Terryw’s Ideal Loan Structure

Hi Terry,

Thanks for the great advise on this thread. Newbies like us really appreciate your knowledge sharing. I was looking for the right structure of my loan and bumped into your awesome tax tips.

I have about 100K equity through savings and planning to buy my first investment property. My PPOR loan structure is as follows

• I borrowed 90% by paying LMI(didn't have savings at that time)
• Loan is 660K with the above 100k in an offset account.
• Loan is IO
• Purchase price is 718K and the current valuation is 780K.

How do I structure my loan so that I can purchase my first investment property around 700K? Is it a good idea to access equity from my PPOR?

Appreciate your help

 

See above!

I don't know your situation so am reluctant to give advice. Just make sure you borrow 100% plus all costs for the IP

 

I'm looking for your suggestion for the 100k equity I have. How do i structure it so that it becomes deductible as interest for tax purposes

Do I need to payback the 100K towards my PPOR loan and then redraw by setting up a new loan B which will be used to borrow and buy the investment property?

 

that will depend on what your PPOR is currently work. if you can don't pay down your PPOR loan but borrow against it. If you will incur LMI then you have a choice to make - pay the LMI or pay down the loan. Which you choose will depend on the circumstances and your plans.

In any case don't just use redraw but make sure you have a new split.

Seek specific tax and credit advice on your situation.

 

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Hi Terry,

Thank you for sharing tips over the forum. On above tread, item 3, loan splitting. What is the benefit is of splitting the loan (eg. Split A, Split B etc.), comparing to a normal one single loan account?

Assuming the same parameter apply to both case eg. offset account, periodic lump sum payment to reduce loan, increase available equity (paid down loan + capital growth?) over time.

Newbie question.

 

A single loan will result in a mixed purpose loan ie interest on split loan will not be tax deductible.

 

You will benefit from specific advice but generally speaking you could get a valuation done, and borrow against the equity up to 80 or 90% (depending on lender policy) via a separate loan split. Depending how much you need for a deposit, if you required more funds you'd also look at using offset funds to pay down PPOR debt, split loan and use the newly split redraw funds for the IP.

 

You need separate splits for the investment loans otherwise your interest deductions may be denied. Mixing PPOR and investment loans in one big loan creates a big mess that can be difficult to rectify.

 

see
Tax Tip 3: Mixing Loans - Don’t do it
Tax Tip 3: Mixing Loans - Don’t do it


Tax Tip: An issue with mixed purpose loans where both portions are investment. Tax Tip: An issue with mixed purpose loans where both portions are investment.

 

Thanks Jess

 

Thanks Terry

 

Jess/Terry

Sorry for asking too many questions.

I was working out the following from what you guys suggested

LOAN A - PPOR - IO with an offset a/c
LOAN B - Split Loan from PPOR- Equity from PPOR - IO
LOAN C - IP - IO with an offset a/c

All payments to the IP like deposits, b&p, solicitor fees paid from LOAN B a/c.

But I got struck where I need more than the money in LOAN B where extra funds are required to purchase IP.

I plan to sell my stocks and put $$$ in the offset a/c in Loan A.

How do I ensure that the amount in the offset a/c in LOAN A is tax deductible?

You suggested paying down PPOR debt but my LOAN A is IO only with offset a/c.

How do I go about this where i'll be using offset funds to
- pay down PPOR debt
- split loan
- use the newly split redraw funds for the IP( I see suggestions in this thread not to redraw funds).

 

Please get specific advice on this - it's a bit complicated and I'm hesitant to offer advice without knowing lender and amounts.
It 'might' be best to top up the PPOR loan, repay the required funds and split a LOC afterwards.

 

Offset account money is NOT deductible.

What you need to do is to pay down the PPOR loan and create a new split and borrow this money, after splitting, to invest.

 

Sure Jess. CBA is my bank and PPOR loan amount is 660K. I will have about 70K in my PPOR offset account after I sell my stocks. Appreciate any suggestions from your expertise. Not sure how I could top up. Are you able to provide an example?

 

Thanks Terry.

1. How do I pay down my PPOR loan as its IO only with offset? Can I ask my broker that i want to pay down? Any example Terry?
2. The new split account Loan B - will be equity+ the amount I paid. Right?

 

First thing I would be doing is working out how short you are? If a few thousand and it's a new application to top up or create a new split then it might not be worth the time and cost.

If so just pay the shortfall with cash.
Loan B and C unless I am missing something would still be deductible. You would just miss out on the shortfall in deductions which could be very minimal.

 

1. How do you pay down a loan? Simply put money into it.
2. The new split will be borrowed money.

e.g.

$100,000 IO non-deductible home loan. You have $20,000 cash in the offset.

Pay down the loan to $80,000 by depositing the $20,000 in the loan.

The best way to do this would be:
step 1. Split the $100,000 loan into 2 portions:
a $80,000
b $20,000

Step 2. Pay off the $20,000 portion
(note some banks will close the loan if you pay it off, so check first and you may have to pay it down to $100 instead)

step 3. Redraw from the $20,000 account straight to its final destination. Don't let these funds do any detours - no parking on savings accounts or cheque accounts

Step 4. Claim all the interest on the $20,000 split as it relates solely for investment purposes.

 

If you are with CBA they will close the loan if you pay it off.
They do have a nice LOC product called the Viridian - I suggst you use then and then once used covert it into a IO term loan.

Only pay down the loan by the amount you are short for.

 

Thank you so much Terry for patiently answering my questions. Appreciate your help!

Looks like Viridian LOC is good but after selling my stocks, I will have more money in the PPOR offset account than the money I get by pulling PPOR equity(maybe 30-40K).

So,

LOAN A - PPOR 660K- IO with an offset a/c of - 50K

LOAN B - Viridian LOC by PPOR equity - say 30K

Say my IP buying expenses are 80K. How do I use the money in Loan A offset a/c for deducting tax? Might be the time for another of your awesome articles on this topic