Terryw’s Ideal Loan Structure

I don't understand the above sentence. Can you explain more details?

 

Brokers don't know about the tax issues as it is not their area. You should have sought tax advice separately as well as loan structuring advice.

 

You need to split the loan into 2. Keep the existing loan as is and set up a new loan which is a line of credit. This way you will be safer from a tax point of view.

LOCs have higher rates generally, so once you have drawn down the money you can then convert the loan to an interest only loan and get a lower rate.

 

Thank you! Terry. That 's why the broker doesn't know we can claim the interest on deposit of investment property.

 

Yes, it is not within their knowledge or ability or licenced area to advise on - unless they are a tax agent or tax lawyer.

 

That's very broad, some do even though it's not their area

But it's pretty clear why using a broker that understands the tax implications of the loan structure they're setting up is so important, and why it's also important not to assume that the broker down the road will have any idea at all about it.

 

Some brokers may know about some tax issues, but a little knowledge can be dangerous.

A broker could not tell a client that setting a loan up in a certain way would make the interest deductible or say they do tax effective structuring for example. All they could do is suggest a loan structure and then say go and confirm with your tax agent that this is ok from a tax point of view.

 

Thanks for a great post. I'm new in the investment space and I'm currently structuring my first investment property this way which is comforting to know. A few different things which I'd like to know:

I'm in the process of refinancing my PPOR to a Line of Credit (IO) where the amount owing on the PPOR is 20cents (didn't want to pay fees on discharging the mortgage at the time) and the LOC loan is $300,000. I follow Steps 3 through to 7 but when it comes to rental income, I don't have a PPOR offset. Will the split LOC work in a similar fashion or should I use my existing transaction + savings account? I also have some personal savings where I'm not sure where to 'park' as I've read in your other threads that I should not park personal funds in investment and take it out later as this would muddy the funds?

 

Sounds like you have no non-deductible debt, so consider an offset on the new investment loan.

Whatever you do don't pay anything into your LOC other than to pay the monthly interest. If you put wages or rents into the LOC you will contaminate it. see Tax Tip 20: Never use a LOC as the main loan!

 

@Terry_w

Can you place a large cash payment such as your tax refund etc into it!!

 

So if I get an offset account with the investment loan, I can safely park savings without causing tax issues whilst also reducing the interest? I'm planning on a construction loan - are there offset accounts associated with these types of loans or are they only linked to the standard type of home loans?

On another note, if I need access to funds and I draw from the LOC via a split for personal use, this is still okay?

 

For the offset question see Tax Tip 82: Taking money from an offset account on an IP and Claiming Interest

For the above, I am not sure what you mean.

 

Best not to (pay into a LOC) as you will be paying down non deductible debt. I would suggest you deposit any cash into an offset account.

 

Thanks Terry. With the help of a broker (from the forum) I am in the process of refinancing and impleteing this loan strategy.

Just a couple of quick questions to make sure I have got my head around it.

• All rent is paid into the offset account?
• Expenses (rates, water, insurance, etc) are paid from the offset account?
• Interest payments for the LOC loan and IP loan are paid straight from the offset account?
• When the 5 year Interest Only expires then refinance again for IO?

Thanks for your time
Ben

 

Yes Ben, but you could look at this thread:
Tax Tip 4: Borrowing to Pay investment expenses Tax Tip 4: Borrowing to Pay investment expenses

and

Tax Tip 2: Debt Recycling Tax Tip 2: Debt Recycling

and while we are at it:
Tax Tip 13: Simple Loan Structuring Strategy Tax Tip 13: Simple Loan Structuring Strategy

 

Thanks @Terry_w. I appreciate it. I have read over those links but will go over them again in more detail. Thanks again.

 

Hi Terry, I rang NAB about splitting my existing into 2. The guy said I would not have the cash for the deposit of IP even I split the loan into 2 for investment purpose. I have $140k in the offset account, which is linked to my existing loan $430k. Can I repay the existing loan by 140k and top up the loan as to open a line of credit account of $140k? Or should I refinance again to set up the appropriate loan accounts such as Westpac? Thanks, Hidare

 

Just another quick question @Terry_w to make sure I have my head around it all.

The deposit, stamp duty etc are paid from the LOC. After settlement of the property if it needs a dishwasher or air con can that be added to the LOC loan?

Thanks