Tax Tip 13: Simple Loan Structuring Strategy

Hi Terry,

I've got a PPOR loan that I've split so I can pay down the portion that I'd I'll use to invest. I have a IP settling soon and CBA has said that they won't draw from that loan split to pay the remaining deposit and stamp duty. How do I maintain deductibility if they don't draw directly from the loan?

Thanks,
VC

 

Have a look at my thread called tax tip 1

 

Hello @Terry_w , we plan to get a P&I PPOR loan, will we still be able to adopt this structure?

If yes, say if we pay down loan B, redraw and then use it to pay deposit and upfront cost of an IP, if there anyway we can change the loan to IO?

Thanks!

 

It won't work as well PI because you will be paying down investment debt prior to paying off the non-deductible debt.

 

Thanks Terry. Yes that's the limitation of using the PI loan, but I figure I can pay off the investment loan quicker and recycle the loan again for another investment property, wouldn't it be the case?

 

Well you could pay off the investment loan quicker. But you would be losing money in wasted tax savings if you have non-deductible debt. Having the loan IO would also allow you do pay it off too, but at your discretion.

 

What a fantastic thread and resource.
I've been mulling things over since first reading your post 12 months ago. Today I am going to the bank just to discuss my personal situation and what the costs would be for me to refinance in this way. I think multiple splits of small 25k/50k amounts suit my personality as it also creates multiple small goals that I can "lock away". Currently my discipline is lacking a little and I pay off a large portion of my loan then re-draw it for fun. Small targets of 50k will allow me to lock that away into investments and force me to wait for my yearly holidays and toys.

Just one question though. You talk about making sure the "re-borrowed" money moves from your 50k chunk straight into an investment without detour. Would an E-trade shares linked account be acceptable? I'm new to E-trade as well but I think I have to transfer to the ANZ account they made for me then deposit from there into E-Trade?

I'd like to balance up my property portfolio with a little shares as well.

 

Ideally you would want your etrade account to have no other cash in it so that then you could trace the borrowed funds to the investment

 

Thanks for the reply Terry, your time is very much appreciated and I am sure I am not the only one.

Having a look further into it, it appears I can bpay direct into etrade, bypassing the ANZ linked account they force you to open when you create an etrade account. However, it still goes into an account of sorts (etrade shows your available funds) until I chose my ETF of choice.

I think the best way forward would be to clear my etrade account of shares/cash (not much in there anyway) and then bpay from one of the 50k split loans into the etrade account and then purchase the shares I require.

I know this is a property forum, but I would like to diversify a little before advancing my property portfolio. I hold $1.2m in property but only $5,000 in shares.

 

So I just got back from a meeting with the bank.
I explained what I wanted to do (split the loans for investment purposes, debt recycling, and to set small goals instead of one big one). The girl I was speaking with was quite new at the job and had to go ask questions, but splitting my existing loan apparently is quite easy.

I have an existing $605,000 PPOR P&I loan at 3.92% interest rate with an offset account.
I was inquiring what it would cost, and what would be required to split it into 5.
1 x $405,000 P&I
4 x $50,000 IO

Turns out all it is, is a $95 fee for each split, no ongoing fee.
However, because the $50,000 loans are below $200,000 all they can offer is an interest rate of 4.02%. So I guess you can say the ongoing cost is hidden in the increased interest rate. (0.1% p.a.) Whats that? $4.16/month?

I asked, and apparently I can just split as I go. So I can make one split for $95 and keep the bulk of my debt at the lower interest rate and when I am ready, split again (fee's and conditions might change before then though).

Just got to do some more research and get the wife to cast her eyes over the plan and we might go for it.

 

what bank? They are getting stingy and trying to revoke existing discounts.

 

Bankwest, Now owed by Combank I believe.

Do you think I should try and push them harder? I suppose you should always TRY and push banks harder. I thought on the surface of it, it seemed like a pretty good deal. I think I'd rather pay the extra 0.1% pa on the 50k chunk than $10/month ongoing fee. Unless my maths is out, which is not unlikely scenario!

 

Bankwest products change every few weeks so perhaps the product you started with is not available for new loans.

If no LMI involved you should try to move away from them perhaps.

 

I have noticed that in the past. I even came up with my own term for it "back burning". It's like they have 4 products like a stove has 4 gas burners.

• New customer deal (introductory offer)
• default after expired introductory offer
• intermediate for inquisitive customers
• back burner for those that don't ask questions.

When you sign up you get thrown into the introductory saucepan "bonus elite product1". You know that deal will expire in 6 months and you'll be moved to the default burner "elite2". If you're not paying attention they'll change the T&C of elite2 and you'll be on the back burner. They'll take you for all your worth!!

I always make an effort to call at least every 12 months and ask if I am on the best deal. I am usually moved to the intermediate product. Which eventually goes back to the back burner. You have to keep calling and hanging products.

I'll look into other banking options. Thanks for the chats Terry!

 

Excellent strategy. The only drawback I see is, If a bank charges say $300 to flip from variable to fixed, then all the splits that I'd want fixed will cost me $300 x number of splits.

 

To avoid that fee you could keep them variable - just fix the larger loan.

 

It pays to get a second opinion
I rang the bankwest phone line today.
Very happy I did.
He waved the split fee's, said the girl I spoke to (who admitted she was new and wasen't 100% sure) was incorrect. The interest rate for the splits stays the same. It will NOT go to 4.02% and said it would have gone through at the lower rate. No ongoing fee's.

So basically it's cost me a phone call (and they will send out paperwork to sign).

On top of that, he looked at my other loans while on the phone and one of my IP's was on quite a high rate (5.82% - how did I let that one slip through?) so we fixed the interest for $95 and dropped the rate 1.77% to 4.02% saving me $6,355 p.a. Also, I'm paying a $360pa fee for a package which does a few things of which none apply to me anymore except wave my credit card fee. Of course the fee for the CC is $95pa so we knocked that package on the head too.

All up, reduced what I am currently paying by $6,620 p.a. and split my loan at no charges. Happy with that at the end of the day.

 

Hello again,
Sorry for the 1000 questions. I just have one more though.

What happens when my split's roll over from IO to P&I?

The longest I think I can keep the split's IO is 5 years. If they roll over to P&I how does that affect my ability to deduct the interest? Obviously the principal component of my monthly repayment would not be deductible, but is there anything we need to look out for when this happens?

I can get a statement around tax time from the bank which expresses the amount of interest I've paid for each loan (split). This would not contain the principal part. It seem's pretty cut and dry to me but I thought I would ask in case there are any traps there that we need to be cautious of.

Cheers!

 

Interest would still be deductible, but reducing over time. If you haven't paid out your non-deductible debt it would be a good idea to try to extend the IO period on the splits that are deductible.

 

hi everyone, just hoping to get some information on structuring my loans properly before I contact my bank to make the necessary adjustments, so any help would be appreciated

I have a PPOR worth $1.3 million with a $950K loan
the loan is split into 2 which consists of $600k variable and $350k fixed
I have an offset attached to the variable loan with $400K in it and both loans are I/O
if I wanted to setup myself to invest in shares or property in the near future, should I use the $400K in the offset account to pay down the $600K variable loan and reduce it to $200K to maximise my borrowing power assuming I have reached my limit and cant move forward from here?
also, can you let me know if these calculations are right?
950K loan reduced by 400K = 550K
if I were to refinance and do some loan splits would it be...
1.3m - 550K = $750K
80% of 750K = 600K available equity
of the 600K in equity, can I ask the bank to split the loans in the following ways
Loan A = $300K
Loan B = $100K
Loan C = $100K
Loan D = $100K
all loan would be I/O with offset or LOC with the intention of turning it back to I/O once I start drawing down from any of the loan
assuming I'm not too fussed about paying down my loan as I don't intend to keep it as an investment property later down the track, would this be the proper way of structuring my loans?
original $550K loan would still be I/O with extra money offsetting this loan and all other loans as LOC or I/O, as I intend to use Loan A to D just for investing purposes
am I doing anything wrong?
I'm trying to set this up as close as possible to terry's tax tip so I can't go wrong down the track

thanks for any help