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Question on line of credit

Discussion in 'Property Finance' started by albanga, 15th Mar, 2016.

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  1. albanga

    albanga Well-Known Member

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    Hi Brokers,
    Question regarding line of credit and as always, consideration of loan structure and contamination.

    Say I have a loan of 200k and I want to release funds but at this stage it is unknown exactly the purpose and how much I require specifically. Let us say I am thinking some will be for a holiday and perhaps also to pay for a deposit on an investment property. As a result I release 300k via a LOC.

    6 months later I find an IP and need a 100k deposit, subsequently I decide to travel the world and given I have no savings, want to take 50k from my LOC.
    I now have 150k unused, 50k personal and 100k investment.

    What is done in this situation, to ensure the loan remains intact? From past reading, I understand you need to turn the investment portion into a separate split to keep the dedcutability? If so what is the process? Is it another application, or is it simply calling the lender and saying please make 100k from LOC into an IO loan?

    Thanks in advance
     
  2. Hodor

    Hodor Well-Known Member

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    In short you would end up with a mixed purpose loan. You need separate facilities for investment and personal expenses.
     
  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    You would have a mixed loan of $50k and $100k. The unused portion hasn't been borrowed so it not an issue.

    To fix this you would have to pay out both portions at the same time. i.e repay $200k into the loan so the balance is nil

    But you would want to keep the $50k deductible so you would need to borrow this amount and repay the loan with this new loan and $100k from cash/another loan.
     
  4. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    Considering a LOC is IO and no principle has been paid, wouldn't be as simple as splitting the loan into the correct portions and playing on?
     
  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Yep split it into the relevant portions.
     
  6. Hodor

    Hodor Well-Known Member

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    I thought once the money has been borrowed and contaminated it can't then be split into deductible and non deductible debt. From my understanding you need to set up the correct structure in advance before borrowing the funds as it can't be corrected (split) after the event, even with no funds repaid.

    Is my understanding incorrect?
     
  7. albanga

    albanga Well-Known Member

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    Are you suggesting say I already spent the 100k for an investment deposit and 50k per my holiday and then down the track I realise they are mixed I could simply get the appropriate splits and then all is restored?
     
  8. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    If no principle has been repaid, it can be as easy as that. It's when loan gets paid down that it gets messy. If funds are then redrawn out again, it's even worse.
     
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  9. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    It's definitely better to get it done properly from the start, but in some instances it can be easily fixed, others, not so much. Depends how much drawing in and out of the loan has taken place.
     
  10. albanga

    albanga Well-Known Member

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    Thanks Jess
    Given this is something of a grey area, could I just ask what is your recommended structure for someone who wants to release equity for both future personal and investment uses?

    Would it just be a top-up of the existing PPOR loan for personal use as required and a separate split set aside for investment purposes?
     
  11. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    No - the existing loan stays, and 2 new splits are created, one for each purpose. So you end up with 3 loans in total. :)

    You don't want to top up your PPOR for personal in case it becomes an IP down the track.
     
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  12. albanga

    albanga Well-Known Member

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    Thanks Jess, all very much appreciated :)
     
  13. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    You must refinance the existing loan as if you just paid a sum of money into a mixed loan it would come off both portions.

    Tax Tip 44: How to Un-Mix a Mixed Loan Tax Tip 44: How to Un-Mix a Mixed Loan