scenario for IP

Hi guys had an interesting chat with a work colleague and wondering how does the following play out!

He is single living in his parent's second home with a fully paid off IP.

Recently bought IP 2 and used IP 1 AS SECURITY yes from the reading here a big no no! This is P+I with full offset.

If they sell IP one the bank said they need to pay off IP 2 as IP1 was used as security!

Was wondering can they somehow get out of this any way by putting proceeds of IP 1 into full offset of IP2 and then take the money out of IP2 and finally buy the ppor that they want with non no deductible debt and have IP 2 good for tax deductions euh interest ? I'm guessing not due to the security or cross coll issue early in setup??

 

They could look into porting the loan from IP1 to IP2

 

Sell IP#1
Reval IP#2
Either reduce loan to 80% and keep rest in offset OR proceeds used as security

 

Easy fixed - get him to speak to a good broker who won't terrify your friend with half-truths.

 

The bank told him if he sells IP1 which was fully paid off he will have to use the proceeds to pay down or pay off IP 2! I thought he could put the proceeds into offset on IP 2 and say in a year or 2 could take the cash out and buy his PPOR using the offset funds and have he IP 2 interest deductible again?

 

If they're cross secured, the bank makes the rules. They can do what they want. There's a much less convoluted way to sort this out well before any sale or purchase. It's not a hard thing to sort out, but a bank won't want to do it - they prefer it just the way it is.

Depending on the bank, they may require a new application/servicing done.

 

Substituting the security is easy enough.
If they sell IP1 they would need to pay off any loan associated with it - which appears to be none. So they could store the cash from the sale in an offset account attached to the loan used to purchase IP 2. Then when they find a main residence to buy they can use all the offset funds and the increased interest on the IP2 loan should be deductible.

Tell them to seek tax advice

 

From my reading on this forum that's what I thought he could do only thing i thought is he may have more paper work too fill in or new applications or changing the security if and when the IP which was security is sold! ?????

 

I don't think so, he seems happy to sell the first IP and then get a ppor down the track from the sale proceeds along with the the newer IP recently purchased.

 

Security substitution or refinance as long as he's not in a rush. Rushing is the enemy of wealth.

As always, speak to a broker.

 

So it's cross collateralised. The banks can choose how they want to fix this - if they want to be nice and IP 1 sells they will revalue IP 2 and need the loan to be reduced to 80% LVR with some of the sale proceeds if there isn't enough equity by itself.

I have seen some other scenarios where the bank has required:

• full repayment of debts
• residual loans to be paid to 40%, 60% etc

Timing is an issue - many settlements get held up due to cross-col, so it's important when unwinding it to have vals, discharges done early so settlement doesn't get stalled for weeks.

 

We don't know based on the information given. It just says property 1 was used as security for for a loan used to purchase property 2. I read it that property 2 was unencumbered, but perhaps this is not the case.

 

IP1 owned outright no loan at all but used as security for IP 2 which has P+I loan with full offset. Hoping to sell IP1 and out proceeds into offset account and then purchase ppor in due course!

 

How can it be owned outright if there is a mortgage on it?
Sounds like IP1 was mortgaged for a loan that related to IP2.
Is there a mortgage on IP2?

 

Let's see if I can word this better!

He has had IP1 for 10 years paid off so no loan on it but NOT discharged from bank.

Recently bought IP 2 with full offset as P+I.

Bank used IP 1 as security for purchase of IP2.

Now looking to sell IP 1 and put proceeds into IP2'S offset until he find a a suitable PPOR!

Hopefully this clears it up! Sorry for the run around

 

If the loan is secured by IP1 only, and your friends sells IP 1, there will be no IP 2 offset b/c there will be no loan.

The loan will be discharged when IP 1 sells.

Your friend needs to restructure.

 

You still didn't answer my question. Is property 2 mortgaged?

 

My understanding is:

IP 1 was bought with a mortgage which are now fully offset (paid off) but the limit is still there. Otherwise the Bank would not held its title.

IP 2 was bought with equities released from IP 1 hence he said IP 2 is on P&I with offset. Potentially it was a 100% to 110% purchase.

In order for the bank to release IP 1 title, IP 2 need to have a high enough valuation to support all the loan which IP 1 also associate with.

I believe what he was asking is, how can his friend sell IP 1 but keep the proceeds as redraw in the offset rather than to clear debt.

And the answer is a security substitute or porting of loan.