Shifting IP loan to OO

Hi Guys,

Have you heard of banks offering to shift your IP loan to your OO and have it loaded as an Investment structure for Tax purposes? So currently we have this structure:

IP: 300k debt
OO: 500k debt

Bank is offering to refinance:

IP: Zero
OO: 500k +
300k (But as investment?)

The IP is just under my wife's name and she is not working at the moment so that is why we have come up with this structure (and there is no stamp duty exemption for transfer of names because its an investment)

Is this common? Are there pro's and con's to this? I know my wife wants to knock down and rebuild our OO in the next 5 - 10 years - not sure if this will have some sort of impact? I guess I can refinance again if need be.

Appreciate your help!

 

What's the actual result that would give you a benefit?

At face value you're simply changing the security of the $300k investment loan from the IP to the PPOR. This wouldn't change the tax deductibility of anything, it probably shouldn't change the types of loans, therefore you should still be getting the same financial result.

If that's the case, then there's two potential downsides:
1. If you default on a loan, you're putting your PPOR at risk, instead of an IP.
2. When you rebuild, you may not have much equity in your own home. Always good to have surplus equity in a property you develop. You could offer the unencumbered IP as security, but then you've got an OO purpose loan classified as investment (unnecessarily expensive). Refinancing back to the original structure takes time and money.

The way I could see there being a benefit to this is the bank does a little doggy thing and labels the $300k loan as owner occupied and you get a better rate. Right now there's products available where the difference between owner occupied and investment rates is very narrow.

 

Thank you Peter!! Sorry forgot to mention that the benefits of the refinance offer is for a huge discount on rates.

I could also wait another 6 months for my wife to return to work but then I would be stuck paying a crappy rate and have to go through the application process all over again =/

 

Sounds like just moving security of the loan. Watch out if you are incorporating the investment debt into the $500k loan as it would be a disaster tax wise unless it is split.

 

Thanks Terry. My wife doesn't like the sound of it either so we're going to avoid this offer for now. Thanks for your help

 

it can be a very good idea though and something i do for clients - with tax advice.

 

Most banks aren't offering discounted rates for investment loans with a PPOR as security, but if they can, that's great!

The biggest risk is that you've not no equity when you want to rebuild. Restructuring again is a solution, but you can't always assume that this is an option in the future. Plenty of people have been caught out in the past few years incorrectly assuming they can refinance.

Overall it sounds like a good deal, but some consideration needs to be given to the longer term plans.

 

You could always borrow against the investment property to build the main residence. It might work out better this way as you could potentially get 2 owner occupied rate loans with different banks.

 

If you can refinance the loan to the PPOR, there's no reason why you can't refinance it as is. Your wife working or not working shouldn't come into it if you can service the debt on just your income.

You can go on the IP loan as a borrower, your wife will either need to guarantee it or also be a borrower but most banks won't have an issue with this - as a spouse you're seen to have an interest in the property regardless of actual ownership.

 

Great points! Its baffling why they have to offer a silly alternative to the same loan amount. Thanks Jess.

 

If you're dealing directly with the bank, it may be against their own policy, potentially, but it's certainly not against everyone's.

Are you dealing with ME bank? They currently have a thing where INV debt is given OO rates when either crossed or part of one application - which would include having it on one security as above.

 

There are some lenders which will allow you to refinance the loans over to them, not have to mix up the securities via cross collateralisation/moving the debt all onto the owner occ property AND still give you owner occ pricing on the IP debt. Just some food for thought.