Refinance - have I made a mistake with deductibility?

Hi

Situation before refinance -

5 loans, one on my PPOR, one on each of my 4 investment properties. All fully deductible as my PPOR loan did not exist prior to buying investments - I borrowed against the PPOR for the deposits on the investments.

So far so good.

Just refinanced. Increased the facility on all 5 loans to the maximum I could borrow. Was intending to move money around via offsets so that the PPOR was paid off (with a large redraw available) and the investment loans were increased. The PPOR is P/I and the investments are IO.

Then along came APRA, and my PPOR loan became 0.27% cheaper than the investment loans. So I redrew the maximum from the PPOR loan, and put the money freed up into offsets of the investment loans.

As all 5 of the loans are for the purpose of investment, and none of the debt is used to finance any personal items, can anyone confirm I have not made any mistakes with deductibility?

Thanks

JB

 

It's not the security, but the purpose of the loan that determines deductibility. So I don't see anything wrong with this.

You might want to wait to have this confirmed by a mortgage broker though.

 

Maybe it's just me but I find your post a little unclear.

Iif you redrew from a loan and put the funds in an offset that is NOT offsetting the loan the funds came from, the interest incurred is not deductible.
This is because in your case, the PPOR is now paying more interest due to funds sitting in an offset account which is not attached to it's loan - putting funds in an offset is not an investment expense.

Normally this is fine b/c the offset is attached to the loan the funds are coming from, so no extra interest is payable.

 

Hmmm. OK - can I fix this (the refinance has only happened today) by reverting to removing the funds from the offsets to the 4 investments and paying this back into the PPOR loan?

JB

 

Yes you have made a mistake - several.

The first mistake is borrowing money and putting in an offset account.
The second mistake is making a mixed purpose loan on the PPOR.
The third mistake is making it difficult to apportion the interest between each property.
The 4th is not being able to pay down your PPOR without reducing your investment debt.

See my tax tips

Can you split your PPOR loan into 5 portions?

 

No simply removing funds won't fix it but make it work. Imagine putting some orange juice into some milk. You can't simply remove the orange juice.

 

Thanks Terry. I have read your tax tips and this is what caused my "oh ****" moment.

Terry, I don't have to get orange juice out of milk. There wasn't anything in the offsets to start with so its like putting entirely milk back in the milk bottle. Is that OK?

JB

 

If there was nothing in the offsets then you might be right. You have borrowed to park with non mixing. If you pay back into the loan you borrowing from then you would be mixing the loan usually, but because you can trace the borrowed funds and there was no mixing placing it back into the loan may fix the problems.

Even if there was mixing it wouldn't be an issue if you are not claiming the interest on the PPOR loan. Could be issues in the future if you were to ever rent it out.

Confirm with your tax adviser.

 

Thanks Terry for taking the time to help out. I am going to put the money from the offsets back into the PPOR loan (where it came from today) - net result I am 0.27% worse off in interest but less principle.

JB

 

You can go what you are proposing just split first.

 

Hi Terry - sorry I don't understand what you mean by "split first" as all the debt is deductible, all of it has been used for purchasing investments.

Thanks

JB

 

Ok, so all the current loan against the PPOR has been used to purchase investments?

In that case it is still necessary to split otherwise you would have a big pool loan relating to many properties. You can apportion, but when selling a property or refinance a portion it won't be possible to pay the debt relating to that portion down independently of the others