Terryw’s Ideal Loan Structure

Lol.

Subdivision is extremely complex with many moving parts. You need specific legal advice on that one. I have covered the lending side in one of the tax tips and have also touched on the tax side in the tax tips too.

 

Hi Terry,

I am so glad to find your post on the net. Your information is very helpful for a newbie like me. I have been researching / studying about these topic lately and my head is overloaded. Could you please guide us the best way to do with our situation as I cant find the answer or info any where.

1. We have a PPOR which already paid in full.
We want to move out to one of the future IPs within couples years to develop the site, turn this to a IP.

2. We are planning to buy an IP, maybe 2? (one might be a new PPOR)

3. We also looking to buy a cheap holiday house to generate positive cash flow from leasing and plan to keep it for a long time.

What is the best loan structure for our situation please? Thank you in advance.

Hayley

 

Borrow 105% for each new purchase interest only with an offset account on either. Then you have options.

When u decide where you will live you can move your cash into that offset and or pay that loan down.

In the meantime ready my strategy post on moving out of the main residence.

 

Nice post @Terry_w .

May I ask about IP loan and shares related?
Consider this scenario:
1. I bought some shares for investment using Cash worth 20k. As it's coming out of my savings account, no interest is deductible.
2. Now I have an investment property loan with offset and balance of 20k.

Can I simply transfer the 20k from #2 IP loan to the #1 savings account so I could claim the 20k interest as tax deduction?
If not, are there any options so I could claim the interest on the 20k without having to sell the shares (which I believe the purchase price can never be that low again)?

Cheers,
LC

 

No t sure what u mean but having an investment property loan of $20k.

I have written a tax tip or 2 on this. You cannot reimburse yourself with borrowed money and claim the interest.

Solution sell the shares and borrow to buy them back.

 

Thanks @Terry_w for your advice.

The figure 20k is only an example. In reality, I might have 200k IP loan which I extracted from the primary home loan.

I know this is an option. However, this is not my preference. Selling the shares will mean capital gain tax and also to buy them back, the share price is a lot higher which means lower % return (dividend).

Perhaps, I will re-evaluate in a year or two.

Cheers,
LC

 

CGT will be payable at some point, you are just bringing it forward. This can be worth it considering the ongoing tax savings from deductibility of interest.

Your comments about the lower % return don't make logical sense. You will still own the same shares are before.

 

Hi @Terry_w thank you so much for your informative tips.
Looking to purchase IP2 with the view to most likely move into it within 3-5 years.
I am in the current situation with the following proposal from my bank.

PPOR Val $950k (currently 2 loans P&I) - my name only (loans + title)
IP1 Val $980k (1 loan IO) - my name only (loans + title)

Bank is proposing to combine PPOR loans and top with approx. $260k surplus.

Now from reading your advice I should request the $260k (released equity) be moved to a split loan @ IO. Is that correct? This will give me the max options i.e. leave as IP or move in as PPOR. They are also requesting my wife be added as co-borrower to assist with serviceability... is this an issue?

Any feedback or thoughts greatly appreciated. Cheers

 

Do the two existing loans relate to the purchase of the property? If so combining them may not pose any issues and it is a good idea.

But the extra money being borrowed should be done via a new split otherwise you will have a mixed purpose loan.

Ideally you would not let your spouse on the loan because of the extra asset protection risks, and the effect on her serviceability. If you have to do it to get the money then consider this. One way to minimise the effect is to just make her a co-borrower on the extra $260k split and not the existing loans.

 

Thanks Terry - you're a whiz. Yes both loans relate to the purchase of the PPOR (H&L package).

Agree with the split... I will advise the Bank. I made this mistake last time and do not want to repeat it.

I will see if my spouse can be added as a co-borrower just on the extra $260 split and not on the existing $500K.

Thank you so much and the reason why I am accessing the PPOR equity and not IP equity is because the IP is IO and originally a PPOR and the bank said they will not move it onto IP rates until/if I re-finance.

Hope that makes sense

 

Thanks so much @Terry_w
I am a newbie and was looking to buy the first IP. Your post has given me a great direction but just want to confirm that I got it right for my situation.

I bought the PPOR in nov 2012 for $440k and now it is valued at $675k with 1 loan paying down to $327k linked to offset.
We can service up to 1million loan max.
(We moved out to live with parents recently and now the PPOR has been leased out. )

For the loan structure do we set up like below?
Loan 1 $327k going to change from PI to IO,
Secured by PPOR
Loan 2 ($1000-$327)*20%=$134k, IO,
For the 10%deposit and stamp duty expense of the IP etc, secured by PPOR
Loan 3 ($1000-$327)*80%= $539k
Secured by IP, IO

Do I get get both PPOR and IP's rent to the loan 1 offset? Or will this cause contamination?

what is the best split between loan 2 and loan 3 as with the limit of my serviceability one increases will cause the other decrease. Or it does not matter?

Do I pay the interest the moment the loan 2 is approved? Talked to the bank sounds like I have to pay the interest for loan 2 even I haven't used it to pay the IP expense? ( i thought my debt is still the same amount as Loan 1 before I use loan 2 to pay the expense?)

Thanks for your kind help.

 

Broadly that looks like a good set up. Make the 20% loan a bit larger then expected so that you can borrow to pay stamp duty etc.

No contamination with money's paid into offset account.

Go 80% on new purchase to avoid lmi. If the smaller loan is cheaper rate then u can increase this amount and and decrease the size of the larger loan.

 

Thank you very much Terry. I will go in confidence and speak to the bank today.

 

Why not use a broker instead?

 

going to do so to save bit of time with my kids. thanks

 

Thank you Terry for your prompt reply. I have read more of your tips and applied them for our situation. Does this strategy seem right to you?

PPOR PAID IN FULL 550k.
Plan to move out in 5 years
Plan to apply for split loans for 2017:
Loan 1: IO 200K with Offset account 1 (preparation for the move PPOR)- all income, savings ect goes here
LOC: pay for all personal expenses. repay from offset acc 1

Loan 2: IO 100k borrow to set up new bussiness.

Loan 3: IO 60k IP1

IP1 230k (plan to keep >10 years)
10% deposit & all purchasing fees pay from Loan 3
90% PI loan fixed interest 3-5 years (to get lower rates interest)
All income go to Loan 1
All expenses paid by LOC2 . Pay LOC2 using offset acc 1.

In the future:
Loan 4 IP 2 with an offset account
Reno and rent for a year to claim tax on the reno?
Move all cash from offset acc Loan 1 to this IP and turn it to PPOR.

Thank you Terry for your time.

 

Seems unusual to me.

What is loan 1 to be used for?
Why use a local to pay for personal expenses?
Why pay lmi when you have so much equity?
Sought tax advice?

 

Hmmm. Maybe a wrong thinking and lack of knowledge.

What's about loan 2,3 & 4. Do they seem alright to you?

As you mention earlier that all income should go to an offset account from PPOR loan. And use that money for family expenses. We however do not have any loan. If we put all income and rent into loan 2 then we won't have any cash to pay for our family expenses? If those expenses are paid from loan B it will contaminate that acount, won't it?
We want to move in few years to live in one of the IP therefore money park in the offset account in loan 1 so we can move the money to pay off the IP when turning it to PPOR.

Please correct me if these are all wrong.

 

You can put cash in an offset attached to an investment property loan without contaminating the loan. You can also pay expenses from an offset account without contaminating to loan.

I have written a tax tip on this in the tax section.

 

Hey @Terry_w . Just a question to ask.

I don't have a PPOR (still living at home) however I have an IP with a $400,000 loan.
Eventually after a couple of years, i was able to access $100,000 of equity from that property.

The $100,000 in equity was then parked in my offset account which was linked to the IP and the initial loan of $400,000 is now currently around $500,000.

I've since used about $65,000 of that equity and purchased another IP.

Question is, did I make a mess out of the structure by not getting a split loan for the equity, instead of making the initial $400k loan bigger?
If so, is it possible/worthwhile to restructure it so that it is split ?

Thanks!