Pay off investment loan or redraw money for deposit on second property ?

Discussion in 'Accounting & Tax' started by Michael19, 20th May, 2020.

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  1. Michael19

    Michael19 Member

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    I'm wanting to move out in a few months and i've got an investment property.
    I'm wondering if i should live in investment property & also pay off the investment loan completely or redraw money for deposit on second property (PPOR) ?

    Investment Loan: 125k avaliable redraw (paid in advanced), 181k current balance, 153k principal paid. Current interst rate at: 3.32% (I don't have an offset account)

    Should i:
    1. Redraw the 125k as a deposit for a 450k PPOR loan

      OR

    2. Live in my investment property until I pay off my existing loan completely, and once paid off, save up for a deposit for the PPOR. (Later, when i move out of my property, i'd want to later place tenants back into it/use it as an investment property again.)
    I'm not entirely sure what is the best option in terms of saving money, as i'm currently utilising negative gear at the moment, and other tax things etc.
    I've heard people say about offset accounts, and wondering if I should do this.
     
  2. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Suggest that we should not have paid any of the Investment loan ideally.

    you will have a + geared property for investment and a relatively large non ded debt of 525 k since the 125 drawn from the IP wont be deductible

    Its a gift that keeps on giving and is reverse compounding over time :(

    Pls seek specific tax advice, not my area of expertise.

    Suggest you get to an IO loan or at least an offset on the IP remaining balance ASAP

    Number of ways you may be able to soften the bite over time BUT it will take some specific advice around tax and debt recycling and loan structures.

    As an aside, who is the lender pls ?

    ta
    rolf
     
  3. Michael19

    Michael19 Member

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    Thanks for the advice, i currently regret not getting an offset on the IP!
    My lender is ANZ
     
  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    Id you are not planning on remaining in the IP then best not to pay it down. So you are probably best to redraw the $125k, split the loan, and then debt recycle the non-deductible loan with the highest interest rate.

    I am licensed - but don't rely on this because I don't know all the details.
     
  5. Michael19

    Michael19 Member

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    Thanks.
    Even though i've paid so much in advanced into the loan, i can't just remove it and open an offset account?
    I feel like i have complicated my situation..
     
  6. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    You can.
    But that won't make the interest deductible.
     
  7. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    As to why this wont work see:
    Tax Tip 285: Redrawing money is borrowing Tax Tip 285: Redrawing money is borrowing
     
  8. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Loans aint loans.

    The simplicity plus product is suitable for many...........May even have been for you at the time you took the loan.

    Did you explain to the banker/broker at the time what your longer term intentions may be ?

    ta
    rolf
     
  9. Michael19

    Michael19 Member

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    I thought i did, but clearly now it went the other way..

    Just on point, regarding moving to an offset account, should i refinance my loan from theremaning balance? I think the bank would then take my redraw completely.
     
  10. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    You should split the loan. This could be done before or after redrawing. but ideally very soon after if the loan is PI - or before.
     
  11. Michael19

    Michael19 Member

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    Thanks Terry, appreciate your feedback.
    If circumstances have now changed, and i no longer want to redraw on the IP for a deposit.
    Should I change to offset and refinance on the remaning balance? I'm not losing any tax deduction right? i just paid a bit too much in advanced.
     
  12. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    Are you asking if you should redraw the extra amount?
    You would need to split it if you did as the interest would need to be apportioned on the loan otherwise.

    You might as well get it ready for a future use, but take tax and credit advice first.
     
  13. Michael19

    Michael19 Member

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    Sorry for the confusion, I no longer want to redraw the extra money, I'm now considering opening an offset account and with a tight budget for 2-3 years, save for a deposit, then move out.
    With that being said, I would not be losing any tax deductions on the IP then?
     
  14. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    If you are just saving cash in the offset and leaving the loan as is I can't see any issues as the loan is not mixed, it is just that you had paid it down. But using an offset will potentially speed up the rate at which it is paid down. So one strategy might be to split and convert part to interest only and offset this split.
     
  15. Michael19

    Michael19 Member

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    Thank you for that.
    I spoke to my accountant and confirmed i'm positive gearing now.
    As there is no future tax deduction, there is no negatives in using my redraw now?
     
  16. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    Not sure what you mean by that but suspect you have a misunderstanding somewhere.

    If a property is positive geared or not has no bearing on the deductibility of interest - you still claim interest and all other expenses as before.

    If you redraw it won't change whether the property is positive geared or not either. the interest on the redrawn amount is deductible against the new income it relates to. If it doesn't relate to income the extra interest is not deductible at all.
     
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