Right purpose, Wrong security..

Discussion in 'Loans & Mortgage Brokers' started by Frosty123, 13th Feb, 2019.

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  1. Frosty123

    Frosty123 Well-Known Member

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    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

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    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

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    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

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    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.
     
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  5. ChrisP73

    ChrisP73 Well-Known Member

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  6. Frosty123

    Frosty123 Well-Known Member

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    Our mortgage broker (whilst advising us to seek advice from an accountant), told us that if we were to settle on our current PPOR before the purchase of the new house - and hence pay out the secured loan, we would just need to show the loan paper trail to show the transfer of security to the new property.

    I am a little confused, because I thought as soon as the loan has been paid out, tax deductability would be dead in the water...
     
  7. Blacky

    Blacky Well-Known Member

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    Ha ha. Another good reason why mortgage brokers/bankers should hand out tax advice.

    Your understanding is correct. Once you repay the loan any future borrowings is ‘new money’ and hence new purpose!

    @Bender12 above has a good solution.

    Blacky
     
  8. Phantom

    Phantom Well-Known Member Premium Member

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    You mean 'shouldn't?'
     
  9. Frosty123

    Frosty123 Well-Known Member

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    Unfortunately my lender (CUA) won't allow for this substitution method with a term deposit.

    I've been told by the mortgage broker that we will be able to hold onto both properties with our current situation.
    I'm thinking we will use the funds in our current PPOR offset account to purchase the new property (leaving us with ~ 50% LVR), then transfer the security of the IP loan to the new property before selling our current PPOR.
     
  10. Terry_w

    Terry_w Broker, Lawyer, Tax advisor, Debt Recycle advisor Business Member

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    Sounds like you are smarter than your mortgage broker and they have given negligent tax advice. Keep good records for any potential litigation.

    If a loan is paid it it can't be reinstated with interest being deductible.
     
  11. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    The investment property is worth $450k and the loans for this purpose are $300k & $120k. I assume these loans are with the same lender?

    You can borrow up to 80% of the investment value without incurring LMI, that amount is $360k.

    What you can do is split the $120k loan into two portions of $60k each. You can then do a security swap on one of those $60k splits to have it secured by the IP. The total amount secured by the IP is now $360k (the 80% limit).

    Now when you sell the PPOR, you will have to pay off the original PPOR loan and $60k of deductible debt. Still not the perfect solution, but better than loosing deductions on $120k.



    There are potentially solutions to keep the remaining $60k. You could lend up to 90% LVR on the investment property value (probably not an ideal solution).

    You can also sometimes keep the loan active, but secure it against a term deposit instead of a property. When you buy the new PPOR, you then use the PPOR to secure the loan and close the term deposit.
     
  12. Terry_w

    Terry_w Broker, Lawyer, Tax advisor, Debt Recycle advisor Business Member

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    another solution is a related party loan. Borrow $120k from parents use it to pay out existing loan.
    Then when settle on the new main residence split and pay down $120k and redraw and pay out the parents.
     
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  13. Blacky

    Blacky Well-Known Member

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    Sorry. Yes.

    *shouldnt.
     
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