What to borrow.

Once i draw it down fully, the loan is $0 and the redraw is $0. Is there anything left to do, wouldn't they close this altogether?

 

After you draw it down the loan balance would be $125k. Redraw available $0.

Regards,

Jason

 

Ah yes of course! Silly me. Thanks

And why an interest only, Terry also indicates its an interest only in his tax tip page. Is that just to maximise tax deductions? why not set the loan to interest only during the split but do it after the redraw? Is there significance in this timing of events?

 

Look up the tips on mixed loans.

You could split later if the loans are interested only it should be easy to apportion in the meantime

 

So the moral of the story is never pay more than you have to into your loan thinking you can redraw it. Use the offset account instead?

 

Yes this is it!

 

I spoke to the loan manager about splitting the redraw portion. He said in his many decades of experience in lending has never seen anyone do it and that it was all too confusing and it was opening myself up for auditing by the tax office. I told him that it was actually the reverse, the intention of splitting is so that my loans don't get mixed purpose and keeping everything clear cut.

I would think the loan managers would see this scenario day in day out - we are talking about 20+ years of experience, and no one has done it before?

 

What a silly comment about auditing.

This is why the majority don't it it. Ignorance.

The sad thing is an offhand comment by a banker about tax would be taken as legitimate advice by most people and that would stop them from seeking real advice.

 

I got the same poor "advice" from a "loan salesman" when I bought my first property. I asked for a loan with offset account and was told that redraw was the same thing (they didn't offer a offset account). Unfortunately I didn't know any better at the time, and only found out after I had paid down the loan fully and decided I wanted to turn it into a IP (and buy a new PPOR). Expensive
mistake.

Regards,

Jason

 

Would accountants know about the impact of this? Surely people must have redrawn from their account to invest elsewhere not because they want to do dodgey tax deductions but because they didn't know about this and it's an honest mistake. My accountant has never asked me about redraws from my loan , and I never had but if I did, it would never had been considered.

And the thing is that's what the banks promote, the redraw gives you the flexibility to invest or use money elsewhere if you need it. Taking it quite literally, who would have known there is a possible tax impact? I thought I was being sensible making more payments than the minimum.

 

I think the majority of loans out there have these sorts of problems but most don't know.

I have had clients come to me and I have pointed out problems, they say their accountant has told them otherwise. One accountant told the client to withdraw all excess payments on a loan before they move out and rent the property - so they choose the one that benefits them even though the advice in incorrect.

 

Well I'm glad and appreciative of the inputs you guys have provided me. So a big thank you!

I do have one more dilemma. The money my parents are going to lend me falls about 10 days short of settlement. It's currently in a term deposit and cannot be broken. As this purchase was rather unexpected, they didn't have time to give the bank the notice they need. So the idea of 55 %bank 50 % parents that I'm planning to do is kind of stuck. If I used my own savings to cover for settlement on the loan my parents were going to lend me until the term deposit matures and get the loan from them at that time, is it going to be a problem? Is there mixed purpose involved here?

The other option is requesting a longer settlement which I'm not sure the vendor would agree.

 

Yes it will be a problem if you use cash and layering borrow. I have written a tax tip on this

 

Oh dear, this won't work then. If the settlement cannot be extended, then i have to borrow completely from the bank.

So would this be the most ideal structure for the new property?
Loan 1 85% against the new property
Loan 2 15% against the existing property

This would avoid crossing yet i can borrow the full 105%.

 

You should consider if LMI will apply to a loan higher than 85% LVR.

Another option is:
Loan 1 80% against the new property
Loan 2 25% against the existing property

If you can do this.

 

That would result in LMI
80% against new
25% against existing may work depending on what the available equity is in the exisitng.

 

No, I checked, the bank can get me 85% without lender insurance.

You mean a combined loan will result in LMI? The insurance is not per loan?

 

Ok in that case 85% should work

 

Would that still have LMI if the combined total is over 85%?

Just say if i was able to extend the settlement date, can the bank cheque from my parent's term deposit account be made directly to the nominated vendor accounts? Or does it have to go into my account and then subsequently me getting another cheque made to the vendor. If its the latter, i will have no chance as it still takes 3 days to clear. Unless, it doesn't have to clear, as long as its deposited, I can use my savings to withdraw and still qualify for the loan?

 

You could avoid lmi by keeping loans secured by each property less than 80 or 85%.