Tax Tip 13: Simple Loan Structuring Strategy

So I owe 207 k on my PPOR, you would recommend a split of 60, 60 and 67? or would it be better to go 2 low one big like 30, 30, 147.

Thanks

 

depends on what you plan to do

 

I want to invest in property as soon as possible

 

I would probably make the split based on your estimate of the deposit need for the property deposit and costs

 

Something like 40 k then, another question is should you make extra repayments into the split or just put it in the offset?

 

I would probably just save into the offset first as you can always pay it down anytime you choose. An exception would be if you are undisciplined.

 

Its making more sense now, its faster then paying down 207 k to get equity that might not even be there if your house looses value

 

Thanks for the diagram - I'm a "pictures, rather than words", person when it comes to learning new stuff (especially when I'm tired and my brain is already full). I had actually spent a bit of time putting a similar one together only a few nights ago, but finding yours helped me to confirm that I was getting it right.

 

@Terry_w Wow what a usefull thread. Thanks Terry for so much information.

Can I please ask a question as well?

I current PPOR outstanding loan is around $400k. This is split into two loans, one for $250k and another and i have $150k. The $150k is deductible debt as this was set up when i bought my IP few years ago. $250k is non deductible. Both are P&I

Also have an offset account attached to $250k loan and currently i have $255k in that offset account.

Now if i want to invest some money in shares can i do the below:

Ask the bank to split the $250k loan into two loans, $220k and $30k. Physically transfer $29,999 from the offset account to the $30k loan. Then after few days redraw this money and buy some shares. Now the interest charged on this $30k split will be deductible?

Am i correct?

 

It could be deductible if the shares pay income and there is no detours along the way. See my many tax tips on this topic and seek specific tax advice from your lawyer.

 

Hi @Terry_w. I've read a number of posts that indicate that, when using the debt recycling method advocated, the dividends paid must go directly into the mortgage, without going anywhere else first/along the way.

I'm a little unsure as to how to accomplish this, as every share trading platform I've investigated transacts via some form of transaction account linked to the trading interface (ie. the funds required for purchasing shares, received for selling shares, or required for the receipt of dividend payments, all move into/out of the one nominated transaction account).

If this is the case, can I just move any dividends paid (in their full amount) immediately from the trading platform's required transaction account onto the mortgage? Or do I need to find a share trading platform that will allow me to direct dividend funds straight into the home loan without hitting a transaction account first? (If this is the case - I'd love the names of those platforms.....)

 

There is no legal basis for this. I have never seen anyone suggest that either. It is not necessary.

 

Some trading platforms allow you to credit dividends directly to your trading platform cash account. You probably want to at least avoid this if you are also using this cash account to deposit borrowed funds from your loan account when purchasing a new parcel of income producing shares. You don't want to mix any other $s with your borrowed funds.

 

None of the accounts should have borrowed money in them. At first it will be necessary to have the money deposited into the account that the purchase will be drawn from, but one the purchase has been made there should be nothing in the account, perhaps $1 might be ok.

Then if dividends are paid into this account there would be no issue.

This maybe was what Kay was thinking.

 

Thanks again @Terry_w. I just went back and re-read your Tax Tip #2 (for the nth time), and applied your structure to our figures - I'm trying to work out how this structure would work our values/situation (ie. values of splits etc), and how to ensure that there aren't any mixed purpose loans etc.

I'd rather get it right the first time, than trying to clean up some sort of tax/finance nightmare down the track.

 

Just think, it doesn't matter where you put income, it only matters where you put borrowed funds - generally.

 

When i got my equity release money (84k) for our first IP it went into a savings account, i was silly and didnt know about mixing loans and put the 84k into my offset at the time (its now a redraw facility). The money is now gone to new bank as deposit for the new build.

Is there anyway to unmix our ppor loan? Maybe refinancing?

 

Yes, you can work out the relevant portions and unmix the loans. But it sounds like your investment loan is also mixed. You won't be able to claim the interest in full. Refinancing in itself won't change anything.
Get some specific advice.

 

Would I just have to go back to where it was changed from a offset to a redraw and work out how much I redrawed and used for non deductible items?

Ive only paid 600 so far into investment mortgage the minimum to service the loan while they build it.

 

You would have to go back to the point of mixing. Which would be when you withdrew money from the loan or borrowed extra.

This might help
Tax Tip 45: How to work out the Portions of a Mixed Loan Tax Tip 45: How to work out the Portions of a Mixed Loan