PPOR Line of Credit structure query

In the process of refinancing the PPOR to NAB to release equity after a major renovation ($100k increase in value based on bank val). The current bank wasn't interest and NAB is offering a good interest rate which is a bonus but not the major selling point. The main reason is that we want to access the equity into a split loan or Line of Credit without contaminating the deductibility of the $100k interest as we plan to use this as part of the deposit to purchase a business in the short term.

NAB is offering to refinance the PPOR loan which is fine, I'm happy with that. My concern I would like to run past you for advice is the structure of the $100k equity.

Their proposal is to setup a loan account with a $100k mortgage connected to a new offset bank account with $100k sitting in it. As we spend down money from the offset account this will trigger interest being payable on the $100k linked loan account. I asked the bank officer if the bank statements will clearly show the $100k being 'redrawn' from the loan account and transferred into the offset account to show a direct connection to satisfy an ATO audit should this be scrutinised. They couldn't guarantee this initial transaction will show on the statements as another department will setup this structure. I raised a concern that the ATO, should they audit me, could conclude the interest from the loan account payable as a result of money being spent from the offset is not deductible if used for business purposes. They assured me they do this all the time and they will issue a letter that confirms the money in the offset account is linked to the loan account.

What do you guys think? If this arrangement isn't going to work I'd rather pay a slightly higher interest rate via a Line of Credit account to establish a clear link of funds being used vs the interest payable.

 

NAB are a terrible lender for this sort of thing.

You wouldn't be doing this "$100k being 'redrawn' from the loan account and transferred into the offset account"

but you would be borrowing an extra $100,000.

The problem is you are borrowing now and parking in an offset account. Any cash deposited into this offset will create a mixed purpose loan. Even if no cash is deposited there are other potential issues which I have discussed in:
Tax Tip 1: Parking borrowed money in an offset account https://propertychat.com.au/communi...ing-borrowed-money-in-an-offset-account.1313/

I would suggest you speak to a broker abou other lenders.

 

Hi Terry,

Thank for your post and link to the Tax Tip.

What NAB are proposing is the following scenario:

1) PPOR Loan $300k Refinanced → Brand new/clean Offset Account No 1 (salary and rental income offsetting PPOR)

2) Home Loan $100k (equity) → Brand new/clean Offset Account No 2 (NAB will setup with $100k cash in this offset)

Offset No 2 will be brand new, NAB will set it up with $100k cash balance at the same time as the $100k loan it is linked to. The cash will sit there until we are ready to use the entire amount as the deposit to purchase a business. Reading your tax tip, if we keep this $100k loan split, don't mix by only using the money for business purposes the interest could be considered deductible if all these conditions are met?

 

NAB are notorious for putting the money in the wrong account - be careful

 

After using all serviceability with one lender I have moved my PPOR loan to NAB to further discounts on few loans I have with them. Also their val was conservative but close enough to what we need to move forward.

 

Potentially. Funds will need to be moved from the offset back in the loan account and redrawn (re-borrowed) when you actually use them for the stated purpose. If you bring it all the way to zero it will close the loan account down with NAB.

As Rolf said there are better options for what you want to do other than NAB but could still work with them.

 

I'm impressed that you managed to get a deal to service with NAB after it didn't service with your existing lender......NAB have one of the least generous servicing calcs now :-(

Cheers

Jamie