Tax Tip 13: Simple Loan Structuring Strategy

Your figures are wrong



$1.3mil x 80% = $1,040,000

This is the max borrowings secured against the property without incurring LMI

 

Ok, I see what you mean
So $1,040,000 minus outstanding balance of $550,000 is the available amount I can refinance right?
And then I split the loan according to above example but instead of $600,000 available equity, it would just be $480,000

 

$1.3mil x 80% = $1,040,000
Less existing loans of, say, $550,000
= $490,000

 

Thanks terry
So theres no problem with the way i want to split the loans?
As in going for LOC and then change to I/O?

​

 

Pete,

You could only borrow an additional $490,000 and have that as interest deductible debt.

Calculation:
1. You have $400,000 in cash you can pay-down and re-draw to invest to make it deductible debt
2. You have the difference between 80% of your $1,300,000 home ($1,040,000) and your current debt of $950,000. That difference is $90,000.

Adding 1+2 gives $490,000.

You can restructure your entire debt of $1,040,000 as the bank allows (extra splits on current variable loan, etc) however you will only be able to utilise $490,000 as deductible debt for investing. Till the point where you have more cash to pay down more splits, and re-draw those.

Terry may correct me! And he is best placed to answer your LoC question.

PP

 

Not sure what you mean, but you could borrow as a LOC and use it and then convert it to an IO loan.

 

Hi @Terry_w thank for your advice. I think many people are confused because you haven't used enough examples to illustrate your awesome loan structure style. For example, I'm still trying understand how the splits would work in investing in another IP. Lets use your example and maybe assume an offset amount of 100k, if I wanted to buy another IP after paying down split A, what is the borrowing capacity and thus max purchase price I could get for my next IP? How would it work.

How I think it works based on what you said is, pay down loan A and B which is 50k each, redraw and use it to pay for the deposit, lets say 80% without LMI. So assuming I can meet serviceability, this is a max purchase price of $500k. Or can I only buy one IP per split? i.e. $250k worth of IP? Anyway lets say I use split A to buy an IP worth up to $250k, what now? I have enough for the deposit, how do I get the other $200k to complete the purchase? Do I need to request another $200k loan from the bank which is providing the splits or get a refinance from another bank?

Cheers!

 

Yes these splits would be just used for deposits and costs. The other 80% or 90% would come from a loan secured by the property being purchased.

 

@Terry_w but can you use two splits for the one property or is it one split per property? i.e. would I be buying a 500k house with two splits or 2x $250k house with each split? So everything else I said sounds right to you?

 

No issues with two or more splits for one property.

 

@Terry_w thanks! Btw do you have an ebook yet of the loan structuring, strategies and tax tips yet? Thought it may be easier than me copying and pasting everything! I'm loving all the stuff you're writing!

 

I have collected all the tips that I write here in a word document so I can easly releast it as a PDF, but I though I should go through them and edit them first. But I keep getting large numbers of new client enquires which take up my time.

Also have a proper book almost ready - on deductibility of interest at around 200pages. You can get on the mailing list here for notification when it is ready. PropertyTaxBook.com.au

 

Hi Terry,

Just wondering how can this stratergy apply for P&I loans/splits or not posssible. Evaluating a situation where we will be borrowing for non deductible debt and can create multiple splits.
We could also have offset link to each split (one by one) and reborrow it for investment purposes as per the stratergy.

Given now a days banks are not willing to provide interest only for owner occupier loans. just wondering can this stratergy still work for P&I loans. The way I see it i can have offset against P&I
split but i'll be reducing the balance as well hence drawing that out will require new application rather than park in redraw and reborrow.... is there any other way around this for P&I loans.

cheers

 

Yes you could do it with pi loans but the balances would be reducing each month. No way around that unless you can change some splits to pi

 

Thanks Terry. Still confused to see how it will work with P&I.

25k split IO with offset - I save 25k in attached offset and only pay interest until then. once money is saved, take that money and pay in loan (i.e. redraw) and take the money from redraw next day for investment purposes.

25k split P&I with offset - depending on the offset account each month, gradually I will pay off that split. The only way I understood to take the paid off 25k is by equity release. because the money I paid off is not sitting in redraw. and equity release is the new application which I want to avoid....

am i missing something?

 

You would have the offset on the biggest split probably this way the $25k loan. Will be reducing but at the minimum rate

 

Pfizer have a patent issue delaying release. It conflicts with a patent on the worlds leading sleeping pill

 

Thanks terry. But redrawing money will not work though cause in P&I i am paying the principal off....its not sitting in redraw infact its reducing the loan. So only way to access that would be equity release...

e.g. loan set up as 100k, 50k, 50k P&I split....lets say i've offset attached to 50k split. 30 yrs loan with 5% rate I am paying $268 monthly (Amortization Schedule Calculator). Assume I've nothing in offset for 1st year...so at the end of 1st year I would have paid $738 of principal....the way i understand it only way to redraw this $738 of loan is equity release (i.e. new application) vs. getting it out of redraw which works if loan in interest only....

 

With PI loans there is a minimum repayment each month. You can pay the loan down to $1 and then redraw up to the limit.

You can only redraw the extra you pay in.

In your example you would save up to $50k in an offset and then pay $50,000 less $738 less $1 into the loan and then redraw this to invest. Interest would be deductible, but the downside is it would slowly be paying the loan down.

 

plus it will have mix purpose loan....and administrative issue. so P&I is not ideal for this strategy then...