Strategy: Borrow Against the Main Residence for an Investment Loan

Strategy: Borrow Against the Main Residence for an Investment Loan

I have referred to this strategy already in a few posts as 'shuffling loans around'.

I see a lot of people who are paying too much interest unnecessarily.

One simple strategy, which most are not aware of, is to borrow against the main residence and use this to pay off a portion of the investment loan. This will generally save people interest now that investment loans are at a higher rate.

Example 1
X has a home loan of $400,000 with $200,000 in the offset with an interest rate of 4%.
X also has an investment loan of $400,000 at an interest rate of 4.5%.
Both loans are interest only.

X could do the following:
Split the main residence loan into 2 portions, each $200,000
Pay $200,000 into loan B so the balance becomes nil or close to it (to avoid closing the loan)
Redraw $200,000 from loan B
Pay this $200,000 into the $400,000 investment loan.

This should save X interest at the rate of $200,000 x 0.5% = $1,000 per year.

Example 2
As above in example 1, but X doesn’t want to pay down the loan. Instead X sets up new borrowings by borrowing an extra $200,000 (or $400,000 if enough equity) and then uses this to pay down the investment loan.

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Most people don’t shuffle because they fear the interest will not be deductible. However this is not the case. In example 1 X has used loan B to refinance a portion of the investment loan. Security for the loan does not determine deductibility, but it is the use of the funds that does. Refinancing doesn’t change this. The original funds were used to acquire an income generating property so the loan interest is deductible and it remains deductible.

There is also a fear of creating a mixed purpose loan. However this is also not going to happen because the purpose is still the same - borrowing for investment property purchase.

If the investment property is ever sold the interest on loan B will no longer be deductible and it would be simple to pay back loan B from the sale proceeds.

If the main residence were to be sold this is more tricky. But redraw of the investment loan could be used to pay back loan B - this is just a refinance and doesn’t change deductibility.

 

In example 2, what are you telling the banks the purpose of the funds is? There are a few exceptions, but the moment you tell most lenders the $200k or $400k is remotely investment related, they'll use the investment product.

 

Yes that could be the case. AMP is a good lender where this strategy is useful as they don't.

Also a variation is to draw down with lender A and refinance with lender B.

 

Can the same strategy be used with an offset account? For example:
- $200k loan used to purchase investment property (higher rate) with empty offset
- $200k funds available on home loan, all sitting in offset (lower rate).
- move $200k into investment property loan account.

Assuming no contamination with other funds into/out of either offset account, and being mindful of warnings in your parking borrowed money in offset account thread.

 

Ashby I don't like that 'sitting in the offset' bit.

I would pay the funds back into the loan, redraw back into the empty offset and then pay immediately back into the investment loan (make sure you don't pay it off tho).

 

Interesting thread. I will be doing this shortly - trying to access some extra equity and a lower rate as the loan will be on PPOR.

Thanks,

Jason

 

Absolutely - there's some great lenders which have niche policy which can allow you to secure significantly lower interest rates for investment debt secured on the PPOR - which can make it a strong driving force for lender selection if there's sufficient servicing and a relatively low/nil leveraged PPOR.

 

We are def seeing the benefit of having investment loans secured against PPOR due the to the difference in interest rates of late.

However we are planning to sell our PPOR and wanting to try and maintain deductibility on the investment loans, by pulling out equity from the corresponding IPs to pay down the investment loans in PPOR before selling PPOR. The way I see it, if we sell PPOR and all funds go to pay off loans secured against it, we are losing deductible loans!

The really tricky thing in this environment (disregarding the equity side of things) is the serviceability and justifying to banks why we are pulling out more equity in IPs. In essence we are needing to borrow more than we need, as are setting this all up before selling PPOR.

Eg. $300K total investment loans secured by PPOR. Need to pull out an extra $300K of loans from IPs to pay down this loan prior to selling. But in the meantime, in the banks eyes we are increasing our overall debt by $300K, when in fact we are just shifting security to maintain deductibility. We've looked into transferring security from PPOR to IP, but this is not doable when loans are not with the same bank!

In sum, did not envisage this issue when we were setting up IP loans secured by PPOR. But it was the best way for us to start investing. Just something for people to be mindful of.

 

It's a straight refi. Bank a takes a refi application on investment property security to pay out bank bs debt of the same amount secured against ppor.

Taking a second loan for the same amount to sit as cash until you sell the ppor fails the purpose test and won't be deductible. Not to mention is dificult lending wise without a reason.

 

And, without a split, that will be a recipe for a mixed purpose loan. No ?

 

If X pays 200k into the investment loan, wouldn't the deduct-ability on the interest paid reduce ?

 

In the scenario the funds borrowed from the newly split Loan B would then claim the deductibility as it's purpose was to pay down (refinance) an investment debt - so there shouldn't be any issues.

 

Been getting plenty through with some lenders as stated purpose "investment" and secured against PPOR on OO rates.

 

Yes

 

No because the interest on the $200k loan would be deductible.

 

Does it make any difference if the Home loan is against property A and investment loan is against property B?
If no issues with that then equity in property A can be used to completely pay off property B(assuming 400k in equity) and that can be good from an asset protection point a view since now you'd fully own property B.

 

Why is it good from an asset protection point of view? The first bank is going to find it much easier to get access to your unencumbered property than if they had to deal with another bank to get at it.

 

No tax difference as to what the security is.

 

Sorry, should have elaborated a bit more. I was thinking that you'd move the properly to a trust.Might come at a cost(thinking stamp duty for example...)depending on circumstances I guess though

 

As always, great post, Terry!

I would just add that unless X places the funds in the offset of the IP loan, s/he will lose liquidity.

Yeah, will need to pay stamp duty, CGT, sale and purchase fees, trust fees. Could be quite an expensive insurance policy...