Tax Tip 75: Refinancing 2 loans for the 1 property and potential tax issues

Refinancing 2 loans for the 1 property and potential tax issues

Another new potential issue has come to my attention thanks to @Propagate in this thread: https://propertychat.com.au/communi...t-cause-borrowed-funds-to-take-a-detour.5011/

Something I had never considered before.

Example

P has a PPOR worth $500,000. This securing 2 loans:

Loan A $100,000 loan for the main residence = non deductible

Loan B $100,000 LOC of which $50,000 has been used to buy IP1.

Both loans are with CBA.


IP 1 purchased for $400,000 using

Loan B $50,000 deposit from the LOC with CBA, and

Loan C $350,000 from ANZ Bank.

$400,000 in total. Interest on both B and C being deductible against the rent for IP1.


IP 1 is now worth $650,000 and P wants to refinance this $350,000 loan from ANZ and also refinance the $50,000 used from the LOC with CBA. He intends to get a $400,000 loan from NAB.


The potential problem

NAB will lend the $400,000 needed as P meets the LVR and income requirements. However when they hand the money over they will only be discharging the mortgage with ANZ. This means they will be paying ANZ $350,000 at settlement with the other $50,000 to be ‘given’ to P by depositing it into an account – only an NAB account.


This will potentially cause the $400,000 loan to be mixed.


If P were to pay into the account and then back into the loan before redrawing and paying the ANZ loan then this would kill the deductions on $50,000 worth of the loan.


Possible solutions

1. Obtain a bank cheque for the $50k and physically deposit it straight into the LOC account with CBA

2. Have the $50k paid into a completely empty NAB account and then from there pay straight into the CBA LOC account. Not ideal – see potential issues in Tax Tip 1.

3. Increase the loan with ANZ from $350,000 to $400,000 before refinancing – but you will have the same issues – where they will pay the extra $50,000 if they cannot pay straight into the CBA account.


The bank cheque is the only ideal solution. The second solution is the next best option, but may not be 100% safe. The third one is not really a solution unless your bank will let you disburse funds directly into another bank’s loan account.

 

Great scenario to examine.

Would the third solution work if the ANZ loan subsumes the CBA LOC 50k? i.e. top up 350 -> 400 and transfer the new 50k from ANZ to CBA?

 

What about have NAB leave the $50k in a LOC so it can be transferred directly across after settlement?

 

If ANZ could pay CBA directly. Not sure they would.

 

Yes that should work - provided the LVRs are still ok. He can then close the LOC or keep it for future investments.

 

(Bank names & values changed to protect the innocent ;-) ) but.....

In the scenario currently playing out, the whole issue is that NAB will not pay out any "surplus" (i.e. the remaining $50k) to anything other than another NAB account. Nor will they allow it to sit un-drawn in the loan. As it's a basic loan there's no LOC facility and can't be changed to another loan type without a whole new application, of which at this stage there just isn't time to do.

Hands are completely tied. I have to say, I had no idea that some banks forced you to draw the entire loan at settlement, this is what scuppered my scenario. When I have re-financed or topped up in the passed the excess funds have been allowed to sit in the new loan account, un-drawn until required. I had no that other banks did things differently and force a complete drawn down at settlement.

This must happen a lot, and I dare say there would be a lot of people out there that have had this exact situation and have unwittingly contaminated their loans at a refinance without knowing there's any potential issue? Seems it's quite common for banks to draw the entire loan out at settlement and my scenario isn't exactly uncommon, it's a pretty bog standard equity release/refi.

 

Is it possible to get CBA/Bank1 (holder of the 50k LOC) to attend settlement? And have your conveyancer instruct accordingly?

(or is it 110% futile as NAB/NewBank refuses to do anything other than deposit into a NAB account)

 

They will want fees to attend - theoretically possible though. A bank cheque could be possible?

 

Possible I guess, 110% is moot as there's heaps of equity, the refinance was only up to 90% which was enough to pay itself out, the deposit split and some left over.

It all got too hard in the end, I couldn't get passed the overseas call centre. They spoke to their supervisor who explained the situation with where surplus funds were to go, and I was told explicitly that they can only be paid into a new, or existing, transaction account with the bank.

A local branch of the bank called me later that day to say hello and introduce themselves and wanted me to come in for a "chat" about our new loan, (i.e. want to flog me all sorts of other stuff I don't need, we banked with this mob years ago and switched away from them as I was sick of being constantly hounded by them to take out new insurances, credit cards etc). I asked them to check the situation for me, they came back and said the same thing, all surplus monies must be fully drawn at settlement and must go into a transaction account with the bank.

 

@Terry_w I have this current scenario

IP A (partner name) with following loans
Loan 1: 700k
Loan 2: 200k in offsets

Have used 50K of Loan 2 to purchase IP B (my name)

Loan 2 with 150k remaining. I would like to use this 150k to pay bills (strata, council etc) for both IP A and IP B.

Is that okay or what do I need to do?

 

That's not ideal - split the loans first. I would do one just for IPA and another just for IPB.

 

@Jess Peletier do you mean split Loan 2 into:

Loan 2A: 50k
Loan 2B: 150k ?

 

Yes, or Loan A $75k, Loan B $125k. It doesn't matter really as long as you keep each property separate.

 

Depends what you mean by 'ok'!

There will be tax issues. Assuming there is a written commercial loan agreement between A and B the interest should be claimable by B if A is charging B. A can then deduct the interest against the income from your payment.

Since A has a loan with 2 purposes it is a mixed purpose loan. A will have problems when any additional payments are made into the loan.

If B wants to borrow to pay interest this should be treated as per normal - see my other costs.

A really needs to split the loan into the relevant portions.

 

Simple solution Wylie!

 

Not so easy when the refinance is on a house interstate and "Bank B" is not a high street lender, (has no branches). Could be deposited via the Post Office, but not sure how lucky you'd have to get to find a bank willing to do it, plus a settlement agent that will walk the bank cheque to a post office? Plus, having the foresight to arrange all this prior to the loan docs being drawn up.

In our case, we had no idea that some banks force a full disbursement at settlement until the loan docs came though, by which time it's far too late to change anything without affecting settlement dates.

 

They could always mail you the bank cheque, or hold it for pick up in a branch.

 

By doing this isn't P losing the tax deductibility for the 50K.

Option 3 is better way to maintain tax deductibility. Get ANZ to release 50K and pay it back into the loan or new offset account wherever your lender lets you write the cheque from. Of course key is you maintain the nexus and do not mix 50K with any other money.....

 

Its not ideal, but the borrowed funds could be traced, with no mixing to occur - like in my tax tip on parking money in an offset account.