Strategy: Don’t Keep Large Sums in Offset Accounts

Discussion in 'Investment Strategy' started by Terry_w, 16th Jun, 2017.

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  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Not sure what this means ?

    PI loans could be paid down and redrawn with the funds applied to higher rate IO loans
    IO loans could generally also be converted to PI loans easily.
     
  2. Omnidragon

    Omnidragon Well-Known Member

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    I mean I’m on IO. Which seems like a rip off
    But I don’t want the higher repayments under PI
     
  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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  4. Omnidragon

    Omnidragon Well-Known Member

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    Just read it very interesting. I wonder what the IO would be on such a LOC, and it’s really only open to people with additional/ample ungeared assets (to get the LOC).
     
  5. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    It could even potentially work on as little as $20k. A LOC is not needed and neither is borrowing extra as you could debt recycle exiting debt and split, use, recycle, and repeat.
     
  6. Simon R

    Simon R Member

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    hi Terry,

    thanks for your contribution - again.

    Ok, so if as you say:

    ...does that mean if i redraw from my PI PPOR and buy shares, then that is deductible? So if i withdrew $100k and was paying 4% on the PI - then for a full year i could claim $4k?

    Seems to meet your criteria - or am i missing something?

    cheers
    Simon
     
  7. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Yes, if you borrow to buy shares that are expected to pay dividends the interest would be deductible.

    This is the basis of debt recycling.
     
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  8. Simon R

    Simon R Member

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    wow, fantastic Terry. Awesome advice, again.
     
  9. ShireBoy

    ShireBoy Well-Known Member

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    You can't just redraw from your PPOR loan. It'd have to be a split.
     
  10. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    You can, but ideally you would split first. It also possible to split later, but best to do upfront.
     
  11. ShireBoy

    ShireBoy Well-Known Member

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    You'd have to apportion the rest owing on the PPOR as non-deductible, right?
     
  12. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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  13. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Yes, but the ATO allows a mixed loan to be unmixed
    Tax Tip 44: How to Un-Mix a Mixed Loan Tax Tip 44: How to Un-Mix a Mixed Loan
     
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  14. Simon R

    Simon R Member

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    is this because it is easier/simpler to work out what part of the loan is deductible and which isn't?

    I do have an existing split (used to fund an IP), so could put the PPOR redraw $ into the split, then take it back from there for the shares - sounds like this is clearer way as IP split is not mixed purpose?
     
  15. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    This doesn't make sense.

    You need to pay down a non-deductible loan and redraw to be able to claim the interest.

    You need to split so that you can independently pay down the non-deductible loan faster than the non-deductible.

    Tax Tip 54: Why Not to Mix Loan Purposes Tax Tip 54: Why Not to Mix Loan Purposes
     
  16. FXD

    FXD Well-Known Member

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    Hi Terry,
    Will this method make sense when PPOR is P&I, pay it down (not off) and re-draw the amount
    into an existing IO LOC. And then use that amount of money in LOC to pay for investment
    property expenses and possibly even investment loan interests.

    I recall there is a separate tips topic of yours mentions something similar, but given PPOR loan
    is P&I and with monthly repayment, will this still make sense?

    Thanks,
    FXD
     
  17. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Hi FXD

    Short answer is no!

    Borrowing to pay into an existing LOC and then borrowing from this to pay expenses sounds messy.

    To pay into a LOC the LOC must have been drawn down, so yuo would be reducing debt.
    If it wasn't drawn down there would be no interest paid on positive balance.

    LOC generally not a good product for drawn loans either.
     
  18. FXD

    FXD Well-Known Member

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    Ok, how about just use the PPOR P&I loan to repay LOC as PPOR loan interest is lower than
    that of LOC?

    The only problem is how do I account for the interests incurred to repay the LOC when comes
    tax time?

    Thanks,
    FXD
     
  19. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    paying one loan with another is just refinancing. But if you are borrowing to pay interest that is capitalising interest.

    Not sure I understand what you are proposing
     
  20. FXD

    FXD Well-Known Member

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    I mean PPOR loan is ahead in repayment and redraw
    that amount to pay down the LOC effectively saving
    interests on LOC which was investment related.

    But how do I account for interests for the redrawn
    amount only as PPOR loan doesn’t have split accounts.

    That is not the same as capitalising interests on LOC
    right?