    Madcatters Member

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    Hi all, great forum.
    I have a question regarding the deposit for an IP and tax deductibility.

    We are about to refinance our PPOR which we will have about $65,000 of usable equity to release. My intention is to use this as paying for the deposit to an investment property. My concern is that it may not be quite enough (borrowing 88%). Will using the $65,000 from an equity loan and then topping it up with cash (approx 10k) which I save between now and then affect tax deductibility or should I wait until I pay down my PPOR a bit more and then get a greater equity loan which will be enough?

    I would prefer to start the finance process now rather than wait longer, but not if it will drastically affect tax outcome... thanks for help guys
     
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    you could use cash and borrowed money to buy an IP, but won't don't you structure you loan now so that you could use that extra cash you save and use it to pay down the loan further so you can borrow this as well. $10k at 4% would save you $400 per year for 30 years or so.
     
  3. Madcatters

    Madcatters Member

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    Thanks for the response.
    So basically you're saying the 65k would still be fully deductible but the 10k would not? I can live with that if this is the case.

    I don't have the 10k now to pay down the loan now otherwise I would. However by the time I refinance my PPOR and start preparing to finance an investment loan, I will easily have more money to pay cash on any investment property shortfalls. I hope this makes sense.

    If the only issue mixing cash and equity loan is not claiming a deduction on the cash component, i think that is ok to start getting the ball rolling.
     
  4. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Lets say you current loan is $400,000. You could structure the new loan as follows:
    Split A $390,000 + offset
    Split B $10,000
    Split C $65,000
    All IO ideally. if not A PI and the rest IO.

    This way you can use the $65k for the investment property and claim this with no probs. But before settlement you will keep saving in the offset account. By the time you settle on the IP you will hopefully have $10k or more in the offset account. so you can then pay off split B and redraw it to use for investment purpose.

    This way you can claim interest on $75k per year instead of $65k and have $400 extra in deductions.

    if you cannot manage to save up $10k you are no worse off (assuming you can still settle).

    The major issue is $10k is too small for a separate split with some banks.
     
  5. Madcatters

    Madcatters Member

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    Sorry I don't quite understand, but thanks for your time. I'll add some more detail.

    I have a PPOR worth 600, 415 owing.
    Refinance at 80% = 480.
    Loan A. P&I, 415k
    Loan B. IO, 65k.

    I could do the refinancing now, get a lower % rate on PPOR and 65k equity loan. If 65k not enough I can save up another 10k over the next two months for a total of 75k. Looking to finance for investment property in March.

    Or, can wait and pay down PPOR before refinancing but this will probably mean looking for finance for investment property in June instead.

    I'm assuming a two month gap between refinancing PPOR and arranging finances for an investment is suitable.
     
  6. tobe

    tobe Well-Known Member

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    Refinance 405 oo. 10 oo/inv. 65 inv

    Over the next couple of months fill up the 10k loan, then reborrow it for the remainder of your deposit. At tax time give your account the 10, 65, and the 88% inv loan to claim interest on.
     
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  7. Madcatters

    Madcatters Member

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    Thanks tobe. Won't that strategy however result in LMI on refinancing the PPOR because now I am over 80%.
    I was only intending to take out some LMI on the financing of investment loan
     
  8. tobe

    tobe Well-Known Member

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    No. it's the same overall loan amount. Instead of 415 borrow 405 and 10. Then the 65 as planned.
     
  9. tobe

    tobe Well-Known Member

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    And where the lmi is charged doesn't matter from a tax perspective if the purpose of lmi is to buy a property you can claim the lmi. Might be worth looking at 2 83% loans than one 88% loan. Lmi might be cheaper.
     
  10. tobe

    tobe Well-Known Member

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    Or a lender that does 85% no lmi.
     
  11. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Not so simple

    if LMI is incurred it will be on the whole loan - most of which relates to the owner occupied non-deductible portion.
     
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  12. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    To keep it simpler, you could do it in 2 splits - have one a $75k line of credit.At settlement of the PPOR refi this will be drawn down $10k, but if you save the $10k into the LOC you will be able to draw down the full amount for you deposit when the time comes. Just saves having too many splits for one property.
    The full $75k will be deductible when the time comes.
     
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