Join Australia's most dynamic and respected property investment community

Use redraw to buy IP

Discussion in 'Property Finance' started by Eugene82, 10th Jan, 2017.

  1. Eugene82

    Eugene82 Well-Known Member

    Joined:
    2nd Oct, 2015
    Posts:
    57
    Location:
    NSW
    Hi everyone,

    While I was reading different threads I had a question about the following scenario:

    For a PPOR with 400k in offset account. Is it possible to create a split on the loan (without accessing extra equity) to the tune of 400K. Transfer money from offset to redraw, and then use/reborrrow this money to buy an IP provided the price of IP+ all extra costs is within 400K.
    Does that make the loan automatically deductible from the investment point of view?
    Does the bank still evaluate servicing etc?
    Can the loan be transferred to the IP later on once LVR hits 80%.?
    If the PPOR later becomes an IP is there any implications?
    Any other things I have missed?
    Thank you
     
  2. kierank

    kierank Well-Known Member

    Joined:
    20th Jan, 2016
    Posts:
    2,532
    Location:
    Brisbane
    I am a bit confused and struggling to understand what you are trying to achieve?

    Don't you want to use the new IP as security for the loan to buy it?

    By the sounds of it, you have equity in your PPOR. I would just take out a separate loan (say 20% to 25% of IP) as a new loan against PPOR (if there was more equity, take out more and put balance in this loan's Offset), borrow the remaining 80% against IP and keep the $400K in the Offset.

    What am I missing?
     
  3. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

    Joined:
    14th Jun, 2015
    Posts:
    2,004
    Location:
    Gold Coast
    what you describe is a form of "one off "debt recycling in its simplest form

    Taking the 400 k cash from the offset to buy the IP would mean no tax dedn.

    Paying down the 400 k into the PPOR loan new split, once redrawn will mean a new borrowing and should therefore be deductible

    pls confirm with your tax people

    Lenders vary with this, with some its not credit critical, and is tick and flick, wwith some its a new app, new credit new val yuk !

    ta
    rolf
     
    Ethan Timor and Eugene82 like this.
  4. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

    Joined:
    18th Jun, 2015
    Posts:
    14,047
    Location:
    Remote
    For a PPOR with 400k in offset account. Is it possible to create a split on the loan (without accessing extra equity) to the tune of 400K.

    Depends on the bank, some will allow this without servicing, with others it would be a new loan application.

    Transfer money from offset to redraw, and then use/reborrrow this money to buy an IP provided the price of IP+ all extra costs is within 400K.
    Yes

    Does that make the loan automatically deductible from the investment point of view?
    Yes , you would be borrowing to invest

    Does the bank still evaluate servicing etc?
    Depends on the lender

    Can the loan be transferred to the IP later on once LVR hits 80%.?
    You mean can the security for the loan be changed? Yes


    If the PPOR later becomes an IP is there any implications?
    Yes, one implication is that you have paid down the loan by $400k

    Any other things I have missed?
    Yes heaps.

    What if you die? Does you will cover this. Generally debts on property are go with the property so this can have a different outcome for your will.

    What is serviceability tightens up? It might be better to just borrow the deposit as above and then borrow as much as you can against the new purchase. Now rather than later.
     
    Ethan Timor, Eugene82 and Perthguy like this.
  5. Eugene82

    Eugene82 Well-Known Member

    Joined:
    2nd Oct, 2015
    Posts:
    57
    Location:
    NSW
    Thank you all for your answers. I'm just thinking what's doable. I have heaps of equity, but tight with servicing. So was thinking through options
     
    Terry_w likes this.
  6. JacM

    JacM VIC Buyer's Agent - Melb N & W, Geelong, Ballarat Business Member

    Joined:
    12th Jul, 2015
    Posts:
    1,510
    Location:
    Melbourne, Australia
    Redraw is not the same as an equity release loan. An equity release loan is much tidier.
     
  7. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

    Joined:
    18th Jun, 2015
    Posts:
    14,047
    Location:
    Remote
    But some lenders IO loans can be used like a LOC. Westpac is an example. others are more restrictive.
     
  8. Eugene82

    Eugene82 Well-Known Member

    Joined:
    2nd Oct, 2015
    Posts:
    57
    Location:
    NSW
    I thought for equity release I need to show servicing for the extra funding?
     
  9. JacM

    JacM VIC Buyer's Agent - Melb N & W, Geelong, Ballarat Business Member

    Joined:
    12th Jul, 2015
    Posts:
    1,510
    Location:
    Melbourne, Australia
    Yep
     
  10. Eugene82

    Eugene82 Well-Known Member

    Joined:
    2nd Oct, 2015
    Posts:
    57
    Location:
    NSW
    You are missing Serviceability
     
  11. kierank

    kierank Well-Known Member

    Joined:
    20th Jan, 2016
    Posts:
    2,532
    Location:
    Brisbane
    Disagree.

    I was recently in a similar situation as you. I was seeking a loan and had two banks vying for my business. I was an existing customer of both and had loans with offsets (fully chocked) with both.

    Both wanted me to use the cash in the offsets to increase my serviceability (as I am retired). I told them that my serviceability was better and their risk was lower if I left the cash in the offsets. They argued that I could withdraw the cash. I counter-argued that they should look at the history of the offsets and find out how long the cash had been there (5 years). I then said to them:

    "Do you really see me withdrawing that cash tomorrow and putting it on red. I run my investment properties like a business. There are risks, things can go wrong, I need a cash reserve to handle these issues (should they occur) and those offsets are my cash reserves. By using those cash reserves as part of this new purchase, my IP business will be more unstable and more riskier for them."​

    The cash stayed in the offsets, I was granted the loan and I now own the property.

    I was in your situation, I would put up a similar and strong business case to your bank.

    IMHO, you is in a far more stable situation and are less riskier to the bank if the $400K stays in your Offset. You just need to convince the bank.
     
  12. Corey Batt

    Corey Batt Finance Strategist Business Plus Member

    Joined:
    14th Jun, 2015
    Posts:
    1,901
    Location:
    Adelaide, SA
    Best to review your servicing with an investment focussed broker to established whether your servicing is truly tapped. I'd say in circa 80% of cases where people say they're "out of capacity", there's still options on the table that they're unaware of.

    From there IF there is borrowing capacity, debt recycle the funds to enable you to 'borrow' for the deposit and costs, then have the remaining loan applied and secured against the new purchase.

    Otherwise if there indeed ISN'T any capacity and the lender's policy allows it, split the loan as necessary for the purchase price and costs, pay down the account and draw out to pay for the purchase.
     
  13. noone

    noone Member

    Joined:
    3rd May, 2016
    Posts:
    8
    Location:
    Australia
    I'm interested to know how this works in practice. I'm not with Westpac so have no idea. Will the loan amount increase when drawing directly from the loan since the IO loan has already been funded? or do you pay down the loan and redraw?
     
  14. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

    Joined:
    18th Jun, 2015
    Posts:
    14,047
    Location:
    Remote
    The will work like a loc. You will have a fixed loan limit and if you are ahead in repayments or have paid down the loan then the balance will be lower than the limit so you could potentially redraw this amount.

    e.g
    $100,000 loan IO and fully drawn, owner occupied
    You have $60,000 in the offiset and need $60,000 deposit for an investment property

    You pay $60,000 into the loan so the balance becomes $40,000 with the limit remaining at $100,000. You then reborrow the $60,000

    You will have a mixed purpose loan, but this can be fixed later.
     
  15. noone

    noone Member

    Joined:
    3rd May, 2016
    Posts:
    8
    Location:
    Australia
    So Westpac allows transacting using the loan, which is a feature most other lenders don't offer?
     
  16. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

    Joined:
    18th Jun, 2015
    Posts:
    14,047
    Location:
    Remote
    Yes. ANZ for example you need to redraw to an ANZ savings account and pay from there and that creates additional issues.
     
  17. noone

    noone Member

    Joined:
    3rd May, 2016
    Posts:
    8
    Location:
    Australia
    Thank you Terry. This is very helpful.
     
    Terry_w likes this.