Strategy: Borrow Against the Main Residence for an Investment Loan

I would have thought that it wouldn't be deductible unless it is used to pay down the loan directly?

 

Most loans offer redraw so no loss of liquidity unless a loan is fully paid off.

 

Yep

 

there is one downside...you are reducing future deductibilty of the ppor loan if it becomes an IP

 

Not necessarily.

You could increase borrowings without paying down the existing loans if you have equity.

 

Hi Terry,
I am wondering what would happen in this scenario.

A person has a property on a large block. Borrowing at 80% , the loan is around 140k. This house is now worth around 230k (has gone up around 50 or 60k since bought).
A strata home is built on the back of the block. Cost of new build is around 270k - of which a new loan of 150k is given by the bank, and the remainder is paid out of cash in the cheque account (120k).

The loan is later refinanced against total holdings to the full 80% value - so lets say the property/ properties is now worth 500k total and loans are 290k. (i.e 140k loan on front house and 150k loan on the back house). Can ALL of the 500k value be drawn down from at 80% - so total loans become 400k - then that remaining 110k (i.e 400k minus 290k) be put back into the investment LOC?
Or using cash has diluted the amount of tax deductable?

Would it be better to fund this remaining 120k from the LOC instead?
Regards,
David

 

I don't understand what you are asking David.

If you can service and qualify you could borrow up to 80% LVR but how you structure this will have tax consequences so you should probably seek specific tax advice before doing anything.

 

Ok, thanks Terry, I will check with the accountant.

 

I have received a successful private binding ruling, for a client, from the ATO for something very similar to example 1 above. The ATO seem happy with it - there was never any doubt in my mind, but gives the client's comfort.

 

Does the amount you can redraw reduce over time for a P&I loan? I have seen a couple of people mention that it may not be possible to redraw back up to the full original amount of the loan, only up to an amount where you've repaid extra on top of the minimum repayments.

In theory, if in year 24 of a 25 year loan, I've paid down most of the principal amount, it would be hard to redraw back to the full original amount as the loan period hasn't changed?

But then I've also read here that you can even redraw more than the original loan amount, if you have increased the equity of your home.. and can meet serviceability requirements?

 

Yes PI loans would be reducing over time so any redraw amount would be reducing.
PI loans amortise.

If you meet serviceability you can always borrow extra, up to the original loan amount or even more as the property increases in value.

 

And I assume the loan period would be reset based on serviceability etc too?

 

That depends on what you ask for, but ideally you would want to extend the loan term at every opportunity.

 

Sorry if this is a dumb question but do you know if it would be possible to get an investment loan in Australia using a commercial property in the USA? Reason I ask is due to a partnership and one partner is in Australia and the other is in USA who owns the commercial property worth several million USD. Wanting to get a loan for not even 25% of the value and can provide full documentation

 

Not possible if the security is overseas.

 

Thank you for the speedy response. It would be possible if we were going to go through a USA Bank instead I assume?

 

If I need 125k (for 20% deposit + stamp duty etc) to buy 500k IP, would this be how to setup my loans?
- split PPOR loan in 2, with loan 1 being balance owing, loan 2 being 125k to pay for IP
- loan 3 of 400k for IP
So interest payments on loans 2&3 are both tax deductible?
Should I be offsetting loan 3? My banker said if there’s no offset option (only redraw) on loan 3, interest rate would be lower (e.g. 3.65% vs 4%). Loans 1&2 have offset.

 

That looks similar to
Terryw’s Ideal Loan Structure Terryw’s Ideal Loan Structure

why would you want to offset loan 3 if it is investment? Do you have surplus cash?

 

Yes I have surplus cash and need to put it somewhere. I could pay the deposit on IP but I figured that’s not the way to go or is it?

 

Yes, the offset on an investment loan might be the way to go in that case - assuming the main residence offset is full.