Terryw’s Ideal Loan Structure

Hi mate,

Its will be around 40-50K so not few thousands

 

Pay down the PPOR by $50k and increase the Viridian by $50k.

I have written about this, I think, in
Tax Tip 9: Don’t use Cash in Offset account to Invest Tax Tip 9: Don’t use Cash in Offset account to Invest

 

Awesome, Thanks so much Terry. Going to get this critical info into my broker's head now ...

 

Just another quick question:
I have accidentally paid for a building and pest inspection from a PPOR offset account for a potential IP. Can I transfer that money from the investment account that I have already set up? Would that be muddying the waters? Many thanks in advance.

 

No. You can't borrow to buy something you already own.

see
Tax Tip 5: Reimbursing yourself - Impossible

 

Thanks for that. Cheap lesson learnt. I am assuming that I can still put a claim as a tax deduction though?

 

No, this would be a capital expense.

 

thanks Terry for clarifying!

 

Terry – thanks for sharing your amazing knowledge with us!

I have a query about a potential alternative method and wanted to see what you think. Often you can get a lower rate if you choose a “no frills” loan that doesn’t include an offset account, so can I:

1. Use the splits method you have described, but for Loan A on the PPOR make it with no offset account but redraw available (and preferably IO) and have it at a relatively small amount (say 20K) that won’t get maxed out unknowingly.

2. Have multiple other splits (all IO), for example 5 x 10K, 2x50K, 1x100K

3. Have all normal income paid directly into Loan A, and if possible use it as your normal everyday account or if needed redraw your living money (say keeping this at no more than 5K) into a bank account and use this for everyday transactions.

4. Regularly transfer money from the Loan A into the smallest 10K splits, filling each one up (within a few dollars to keep them open if needed) consecutively.

5. Once a small split is full redraw and use it for small investing (eg. shares), or wait until the 5 are full then redraw and put all into a 50K split.

6. Repeat this and fill the second 50K split, then redraw both 50K splits and put into 100K split. This can then be redrawn for a larger investment (eg IP).

From my (admittedly limited) understanding this could be a way to efficiently debt recycle, and with a 0.22% difference between a loan with and without an offset from my current lender from my calcs this would save me around 1K per year on a 600K loan. The reason I have for the 5x10K splits and shifting the money over vs just the 50K splits is that if there is a great investment opportunity (eg another GFC) the loan structure is in place to pull the trigger on multiple small investments without restructuring the loan. A drawback is that money is being paid into the Loan A account which could impact tax savings if the PPOR is ever converted to a rental, but if this is unlikely keeping this loan small minimises the potential negatives and you could max this out and redraw to invest elsewhere to recycle the debt.

Does this sound even remotely logical? Reading your tax tips has filled my mind with crazy ideas…

 

You could do that, but you have to consider the tax consequences.

 

Hi everyone,

First and foremost I want to thank you Terry for this thread, It is the most simplified and structured piece of info that I have found. It explains the topic in a very specific but simplistic way. Great for beginners like myself.

It is a great piece of work you should be very proud of Terry. I'm very grateful for the time and effort you took in doing this.

Now, down to business:

I'm currently in the process of setting this loan structure with the bank. It will be our first IP. All this is very new to us as you can tell.

The bank is currently asking me if the PPOR split loan (LOAN B) to pay for the deposit and costs should be setup as Investment Loan owner Occupied or Unoccupied. The interest on the second is higher.

I know that the security of LOAN B is the PPOR. However I don't know what to answer them about this since security not necessarily means purpose.

Are there any implications of choosing one instead of the other?

 

Tell them owner occupied and get a lower rate!

 

The approach I am currently using is to have multiple offset accounts linked to my PPOR (many banks now allow this). It allows me to be more organised. I have these roughly organised as follows:

• PPOR Offset 1 - Everyday expenses ( linked to my debit card )
• PPOR Offset 2 - Loan funding ( used for funding repayments of PPOR, IP loans and credit card )
• PPOR Offset 3 - Primary offset ( this has no cards linked and so is good for security of funds )
• PPOR Offset 4 - Share investment income
• PPOR Offset 5 - Rental income ( also acting as an IP maintenance buffer )
• PPOR Offset 6 - Buffer ( 3 x monthly expenses )

My salary is apportioned each month into #1, #2 and #3.

Intent is to periodically use excess funds above minimum balances I am maintaining in #3 and #5 to top-up share market investments ( only when deductible investment loans are not available ).

#5 is also used for funding investment property maintenance expenses.

I will use #2 pay off my credit card balance in full each month. I am also running a balance alert on this account to make sure my loans will never go into arrears.

The above approach whilst fiddly to setup also makes it easier to reconcile investment and property-related expenses.

 

Why not just borrow to buy shares and pay down your PPOR debt?
Same with property expenses.

 

I didn't want to complicate it further but yes I am also borrowing to buy shares. Once I use those funds I will be topping up investments each month or quarter from excess cash.

I also have another IO split which will be used for expenses associated with my next IP ( still in the process of finding a suitable property ).

 

Hi guys,

Regarding loan C ( IP loan) secured to IP.

In my case I have loan B ( deposit and costs) set up already as 10% of IP price + costs, secured to the ppor.

Now bank has told me that loan C can't be secured to the IP only because I will have to pay lmi. (Lvr 90%)

The only option they are giving me is joint security (PPOR and IP) on loan C.

Considering loan B is already funded. Is there a way to Work around this? Is there a way to get loan C secured to IP only as per Terry's strategy?

 

From a tax perspective it doesn't matter what property loan C is secured against

 

Interesting you said that. Loan B (Equity Loan) interest rate would be higher than Loan A (PPOR) so wouldn't be more beneficial to cut costs down and pump money back to Loan B whenever possible (in this case, the rent)?

 

You might save interest but you would be paying down deductible debt meaning losing tax deductions.

Because the rates are higher and conditions not as good I suggest a LOC be converted into a term IO loan after you have used it.

 

And the reason why you don't start off with an IO is because many banks don't allow payments directly from the loan account so the funds has to take a detour which means risk - losing deductibility of interest.

If your IO loan can be used like a LOC and expenses paid directly from it then this would be the preferable way to go