Non-bank lenders

Firstmac sets up the "redraw offset" as a separate sub account and its treated exactly as an offset would be. It falls under the ATO's "dual account" ruling - paragraph 8 ( below) Of course, confirm these things yourself by chatting to an accountant or seeking ATO advice, but it seems quite straightforward.

TR 93/6 - Income tax and fringe benefits tax: loan account offset arrangements (As at 18 March 1993)


Ruling



How do acceptable loan account arrangements operate?

2. An acceptable loan account offset arrangement must operate in one of the following two ways.

Single Accounts

3. The customer is granted a line of credit. Interest is payable only on the amount which has been drawn down, with the customer able to deposit funds in the account at any time to reduce the balance of the loan. (That is, every repayment which is in excess of the interest owing on the drawn-down amount is a repayment of the principal.) There is usually no entitlement to receive interest when the balance of the account is in credit.

4. If there is an entitlement to interest on credit balances in the account then the full amount of that interest is assessable income to the customer. Additionally, the account while it is in credit will not be an acceptable loan account offset arrangement. However, this does not mean that the interest on the deposit account cannot be offset against any interest on a loan account. It simply means that during the period in which the account is in credit the taxation advantages usually associated with a loan account offset arrangement do not apply. Once the account is in debit it may qualify as a loan account offset arrangement.

5. An acceptable arrangement may also involve a deposit account with an overdraft, or a credit or debit card facility.

Dual Accounts

6. The customer operates two accounts - a loan account and a deposit account. To be acceptable, it is essential that there be no entitlement, either in law or in equity, to receive interest payments or payments in the nature of interest on the amounts credited to the deposit account. The only benefit arising in the deposit account should be the right of the customer to ensure that the interest payable on the loan account is reduced in the way described in paragraph 7.

7. The reduction in the loan account interest referred to in paragraph 6 should be achieved by offsetting the balances of the two accounts. That is, the interest payable on the loan account should be calculated by dividing the outstanding loan principal into two components. A reduced rate of interest (often the lending rate less the ordinary deposit account rate) is charged on an amount equal to the balance of the deposit account. The reduced interest rate can never be a negative, ie. the deposit rate used cannot exceed the loan rate used. In those cases where the deposit rate would exceed the loan rate the deposit rate actually used in the calculation must be limited to the loan rate (see Example 3, paragraphs 31 and 32). The usual lending rate of interest on loans of this type is charged on the remainder of the loan principal.

8. If an account is made up of a series of sub-accounts, some of which are used for deposits and some for loans, then the sub-accounts will be treated, for the purposes of this Ruling, as separate accounts. Consequently, a loan offset account arrangement involving such accounts will fall for consideration under the principles applying to dual accounts (paragraphs 6 and 7).

 

I am not sure how this would work in practice. If it is an savings account fine, but if it is a loan account I don't see how it could work.

 

Seems fairly clear..

If an account is made up of a series of sub-accounts ( firstmac's is) some of which are used for deposits and some for loans ( firstmac's is) , then the sub-accounts will be treated, for the purposes of this Ruling, as separate accounts. Consequently, a loan offset account arrangement involving such accounts will fall for consideration under the principles applying to dual accounts (paragraphs 6 and 7).

They have been running things this way for a very long time without incident... for whatever that's worth

 

Does Pepper and Liberty also do 12% plus LMI ie 88% lending for investment properties?

 

They do, but with Liberty it won't work to improve servicing as it then falls under the mortgage insurers calculators. Pepper is more generous in that regard.

 

If you maxed out your servicing with Pepper, what would the potential exit options be?

Would you have to wait until bank servicing is loosened to go back to a regulated lender?

 

You could possibly exit to liberty but, assuming you used pepper for servicing that’d be it.

 

Oh no I'm coming to the end of the party ☹️
On a serious note I've maxed out on serviceability with Westpac and about to apply for an 80% loan with pepper for my next IP. Do you guys and girls see restrictions on serviceability easing with the big 4 anytime in the next few years?

Thanks

 

No big concerns for immediate exits but I guess Pepper is not viewed with the same confidence as ADIs, they also are a bit more expensive. It's probably just more of the feeling that it's the end of the line...

 

In certain circumstances the likes of Pepper or Liberty are actually significantly cheaper than regular ADIs at the moment.

You don't have to exit just for the sake of it, it's just good to have options and under certain circumstances these lenders may be risky.

Overall I don't see lenders easing off their policies. There has been (and will be further) tweaking which has improved things for some people, but generally not enough to make a difference.

 

Its really very unlikely

In any discussion about pre APRA and post APRA its helpful to remember there are multiple moving parts to the regulatory changes... some are here to stay, and some were shorter term changes designed to meet a shorter term outcome - ie the 30% IO quote for new lending after July 1,2017

My views are that as the banks get the balance of P&I v IO loans back to where APRA wants it to be over the next couple of years, you may see the IO quota's start to ease a little bit. And I do mean a LITTLE bit. It's probably a few years away , but it may well result in 10 year IO being more readily available than it is now. You may even see some modest improvements to servicing with some lenders. For example, some use assessment rates nearly 8%...they would have scope to reduce that figure to 7.2 or 7.5% for example... another example might be "shading". Several banks now accept less than 100% of secondary income sources such as OT. commission, bonus etc. They could restore that to 100% for example. In other words...modest tinkering at the edges.

But if you are hoping for the old 1970's based Henderson Poverty Index to be restored instead of todays HEM's, or for "actual" treatment of existing debt to be restored in place of today's sensitised P&I treatment ... one can never say never, but it's very very very unlikely. And those are the game changers...

 

I think it's just this.
By going with non-ADI, it seems to limit the options to change if the lender does something with a material negative impact.
i.e. If Pepper does something, it feels like the only option is to take it on the chin.

 

Its much more straightforward than that. You either want the money, or you dont.
If you are applying at Pepper, its because you cant get what you need from an ADI

 

Appreciate the bluntness (not being sarcastic)

 

And wasn't meaning to be harsh... but yes that's the blunt truth of the matter. if you dont have the borrowing power required for a CBA, NAB, ANZ, WBC, ING, Suncorp, AMP, Macquarie etc... and you wish to keep buying...its Pepper or Liberty . Gotta pay what they are asking... and that's all there is to say about that .

Yet another reason why cash cows for debt reduction is what people should be using the last of their borrowing power for...

 

IMO the credit environment is still very attractive. Servicing may be a little restrictive (although LTI's are around 7+ here, which is likely higher than international standards once standardised).

Will you see servicing adjustments that boost serviceability over the next few years - YES. Things like 40 year loan terms, net rental incomes, gearing addbacks at assessment rates, etc may help tinker calculators and help squeeze out servicing further. Credit growth slowing to 4-5% will have this happen in a competitive world.

Will the actual underlying cash rate, that is one of the key features of serviceability, increase over time? Yes.

Where will we end up servicing wise - not much better than today, with a likelihood of a higher funding cost (meaning credit environment may become less attractive).