Tax Tip 13: Simple Loan Structuring Strategy

No it wouldn't be mixed purpose. You would be paying the loan split down to nil - or $1 perhaps.

 

Terry, i get that i'll be paying it down to $1. However some of these paid off money would be sitting in redraw (which I've deposited from my savings) and some of it will be paid off loan (as standard principal paid out at each monthly instalment).

My trouble is only way to take those two amounts out of that split will be equity release (which means full application). that is not this strategy is about.

Important to note that I am not paying the loan down to $1 only using my savings (which would be the case if this was IO). If I am not understanding you can you share example on how you think it works so i understand it better pls...

 

This strategy is not about equity releasing but splitting so you can pay a loan down and redraw. This can be done whether the loan is PI or IO.

If you are wanting to pay the loan down in stages and redraw in stages then this would create a mixed purpose loan whether the loan is PI or IO.

That is why you would make the splits as small as you need. say $20,000 split - you wait until you have $20k saved in the offset and then pay down the split to $0 and redraw to invest.

 

Terry, I think i may have got this. let's with 50k loan split after paying monthly PI instalment for a year my loan would reduce down to ~49.5k. Lets say at that time I've 49.5k saved in offset and i use that to pay it off...now 49.5k sitting in redraw of this split which i can release and borrow it for investment purposes....making my 49.5k deductible going forward....

am i correct?

 

Yep

 

Hi @Terry_w thanks for sending me this link yesterday.

I thought I was understanding it, however I just walked into my bank (NAB) to see if the splits can be easily done with a PPoR loan so that I can pay down and re-borrow for investments. The guy I spoke to said it was not possible to pay down a split (say $50,000) that was previously a PPoR loan and re borrow for investments as the purpose has changed (from PPoR to investment) and a new application would need to be submitted? does this seem correct?

Thanks

 

No

 

Thanks @Terry_w I thought that was the case.

Does the attached structure look correct when first setting up a PPoR loan? Given it's getting harder to get IO loans and there is a strong case to pay P&I on non-deductible debt, is it possible to have all splits initially as P&I, however once they are repaid and re-borrowed to change them to IO so that non-deducible debt is paid down quicker?

As always, I really appreciate your help

 

With NAB changing to IO would mean a new assessment. They are not very flexible and are a pain in the arse to deal with.

Yes your diagram looks like as I have suggested in this thread.

 

Awesome thanks @Terry_w . That's my plan so I will contact my broker to see which banks allow easy transition from P&I to IO

 

Try AMP
Strategy: Using AMP’s Master Facility to Debt Recycle https://www.propertychat.com.au/com...ng-amps-master-facility-to-debt-recycle.16449

 

Great thanks @Terry_w

 

Just a quick one...
When you say the funds need to go from one of your split loans directly into your investment without deviation would the following be fine?

• BPay payment into my commsec account using the bpay details in the bottom right corner of the "Account details" tab? (in the red circle)
  
• Could I use the account they entice you to create with commbank which becomes your settlement account? (In the blue circle)?

Please note that I am a commsec newbie so there is no money anywhere at the moment. All I have done is create an account, and a Netbank account or something.

 

Hey Terry, just quickly if you had splits for PPOR where the min is 50k but you only need 32k to complete settlement for an IP, how would you go about it? Would you pay down one split of 50k and redraw 32k into the nominated bank account or is there another way to do it without mixing loans?

 

You would need to pay the loan off in full and reborrow what you need or split it first. If you don't do this then you would end up with a mixed purpose loan - which may not be a big deal depending on the circumstances.

Seek tax advice.

 

Hi Terry,

I have really enjoyed reading a number of your postings around tax and loan arrangements within the forums. Its a great resource and I am interested in learning more given I am at the beginning of my property investing journey. The loan splitting arrangement is particularly interesting for my situation.

I was wondering if you provide your thoughts on the following scenario:
My two siblings and I are looking at purchasing a PPOR for $1mil. We have cash available for a 20% deposit (substantially more if necessary). We have conditional approval for the loan amount which would be split as 3 loans entitling 33.33% ownership to each party (tenants in common). The lender has confirmed that we would not be liable for each other's debt under this structure in relation to future borrowings although this lender does not have a specific common debt reducer policy.

Our ultimate goal is to build a long term portfolio of IPs and set ourselves up for the future given our ages (low 20s) and stable jobs with growing incomes. We also have a trust account (discretionary unit trust) with a substantial share portfolio.
To be more specific, does this loan structure seem like a flexible way to move forward given our goals?
Can/should the existing trust be utilised in an effective manner with respect to this scenario?
Any benefits of going investor vs owner occupier initially undear this arrangement for the first property?
We are aware and willing to accept the risks of joint ownership. Apologies for the number of questions, we would like to be as informed as possible and start from the best possible position.
Thanks, Leeroy

 

Whats the reason for going thirds? Can you "go it alone"?

Multiple people on one property could cause issues with future borrowing capacity due to limited CDR lenders, amongst other possible problems you may not want to face in the future.

 

Hi Colin,
Thanks for your response. We are aware of the implications. There are a few reasons:
1. Two of us do not have a substantial enough deposit to invest in the area we intend.
2. We all have an interest in property/investing and believe that with the three of us involved we can leverage each individuals research/knowledge and investment perspectives. We are time restricted and not all of us can dedicate enough time to research or be aware of opportunities as they arise. Having each other to bounce ideas off and maintain enthusiasm is important to us.
3. Note also only two of the three will have an outstanding debt in the first instance as one will look to either immediately pay out their loan in cash or park it in an offset. Our collective borrowing power allows us to invest close to the cbd in brisbane which we believe will provide greater stability and scope for long term growth.

 

Best to seek some legal advice on structure and then some credit advice on the loan side. You would each have to guarantee each others loans.