PPOR loan split to cover IP expenses

Discussion in 'Loans & Mortgage Brokers' started by San2018, 25th Feb, 2019.

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  1. San2018

    San2018 Well-Known Member

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    Can someone advise of I split PPOR refinanced loan to cover the IP expenses.

    Recently I have refinanced my PPOR and created a 100K loan for future IP/PPOR buy. While waiting, i am thiking to split 100K with 90K and 10K, then use 10K to cover my existing IP expenses like repairs, property management fee, council bills etc. so that I can increase the deductable loan. And is this effort worth to increase ~10k deductable every year?

    If yes, how I do this. Once I have 10K split loan, I simply tag it aganst IP and ensure that i have a record of 10K worth of IP expenses? For example, if I spent 10K worth of IP expenses last year, can i assume this split 10K to cover those expenses.

    My current IP is P&I so I am paying some principle loan amount every month. I want to make sure that I always have good amount of deductable loan if the property become positive gearing to avoid tax on rent in future. I am thinking the above approach is better than converting IP loan as IO as it attracts increased interest.

    Appreciate your inputs and guidance

    Thanks,
     
  2. Simon Moore

    Simon Moore Residential & Commercial Mortgage Broker Business Member

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  3. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    That would not be deductible and last years expenses were not paid using borrowed money. (You cant lend to yourself). Only if the newly borrowed funds were used to pay the outgoings does the loan interest become deductible from that time.

    Making the loan IO doesnt increase interest (except a rate differential). It just means less casflow that is non-deductible. Dont use a loan split to pay the interest. The ATO may consider the whole matter is a tax scheme.

    Remember borrowing more reduces equity. These sorts of arrangements really only work if you can redirect the cashflow savings towards non-deductible debt. eg repay your own home loan faster by $10K a year.
     
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  4. San2018

    San2018 Well-Known Member

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    Thanks Simon. I am with Westpac. Do you know if westpac allows $10 K split.

    Agree Paul, it reduces the equity but increases the deductable loan amount and i think its good for me because the property soon will become positive gearing. I am trying avoid it.other option is opt for IO but i endup paying more interest. Yes, i am thiking to move funds to payoff PPOR, park in offset account. Just more cash in hands.

    Assuming that westpac can do small splits like 10k, I assume steps are something below.
    - establish a split loan worth 10K
    - pay 10K in to loan account. Ensure that bank wont close the loan
    - and pay all IP expenses directly from the loan account. If bank doesnt allow, setup zero balance savings and use to route the funds?

    I am not sure if its worth to invest too much on this so probably ill focus when I have nothing to do :)
     
  5. Christina46

    Christina46 Well-Known Member

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    @San2018 - we are with Westpac and have been able to do a $10k split. Just a matter of ringing up the help desk and from memory it was updated in a couple of days. Just make sure you get them to deduct the interest from the correct account. The default for us seemed to be the interest coming out of the split. Easy to change where the interest is being paid from with a form off your internet banking portal. We did then pay the loan down again because we didn't want to risk the interest being treated as capitalised.
     
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  6. San2018

    San2018 Well-Known Member

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    Thanks @Christina46. Can you directly pay the bills or transfer the funds from split loan account. Probably it make sense to make it as IO otherwise, we quickly endup paying the principle?
     
  7. Christina46

    Christina46 Well-Known Member

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    Yes - I have direct debits set up coming from the split (insurance etc), no worries paying bills etc from it.

    It does make sense to have the split as interest only, but this might depend on how your existing $100k loan is set up? The loan from which we created the split was already IO. If you wanted to change from P&I to IO, this may need to be re-assessed by the bank??