What to borrow.

Discussion in 'Accounting & Tax' started by giraffez, 20th Mar, 2017.

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  1. Perthguy

    Perthguy Well-Known Member

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    A tax time your accountant will need to put some numbers into your tax return. One number is the amount of interest paid for property number 1 and another number is the interest paid for property number 2. If there is just one loan use in part to pay property number 1 and in part to pay property number 2, how will your accountant calculate the correct interest paid for each property? I can be done but it is a lot more complex than it needs to be. It is much more straightforward if there is a separate loan or loans for each property and no mixed loans.
     
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  2. giraffez

    giraffez Well-Known Member

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    The more I think about this approach the more I like it. :) I have a few questions:

    1. Why 55% from the bank? When you add 55% (bank) and 50% (parents) together, that's 105%. Doesn't it need to be 100%

    2. Assuming I will be buying a third one later on, can I borrow 80% now (and still keep the 50% from my parents), so that I have enough funds to cover the majority of the third property without taking on possibly a third loan (and also avoiding the legislation affecting borrowing capacity you mentioned earlier)? The additional amount borrow is offsetted anyway so makes no difference to the outflow.

    3. Does the Bank need to know the other half is a loan from my parents? I have enough funds in my account to cover it but as you pointed out, if i use it all up, my cash flow will be poor. So borrowing from both is probably ideal.

    4. LMI - its for the Bank only right? The fact that my loans together exceed 100% has no bearing to this?
     
  3. Terry_w

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

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    Order you do things is important You. could borrow 100% from bank and then borrow from parents.
     
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  4. giraffez

    giraffez Well-Known Member

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    Sorry for being slow, this isn't obvious to me what you mean. Can you please elaborate?
     
  5. Terry_w

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

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    As an example:
    If you borrow $100,000 from your parents at 5% pa for 5 years it is going to have a very large effect on your borrowing capacity because of the short term.

    So what you could do is borrow $100,000 from the bank for 30 years at 5% and this will have a lesser effect on borrowing capacity.

    After settlement you might borrow the $100,000 from the parents and pay it into the bank loan - perhaps borrowing from them at a lower rate. If you want to buy that third property you redraw this $100k from the bank loan and pay off your parents.

    Serviceabiility improves and you settle on the 3rd property and its loan. You can then borrow back from the parents and pay down the loan again.

    No point in doing this if you are not saving money, but it could benefit your parents instead of the bank with them earning more money.

    Make sure you get legal advice before trying this.
     
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  6. giraffez

    giraffez Well-Known Member

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    Thanks terry. So it's perfectly ok to service a loan with another loan? Seems like paying of a credit card with another.

    How is this effect different from what perthguy recommended a few posts up? He said 55 pc from bank, 50 from parents. This I assume is at the same time so timing is not an issue. And use savings in back to offset the loan.
     
  7. Terry_w

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

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    I haven't mentioned anything about servicing one loan with another. It can be done but many isuses to consider.

    What i was talking about is paying down the principal of one loan with another - a refinance.

    The benefits are you can improve serviceability as well as have funds available for the next one.
     
  8. giraffez

    giraffez Well-Known Member

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    Terry I finally found your tax tips that you were referring to. A lot of great stuff there, wish I read it earlier.

    One of the post refers to redraws and that you shouldn't park money in your loan account but use Offset instead.

    With my current investment loan, I have been making more than my minimum repayment which I thought was a good thing but now learnt from your post it's not.

    I was planning to redraw the excess of this to pay off the price of the second property. Is this going to be a problem? I think in the tips, you mentioned the loan of the first property was a residential one, but in my case both are investment. Have I muddied the waters unintentionally?
     
  9. Terry_w

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

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    You could redraw from the first to pay off the second but the interest would then be deductible against the second property. No real point unless the interest rates are different.
     
  10. Perthguy

    Perthguy Well-Known Member

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    I should have been more clear that I was raising the 55/50 as an option to consider. Another option is 80% on the new property and 25% from the parents.

    @Terry_w's suggestion is worth considering too.

    What you need to do is have a look at the options, work out the implications of each, identify which you are comfortable with and which will help you reach your goals. I am trying to help you identify options. I can't really help much with the rest.
     
  11. giraffez

    giraffez Well-Known Member

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    I think I misunderstood something along the way, in you tax tips you talked about that redraw portion no longer being tax deductible and that it was now a new borrowing. i was worried that by redrawing, the tax deduction disappears.

    I'm a little confused with your response, what interest are you referring to here? Are you saying the interest incurred as a result of redrawing from the first property needs to be declared against the second property? How to keep track of this for tax? The statements that I give my accountants do not go to that much detail. Ultimately it's an expense, so should it matter which property it goes against?
     
  12. giraffez

    giraffez Well-Known Member

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    Yes, this is understood, thanks
     
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  13. Terry_w

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

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    If u redraw you will have a mixed purpose loan . The interest will need to be apportioned based on the 2 uses. The interest on the redrawn portion could be deductible depending on its use.

    But best to avoid this by splitting the loan and the redrawing
     
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  14. giraffez

    giraffez Well-Known Member

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    But the redraw amount is used for investment. So how is it mixed purpose?

    I'm sorry to have to ask you this ( obviously I'm still on training wheels in this area), when you say split the loan, what do you mean?

    Also in your earlier post, you mentioned refinance not service, are they not the same in that context. You are using one loan to pay off another.
     
  15. Terry_w

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

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    Keep reading my tax tips

    Purpose is mixed if one loan is used for.2 different things.

    Refinancing is paying one loan down with another.

    Servicing the loan is the payment of the interest
     
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  16. giraffez

    giraffez Well-Known Member

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    Ah I see. In my previous post I was actually referring to refinancing then, not servicing. Thanks for clearing that up.

    What do you mean by splitting the loan? Basically the situation is I have money to redraw from my first loan, and in order to pay for my new property, I need to redraw on it. Judging by what you have indicated in the tips, it seems that it's better to leave that alone and just borrow that extra amount. But if I really needed to redraw for this new property, the consequences?
     
  17. JasonC

    JasonC Well-Known Member

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    Graffez,

    The extra 5% is to cover purchase costs (stamp duty/legals etc).

    Say you had 1 IP worth $500k and a loan secured against it with balance of $275k. You have $125k available redraw. You now want to buy a second IP that costs $500k.

    Scenario 1 (not ideal):

    Draw down $125k on loan against IP 1, use as deposit/costs to purchase IP2 (which has a 80% loan against it for the rest of the funds). You'd then have two loans:

    Loan 1 - secured by IP1. Purpose is mixed - $275k was for IP1 and $125k for IP2. Both components would be tax deductible (as they are for IP's).

    But wait - circumstances change and you decide you want to move into IP1 or IP2. Suddenly some of the loan is non deductible. How do you calculate what part is deductible and which part is not? Every repayments would need to be apportioned between the two IPs.

    Scenario 2 (better):

    Split the loan on IP1 into two parts: Existing $275k purpose for IP1 secured by IP1, a new split with $0 balance and $125k redraw available (again secured by IP1).
    Draw down $125k on split, use as deposit/costs to purchase IP2 (which has a 80% loan against it for the rest of the funds). You'd then have three loans:

    Loan 1 - 275k secured by IP1 purpose IP1.
    Loan 2 - 125k secured by IP1 purpose IP2.
    Loan 3 - 400k secured by IP2 purpose IP2.

    Then it is always easy to determine what related to each property. Additionally if you after setting this all up with your bank you want to borrow money from your parents then do so - get the loan amount from them paid directly into one of your loans (say loan 3) to use the refinance principal.

    Loan 1 - 275k from bank secured by IP1 purpose IP1.
    Loan 2 - 125k from bank secured by IP1 purpose IP2.
    Loan 3 - 200k (with 200k redraw available) from bank secured by IP2 purpose IP2.
    Loan 4 - 200k from mum&dad secured by goodwill purpose IP2.

    Then if at any point the bank of Mum and Dad need to recall their loan, you can simple transfer it back from loan 3 (once again using refinance principal to keep the loan deductible).

    Regards,

    Jason

    ps. This is not advice :)
     
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  18. giraffez

    giraffez Well-Known Member

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    Jason,
    Thats great, thanks for clearing that up. The bit i'm a bit stuck on the creation of loan2.

    With the splitting on the loan, in your example, there is $125K redraw. Isn't this money still essentially mine? I moved it from my savings into additional repayment of the loan for IP1. When i redraw, i understand i'm redrawing on borrowings but at the end of the day isn't that still my money. So how do i create loan 2? So why is that money a loan?

    Am i asking the bank to:
    Make loan 1 275K to 150K (275-125K)
    Create loan 2 125K

    In total, the loan balance is still 275K except that its 2 loans instead of 1?

    Apologies if i have this wrong complete. I suspect this is probably the case as your example still indicates Loan 1 is 275k. :confused:

    Is it a big deal for the bank to split the loan? ie lots of paper work, lots of fees etc.
     
  19. giraffez

    giraffez Well-Known Member

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    Ah i think this is what i missed
    So you are saying to get the bank to give me a $0 loan with $125K redraw in it?

    Will they do this? Whats in it for them as this is a $0 loan.
     
  20. JasonC

    JasonC Well-Known Member

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    Usually they will, but it depends on the bank and the best way to do it. For example with CBA you could do a split and create the split as a line of credit ($0 balance, $125k redraw available). Then after you draw it down fully, do a loan type change to Interest Only loan.

    Others might insist on funding it fully (ie. putting the money out into another account). In which case you need to be careful that it's purpose doesn't get mixed. This is really where it is beneficial talking to a broker about what your bank does (or a specialist loan manager at the bank if you are talking directly to the bank). Don't leave your loans in the hands of the branchies :)

    Regards,

    Jason
     
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