Terryw’s Ideal Loan Structure

Try to refi with Westpac. Westpac are very good at splitting loans as this can be done over the phone without fuss.

 

Yes.

 

Thankyou.

 

Thank you! Terry

 

Just a question about a PPOR turned IP then back into a PPOR.

Say property A had an initial loan of 400K with payments being made interest only. For the period where it was a PPOR I understand the interest is not deductible.

Property A goes up in value and now equity has been released, and there is a new loan being.
Loan A - 400k
Loan B - 200k (generated equity)
The property now becomes an IP and hence the interest is now deductible.
Repairs and rates for the property are paid from loan B for this property. 60k is used as a deposit for a new property.

Later on, property A becomes a PPOR again.
I cannot claim the interest for loan A. I assume I can claim the interest for 60K from loan B as it is still an IP. My question is have I contaminated loan B as I had used some of the money from loan B for renovations to property A or even to pay property As rates, when it is now a PPOR ?

 

When the property becomes an IP interest only loan A will be deductible. Interest on loan B will need to be aportioned. Interest on Repairs and rates relating to property A would generally be deductible. Interest on the $60k used for a new property may be deductible if this new property is an investment.

Once you move back into property A you may still be able to claim interest on the $60k borrowed for a deposit but that will be a part of loan B and that loan is mixed. You would need to refinance it before paying down the principal or you will lose money.
Tax Tip 44: How to Un-Mix a Mixed Loan

 

I would not loan to Tom and Jerry....they'd destroy the house, if they didn't kill each other first!!

 

Thanks very much Terry for your words of wisdom on this forum, it's really opened my eyes to debt recycling and loan structuring!

I have recently purchased a PPOR with the loan split along the lines of your recommendations - I have half set aside with an offset as Loan A, and the remainder in multiple IO 100K and 25K splits to use for potential property and share investments over upcoming years. I plan on transferring money from the offset into the IO loans to pay them off and redraw to invest as per your recommendations, but was curious as to what would happen if I decide to transfer my loans to another bank down the track.

Can you simply transfer the loans as they are to the new lender as long as the structure is exactly the same and no changes occur to the security or loan purpose? I don't want to be trapped with the one lender in case they are no longer competitive in a few years and don't want to lose the tax benefits.

Thanks

Ross

 

If refinancing you can take the opportunity of consolidating the loans where the purpose is the same. Like this Tax Tip 36: Consolidating Loans for investment properties
Or you can just maintain the same loan structure.

 

Thanks again for your help Terry!

 

Hi Terry. Is this still current today? I am using an offset account against my PPOR to put my salary etc into, but use a LOC against my IP's, where all rents go in and all business expenses come out of. Your method is obviously better, but I was warned of "The Hart Case" where the ATO ruled this practise illegal. Is this the same thing? If not, I will restrucure as you explained.
Brad

 

Hi Brad

The Hart case involved a loan product which allowed the interest on the investment portion of the loan to be fully capitalised while the PPOR debt was paid off first. It wasn't ruled illegal, but the ATO was allowed to apply Part IVA anti avoidance provisions to deny the deduction of interest on the capitalised portion of the loan.

Yes, my method still applies today.

You should get tax advice on your method because you have created some adverse tax issues. See
Tax Tip 20: Never use a LOC as the main loan Tax Tip 20: Never use a LOC as the main loan!

You are actually doing something similar to the Hart case, but probably with less capitalising.

 

Thanks for answering my last question. I have one more, please.
What's the ideal loan structure once your PPR is paid off?
Has this been covered somewhere? I could not find it. Thank you!

 

Not sure if I have covered this or not but I will write one up.

 

Thanks, Terry. Looking forward to it.

 

See
The ideal loan structure for someone who has paid off the main residence

 

Not sure if this is logical...for those who have fully offset their main residence, can they release equity as a standard variable loan split or top up existing loan or refinance and then convert the loan to a LOC after funding?

So free interest income (after tax) while they look for a new property?

 

They should only increase their loan via a new split. If top up the existing loan it would be a mixed purpose.

You wouldn't want to covert a loan to a LOC after funding - but the opposite from a LOC to an IO loan.

 

Why is that? If someone already released equity as a new loan split, wouldn't it be better to pay the deposit of an investment property using a LOC than an offset? They can convert the LOC to IO loan after settlement

 

Definitely. You should set it up as a LOC and then convert it to a IO.

The exception is if the IO can be used like a LOC with amounts paid from the loan.