Using PPOR loan to pay off IP loan - why is this silly

Discussion in 'Loans & Mortgage Brokers' started by costanza, 25th Apr, 2021.

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  1. costanza

    costanza Well-Known Member

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    Wondering why this is a silly strategy as I've never seen it mentioned.

    Say you have some loan splits for your PPOR @ OO rates of 2%.

    And you have your loan for IP @ 3%.

    Why not pay down splits for your PPOR, redraw and use the money to pay down the IP loan?

    Then the PPOR splits will be deductible and IP loan would be lower. So effectively you are saving 1% in interest by debt recycling?
     
  2. Tony Xia

    Tony Xia Structured Loan Advisor Business Member

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    Most banks price loans based on the purpose of its usage, thus if its for investment purposes, you'll get investment rates.

    However there is a handful of banks that will price rates based on security rather then the purpose.
     
  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    I have done this for clients and even have a private binding ruling for the deductibility of interest.
    It is a good strategy and can be done even where the lender would charge more for investment loans.
     
  4. costanza

    costanza Well-Known Member

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    Really? I thought redrawing wasn't assessed again? Eg at CBA.
    So if you are redrawing a split from your PPOR there's no new application etc, so you would be getting OO rates...
     
  5. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Again, as an aside, a 1 % spread in IP to PPOR rate seems an excessive model. 40 to 60 points is more common.

    Again, I have to throw the active debt recycle piece into the ring.

    Say one does the above model with a 500 k IP lend, and based on a 60 pt spread the pre tax rate saving is 3000, assuming a 34 % tax rate, after tax this is 2000 pa

    If one redeploys the 500 k into an equities portfolio over time as the PPOR loans are paid down the likely outcome will be a "bit" more than 2000 pa.equivalent .

    Does that have risk, of course it does, but so does a 5 to 1 or 9 to 1 gearing in resi real estate..

    Historically, Over 10 to 15 years that equities capital loss risk irons out nicely

    Not for those that cant stomach the red or closesish to transition to retirement.

    For every dip, the next 1 year recovery was higher than the previous dip, so the 40 year historical risk profile is objectively low to medium at highest provided the " time in market" rules around when one wants to retire are applied.

    The data dont lie, our emotions do.

    Not advice - seek specific advice for your circumstances

    ta

    rolf

    upload_2021-4-26_4-15-23.png

    ta
    rolf
     
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  6. Tony Xia

    Tony Xia Structured Loan Advisor Business Member

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    Sorry misreed the redraw part. Yes it can be done.

    But that means you'll be paying P&I on that portion of the investment ( assuming it's currently IO)
     
  7. kierank

    kierank Well-Known Member

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    Over the last 108+ years, the ASX has produced total returns which averaged 12% to 13% per annum (growth 8% to 9%, income 4% to 5%).

    This period includes WW1, Great Depression, WW2, GFC, COVID, ... and covers every shares on the ASX.

    Nice ironing ASX :D.
    As B+H investor, I view the ASX as volatile, not risky.

    Cash is far less volatile BUT far more riskier IMHO.
     
    Last edited: 26th Apr, 2021
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  8. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Even without the debt recycling it can save a **** load of money.

    We had a client who wanted $400k kept available for some reason so he had a $400,000 main residence home loan fully offset. He couldn't qualify for any further loans but had a high rate investment loan with another bank.
    The strategy saved him 1% on the interest rate by paying down the home loan and redrawing and paying into the offset of the IP - ATO said it didn't need to go into the IP loan, which I think was a mistake, but I clarrified and they insisted so he was able to rely on that private ruling to do this ( you can't rely on someone else's ruling).
    He is saving $4,000 per year without investing further. That is a months salary to him.
     
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  9. ChrisP73

    ChrisP73 Well-Known Member

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    o_O

    Btw,what was the advantage of paying into the offset vs the loan? Ie why even do this?
     
  10. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    It wasn't really planned that way, I just asked an additional question and got an unexpected answer in the positive.

    I think the investment loan was IO and the home loan PI so this would have been a way to pay IO on an investment loan at PI rates. Easier to redraw and access the money when needed too.
     
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  11. costanza

    costanza Well-Known Member

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    So essentially it comes down to risk appetite for shares vs property and time horizon. If property you'll save the spread between OO and IP rates. If you have the appetite for shares likely to outperform in the long term.

    With a P&I loan the tax benefits of debt recycling must deminish as you pay back the principal? So then I assume towards the end of the loan, there is not much redraw available (assuming you have been redrawing consistently) - so at that stage essentially it will be like you bought 500k worth of shares directly with cash (ignoring the past tax benefits you receive)
     
  12. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Yep, but thats like driving from Sydney to Perth with enough fuel money to get to Adelaide.

    Which is why lendingstructure can and does often make a large impact especially over the longer ter..

    Slight Edge Principle

    ta
    rolf
     
  13. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    It would be rare for someone to get a 30 year PI loan for an investment and just sit on it for 30 years. What some do is to keep extending the loan term back to 30 years by refinancing every 3 or 5 years. It becomes like a surrogate IO loan with the payments constantly decreasing over time - to an amount lower than would be possible with a IO loan.
     
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  14. costanza

    costanza Well-Known Member

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    Is refinancing smaller splits, say 25-50k really that practical?
     
  15. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    You would normally refinance all loans secured by the one security property at once rather than just small splits, but it depends.
     
  16. FXD

    FXD Well-Known Member

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    If the home loan P&I repayment amount is higher than IP IO repayment, how can one maintain the
    IP cashflow position now having a higher monthly repayment amount? Can one redraw from home
    loan offset every month to amount of the principal component to pay back to the IP owning entity?
     
  17. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    I think that would have worked where the money was parked in an offset account. But dangerous to do without a private ruling.
     
  18. FXD

    FXD Well-Known Member

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    Hi Terry, would it be right to say that this strategy works well with a positively geared and/or
    slightly negatively geared IP with the interest savings from home loan and IP income combined
    will sustain the IP cashflow position to be self sufficient?
     
  19. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Each taxpayer will have their own situation. Remember increasing borrowings reduces equity for the benefit of under 4% a year in increased deductions.

    eg Lose $1 equity and save 2.5 CENTS of tax in each year. Takes a long time to be a favourable strategy. BUT if you can pay down the non-deductible home faster by $1 in exchange for that $1 increase on the IP its a bigger benefit than $1 a year.
     
  20. XBenX

    XBenX Well-Known Member

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    Ive done this for new borrowing to get a rate advantage (low LVR's and arent all that interested in borrowing to limits) but not for exisiting properties.

    Thanks for prompting the idea to look at doing it for exisitng borrowing too. Beats burning a hole in the PPOR loan offsets.

    Is the gap for IP vs PPOR loans typically 1%? Ours isnt that much.
     

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