Hi I am new to this forum but would appreciate some general advise on loan structure as we are about to finalise for finance for an IP with ANZ who holds our mortgage.
We have a PPOR worth 330-350K. At present we have 60K including 40k in redraw, owing on our current mortgage which is fully offset. It is a split loan with approx 20k and 40k. We have managed all this in 8 years – as you can see, we are good savers. We also have just put in an O&A on an investment property for 280K which we believe has a market value of 310K. After all tax benifits, this new IP will about even out and not really cost us very much. Ideally we would like to keep on our current PPOR as an IP in about 3-5 years, as we have outgrown it. We would like to convert our IP through renovation to be our PPOR. We are hoping this will happen in 3-5 years time. At present we are not thinking of building a property portfolio fast and will only do so using equity built from investments in the future. We are happy to take things very slowly as truthfully we are very happy right now but just want to make our money work for us. My husbands income is 58K pa and I have family tax benifits of 525per fortnight. I have just started working casually and will probably be working part-time in the future. The ultimate plan is for me to work two days a week and for my husband to continue working four, as we are very devoted to our three young children. It is possible that in about 3 years my husband will study for a year or two and make a career change. ie my income will increase, his will decrease in the next ten years or so. Our questions are as follows.
1. ANZ is recommending we leave our existing loans as they are and take out a ANZ simplicity interest only loan with offset for our IP to keep things simple. They are only willing to give us 310k for 5 years interest free otherwise they will only give us 3 years interest free for a greater amount. This avoids fees for eg the ANZ breakfree ( they are willing to give us the some interest rate on the Breakfree that is 0.7% off std variable, as the Simplicity). Is this the right advise?
2. In order to live in our IP in the future we will need to do at least 50k of renovations. How is it best to structure our loans for this? The advise we have heard is to keep things as simple as possible for your current situation and refinance or restructure in the future as we do not know what the future will hold. What do you think? Do we have the most power now? ANZ says they will consolidate our split for free if we go with the breakfree but at present although our interest rate is high we are fee free and have two offsets to play with – we could never get this deal again. Can we use our already split account to our advantage?
3. Obviously, with the above senario our IP will be secured against our current PPOR. Is it better to take out the equity on our PPOR in a interst only with offset and use some as a deposit on our new IP, so it will be a stand alone loan. Then we can keep this other loan for investment only expenses and therefore use the intest as a tax offset? I am thinking taking out two interest only with offest and paying the application fee (which ANZ said they will reduce to $375) is better than on-going costs of breakfree. Or is all this just a waist of time and complicating matters. ANZ said they are happy to do it however we want and want us to keep it all with them – is this a good idea. They say we can change our structure however we want till we sign all the paperwork. We settle in about mid-august. What do you think?
4. We originally signed our o&a in both names. We can change it to just my husbands name for free. Although we realise that would be the best idea for tax purposes at present – is it better to set up a 80% his 20% mine to allow for the future? Also ANZ says it will be cheaper and easier to set up the loans in both our names rather than just my husbands. They say it will have no tax implications. Is this true? – as we believed it would be better to set it up in just his name with me as guarentor?
5. We are new to all this. I am a risk taker and my husband is not. Probably a good thing as we balance each other out. We are also thinking of trying self-managing the property. Yes, we have taken out Landlords insurance and income protection. Any other ideas, warnings or general comments would be greatly appreciated.
Thank-you in advance!!
Hi Dawn
Firstly welcome to the forum and I hope you enjoy your time with us.
Look sorry to say this but i dont think you or your Bank have an understanding of the required set up and clearly they do not appear to be acting in your best interest.
I assume it was a simple typing error but Anz do not offer Interest free periods at all only interest only periods.
Interest deductability is based on the Title holding and not whose name the loan is in.
Also the "purpose test" applies and not merely the security where the loan is taken upon.I think to get some unbiased advice you should consult a independant Mortgage Broker as they will be required to provide this for you under NCPP whereas at the moment your Bank do not have to fall under the legislation for another 6 months.
Richard Taylor | Australia's leading private lender
Thanks Richard;
Yes, I was only dreaming of interest free ha ha. I meant interest only.
I think your right – neither I or the bank really knows. We have spoken to three mortgage brokers and they don't seem to know either?
Yes, it's hard to get our heads around it all. We would still appreciate any general advise or where best to get advise.
Firstly, I would suggest you not believe anything a bank tells you without checking. They tend to be wrong!
I would suggest you set it up something similar to this:
1. LOC1 on the existing PPOR
2. LOC 2 on the existing PPOR
3. Change existing loan to IO for maximum period
4. Set up a new loan secured only on the new property. IO
5. Set up an offset account attached to loan 3.Since you are planning on moving out of the PPOR you would want to stop paying this off. You would also want to slowly increase this loan by paying the interest on it by borrowing from LOC1. Place all spare cash into the offset account.
When you find the new property borrow 80% as a stand alone loan and use the deposit from LOC2. This way the two properties are not cross secured and you can free up cash. If you move into the new property then attach the offset to the new loan (no 5).
You should be able to get up to 6 loans on the breakfree package.
Although tax deductibility doesn't depend who is on the loan it may still be a good idea to get the loan only in one name, if you can service, as this will help serviceability in the future.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Terry is almost right
Maximum 5 loans under Anz Bank Breakfree but nothing to stop you having more than 1 Breakfree package.
I have several clients including myself with this.Richard Taylor | Australia's leading private lender
Thanks Terryw;
I appreciate your experience and advise.
Just a few questions.Loan C: Why LOC as opposed to IO with offset? I am under the impression that LOC has higher interest rate and the same flexibility can be achieved with IO with offset.
Why do you suggest two LOC loans? Is it to keep separate expenses/ deposit / etc for IP1 – interest tax deductible and second LOC money for other Investment eg next IP? I was thinking three loans would be enough.
Loan A: I agree consolidate existing split loan to IO with offset.
Loan B: I agree set up new IO for IP1 which is stand alone using deposit from PPOR equity ie Loan C.Also as I have said above. ANZ said they are happy to structure it this way. Do you think it is a problem keeping this all with the same bank?
Yes Richard – five loans with Breakfree.
Would love to hear comments from anyone else on the forum, as always willing to learn more.
“You would also want to slowly increase this loan by paying the interest on it by borrowing from LOC1. Place all spare cash into the offset account….” Terryw
I don’t really understand how this works?
Hi there,
I'm new to this site too! Also, I'm looking to do what you are doing as well!
Wanted to let you know that we found a great deal with the Nab – unlimited loans, offset account, free credit card facility, $395 per year, 6.44% (.8% of a discount for the life of the loan), $900 break fee within the first 4 years, no set up fee, no valuation fees.
From what I can see with Anz, they are a bit dearer on the interest rate side + you say you can only have 5 loans with their Breakfree package.
Send me a PM if you want the details of the person we dealt with.
CJ
newdawn2001 wrote:Thanks Terryw; I appreciate your experience and advise. Just a few questions. Loan C: Why LOC as opposed to IO with offset? I am under the impression that LOC has higher interest rate and the same flexibility can be achieved with IO with offset. Why do you suggest two LOC loans? Is it to keep separate expenses/ deposit / etc for IP1 – interest tax deductible and second LOC money for other Investment eg next IP? I was thinking three loans would be enough. Loan A: I agree consolidate existing split loan to IO with offset. Loan B: I agree set up new IO for IP1 which is stand alone using deposit from PPOR equity ie Loan C. Also as I have said above. ANZ said they are happy to structure it this way. Do you think it is a problem keeping this all with the same bank? Yes Richard – five loans with Breakfree. Would love to hear comments from anyone else on the forum, as always willing to learn more.newdawn2001 wrote:Thanks Terryw; I appreciate your experience and advise. Just a few questions. Loan C: Why LOC as opposed to IO with offset?See point 3. I wasn't very clear, but you should have an IO loan with a 100% offset account for the main loan.
I suggest a LOC so you can borrow extra money. A LOC is very different to an io loan with offset. with an LOC you are borrowing money. With an IO/offset you are actually using your own money. They can work similar in some cases, but not all.newdawn2001 wrote:Why do you suggest two LOC loans?The second LOC will be used to access equity and use this as deposit on the new property when you find it. If you live in the new property the interest on this portion won't be deductible so you will need to keep it separate. Using a separate loan like this and then borrowing the remaining 80% will mean loans are not cross collateralised.
You could also use an IO loan, but you need to make sure it has redraw. You borrow the money and put it back into the account and then redraw it when a loan is found. LOC just makes it easier. Ask for a discount if the rate is higher.
newdawn2001 wrote:Why do you suggest two LOC loans?Because one will be used for the investment and one for the new main residence.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
newdawn2001 wrote:Do you think it is a problem keeping this all with the same bank?Actually, you need specialist tax advice on what I am suggesting. You will end up saving considerable amounts of tax and the ATO could attack it as a scheme to minimise tax. For this reason having the two main loans at different banks would make your case stronger, ideally the LOC which you pay the interest on the IO loan should be at a different bank – but you have your equity in the investment property which will make this hard.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
newdawn2001 wrote:"You would also want to slowly increase this loan by paying the interest on it by borrowing from LOC1. Place all spare cash into the offset account…." Terryw I don't really understand how this works?You use your cash, wages and rents to save you interest on your home loan. This is not deductible.
Insteat of paying the interest and costs on your investment loan you borrow from a LOC.
See a good tax advisor to set this up. It will save you thousands.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Thanks again Terryw;
So put simply. Am I on the right track below.
Loan 1: IO with redraw and offset for current PPOR. Put all wages and spare cash in offset now to reduce interest and so can use in future for next PPOR, when current PPOR becomes future IP.
Loan 2: LOC secured on PPOR. Part of equity from PPOR. Use for deposit to buy IP1 plus all other interest payments and costs. Hopefully can tax deduct interest. (Check with tax advisor).
Loan 3: LOC secured on PPOR. Part of equity from PPOR. Use for deposit for future PPOR or to renovate IP1 to become future PPOR or for deposit and costs for next IP.
Loan 4: IO with offset. Stand alone loan for IP1 currently being settled.
If this is correct, it should cover all our future possibilities.
Thanks once again to all. You have been a great help.Have sent you a PM, CJC. It sounds good, but we are short on time as need to have approval next week.
That sounds about right. Just don't use the redraw on loan 1.
Since your current home is going to be an investment you could borrow from Loan 2 now for paying all associated costs. Later on when you do rent it the interest should be deductible as you have incurred the interest in money borrowed for the property that is being rented..
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Thanks Terryw;
This has been a great help. We will seek advise and then put this in place.
It's all very exciting. We appreciate your time and consideration. Have also decided to put title and loan in hubbys name.
Hope this info helps a few others out there too.Good journey!
Your welcome
I can't stand to see people lose money, or not save money, when a simple adjustment of how they structure their loans will save them.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Cheers Terryw.
Did PM CJC but no reply.
Just a follow up for other forum users regarding NAB v's ANZ multiloan products. We spoke at length to NAB. We were advised that the 6.44% was only an intro rate and that loan also required a $10/mth fee. Best they could do otherwise, was 6.64% only marginally better than the 6.71% ANZ is offering us (after discount). So that coupled with the difference in the annual rate ie you pay $20pa less with ANZ and the complexity with moving all our finances, it really isn't worth our while. We also explored the idea of splitting the loans across the two banks but this would also work out more expensive and complex.
I must say that in the 8 years we have been in ANZ, we have never had a problem and always great customer service. That is another factor in our decision. We walked into the NAB last week and they just turned us away. All the help we have recieved from them has been over the phone and they themselves admit that it is difficult to get to see anyone face to face in WA.
Hope that helps.
NewdawnHey Terryw;
Just re-reading what we said. When you said "Since your current home is going to be an investment you could borrow from Loan 2 now for paying all associated costs. Later on when you do rent it the interest should be deductible as you have incurred the interest in money borrowed for the property that is being rented..". Did you mean the LOC Loan 3? ie not for IP1 costs, as laid out in my final example.
Just checking.
Signing the paperwork Monday – feeling confident that we are on the right track. (Only scary thought is that it will cost us $700 each loan with ANZ Breakfree, if we should choose to refinance during the first 4 years, but that shouldn't be a problem).
Nope, i meant loan 2. Loan 3 will be used for the new purchase which you will live in. You don't want to mix investment loans and personal loans
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Sorry to be ignorant Terryw but I still don't understand. If I borrow from loan 2 now when it is still our current home and loan 2 also has all the costs for IP1 coming out of it (which would be eligable for tax deduction now), won't that be mixing things between IP1 and future IP2 (now PPOR)? Is this something accountants can easily deal with?
I was just thinking if we kept Loan 2 for IP1 expenses and Loan 3 for current property expenses. So it would be like having two IP's already except that we couldn't claim for anything for loan 2 till our ppor became an IP but as you said it would build up debt on that property for negative gearing. If I am wrong in my understanding forgive me? We still have scope on Breakfree for one more loan if we need it in the future.
A few more queries, that have come to mind.
If we keep loan 3 paying out all costs and interest for ppor and we wanted to do some renovations on it, would it muck things up for us if we took money from Loan3 or is it best to take the money from redraw and then pay it back? I understand any costs incured could be used to increase our base amt when calculating CGT?
Just in general if we were to take money from the redraw for any use eg personal, would it cause any problems as long as we paid it back to the same amt before we turned it into IP. This is also an issue for us because in order to consolidate out split loans and retain redraw, we were advised by bank to redraw all funds and place in offset. So should we put the redraw back to previous levels?
We have had a building report and it shows the IP1 needs some minor maitenance eg clean gutters, cracked roof tiles, loose bathroom tiles etc. We would like to fix these as soon as we settle. I understand the property has to be avilable for rent, if we want to later claim deductions on this costs. Is a post on a free internet site sufficient? How do we prove it is available for rent?
I understand for later calculation of CGT you need to confirm the value of the property on purchase. I assume the price you bought it for does that. Do you need to do another official valuation of any sort? When should you do a valuation on an IP or is it needed just for finance reasons?
Thanks again for all replies. I will start a new post in future – Cheers.
PS They did give us a 0.6% discount for LOC loans.
Hi Newdawn. I think you are referring to my reply to you???
If so, then Loan 2 is a LOC which will be used only for investments. so interest should be deductible. It doesn't matter what the property securing this is used for, it matters what the borrowed money is used for. So changing your current home from PPOR to IP won't affect deductibility.
What you are doing with Loan 3 is to borrow money to pay for expenses on the existing PPOR. The interest on this loan is attributable to the PPOR so it won't be deductible. But when the PPOR becomes an IP it should be deductible.
If you want to do renovations on the current PPOR you could take money from loan 3. But you must never use loan 3 for your new PPOR or you will be mixing business and non-business.
You should never use redraw on an investment loan . This will muck up tax workings. If it is a personal non deductible loan then it will be less of a problem.
You should be able to claim interest on a property before it is available to rent if intended as a rental. Talk to your accountant. If not then all you have to do it to put it up for rent and put the rent up $100 more per week so no one will take it.
For CGT you would probably only need a valuation if you start living in the property or cease living in it. CGT is usually based on the purchase price and selling price.
Ask for 0.80% of on your LOC if your total borrowings are large. LOCs are usually 0.1% higher so they can discount more.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
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