Convert PPOR to IP…Am I doing it right?

Shanus wow my friend stop right there.

Do that and you run the risk of contaminating the interest on the entire loan.

Your 50K redraw has gone and you can’t refinance it back into the loan and claim the interest.

I do hope your Broker / Banker hasn’t suggest such strategy as if they have i would be switching Broker tomorrow.

All you can claim is the interest on the current loan balance of 185K.

Is the property is your sole name or in joint names ? (reason i ask is you mentioned “we are still living in it”)

If it is in joint names then there is an option but would need further information first.

Cheers

Yours in Finance

As i say might be some options if the property is owned jointly.

Cheers

Yours in Finance

No, do not redraw the $50K whatever you do. As soon as you redraw it, you contaminate the loan at the current moment in time.

There is the option of either you or your wife purchasing the other half of the property from the other (I think what Richard was referring to as an option). Doing this will allow you to increase the loan size and keep the deductibility while still having those extra funds available. As the property is in Victoria, there is no stamp duty payable transferring to a spouse, the only cost is the paperwork itself.

If the above is not viable to you then the refinanced loan really needs to be structured correctly.

Cheers

Tom

Shanus, as a tax lawyer I can say you have done yourself a disservice here. Paying the loan down will mean you will lose deductions for potentially the next 30+ years costing you thousands!

But all is not lost. if the property is in Victoria you may be able to sell your share to your spouse or vice versa which could be done without stamp duty or CGT and could allow you to claim much more interest if done correctly.

Many banks talk to people of Redraw, and “Yes, no problems, you can just borrow the money back again if you need it!”

I have had clients tell me that bank staff have told them that redraw and offset are the same thing. They clearly serve different purposes but if you have no understanding of tax law you may think otherwise!

An option to consider is go interest only with a linked offset. Make interest only payments (from this same offset) and store the principal plus any savings in the offset account. Having salary’s and rent from IPs paid into the offset is beneficial in most cases as well as it will potentially offset non deductible debt.

This way you preserve the principal loan amount at 100% of its original value, so if you do rent out in the future you get max deductions, yet still receive the same net benefits as if you where paying down the loan due to funds in linked offset.

Its a great way to “hedge your bets” because if you never rent it out then you have bulk cash in the offset (you become the bank so to speak) with the ultimate aim of having the same amount in offset as the original principal amount.

Disclaimer: the above only works well if you are disciplined with finances and dont just spend money because its in the bank. Also, new responsible lending guidelines need to be observed so a P&I on a PPOR loan may be applicable in some circumstances as well.

• This reply was modified 8 years, 3 months ago by  Colin Rice.

@benny – yes indeed and I would estimate 90%+ of investment loans would be deemed “contaminated and not fit for purpose” if thoroughly investigated but they dont drill that deep. I suspect the cost v reward may not be there to do so (yet) as I have never heard of it during an audit from ATO.

I have instructed banks to place funds in a dedicated offset or to be made available as redraw in the mortgage account but these instructions fail to make it tot the button pusher in India so just gets whacked in the personal offset / transaction account therefore mixing personal with investment lending.