Right purpose, Wrong security..

Discussion in 'Property Finance' started by Frosty123, 13th Feb, 2019 at 7:46 PM.

Join Australia's most dynamic and respected property investment community
  1. Frosty123

    Frosty123 Well-Known Member

    Joined:
    12th Nov, 2015
    Posts:
    84
    Location:
    VIC
    Hi all,

    My wife and I currently have the following home loan:

    Loan: $338k
    Type: Variable Interest Only
    Offset Account: $338k (ie. effectively paid off)
    Security: Home
    Purpose: Home

    We decided a few years back to purchase an investment property and set up the following loans:

    Loan: $120k
    Type: Variable Interest Only
    Offset Account: $20k
    Security: Home (Used equity in our home for purchase costs of IP)
    Purpose: Investment Property 1

    Loan: $300k
    Type: Variable P&I
    Offset Account: $0
    Security: Investment Property 1
    Purpose: Investment Property 1

    The PPR is valued at ~ $675k
    Investment Property is valued at ~$450k

    We have decided recently we'd like to sell our home, and purchase a bigger place (kids on the way).
    As you can see above, we have two loans, each using the PPR as security. Obviously when we sell our PPR, the proceeds are going to have to pay off these two loans

    Given the $120k loan is tax-deductible, since the purpose of it is for the investment property, I would obviously not want to pay this off. I would want the sale proceeds to go towards my future PPR (non-deductible debt). Is there any way I can get around this, given I have a bit of extra equity in the PPR?

    I'm looking at going to a mortgage broker for advice soon, but just wanted to get an idea here first, so I have some idea of the options.

    Appreciate any help.

    Frosty
     
  2. tobe

    tobe Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    1,728
    Location:
    Melbourne
    Simply transfer the tax deductible debt to the new home. The tax deductibility remains regardless of where the loan is secured. If there’s a gap, selling first before you buy, then secure it to a term deposit for the interim.

    This is bordering on a tax question. It’s important to get specific tax advice.
     
  3. Frosty123

    Frosty123 Well-Known Member

    Joined:
    12th Nov, 2015
    Posts:
    84
    Location:
    VIC
    We are looking at selling our PPR first, and buying the new PPR after this.
    I'm a bit unsure of what you mean by 'transfer the tax deductible debt to the new home'. When I sell our current PPR, won't the bank require us to use the proceeds to pay off both of the loans?
     
  4. Bender12

    Bender12 Well-Known Member

    Joined:
    20th Jun, 2015
    Posts:
    130
    Location:
    Sydney
    What you need is a security substitution. When you sell your home, put a request to your bank to hold a term deposit of $120k as security for the investment loan.
    When you purchase your new home, you can ask them to release the term deposit and substitute for the new house. They will go to settlement, hand over your $120k and take security over the new house.
     
    Frosty123 and tobe like this.
  5. ChrisP73

    ChrisP73 Member

    Joined:
    5th Oct, 2018
    Posts:
    18
    Location:
    Brisbane