Hi there
A good friend of mine sent me a description of what some of his friends are doing regarding their loans on his PPOR, & IP, and simply put he takes out a LOC on his PPOR to pay the repayments on the IP loan? Any way, here is what he sent to me…
Loan 1 Your typical P & I variable loan for your ppor
Loan 2 Your IP loan Interset only
Loan 3 An equity loan (or line of credit call it what you like) loan taken from your place of residence (on what equity you have there)
How it works………
Loan 1 is payed off by me as per my usual fortnightly payments plus by all the income generated by the IP (ie rent).
Loan 2, the IP Interest only loan, is payed off by the equity loan fortnightly
All moneys paid to the IP loan from the equity loan become tax deductable as it was used for investment purposes.
Result……………….Home loan is payed off much much quicker. Several IP loans could be going into the home loan depending on equity available.
What do you all think about this?
P.S Thanks AB
Ray
Hmmmm,
I had a good read of this. At first I thought, yep this is your standard split loan arrangment, but after reading more carefully it doesn’t seem to be.
Yes there is a way to repay your PPOR loan much faster but I think your friend is doing it wrong.
He needs to make “special” arrangments with the banks, but he shouldn’t be using the equity in his PPOR to make his IP repayments.
All moneys paid to the IP loan from the equity loan become tax deductable as it was used for investment purposesYes this is true BUT any money would be. It is not tax deductable because it comes from his PPOR but because it goes TOWARDS his IP, no matter wher themoney comes from.
He is just going in circles.
What he wants to do is NOT repay the IP loan at all and let the interest capitilise. Form a taxation point of view, only claim the interest that is NOT capitalised (the ATO doesn’t like the capitalised part.) You will still be heaps in front. However to do this you will need a “special” type of loan.APIM
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Australian Property SoftwareAPIM: http://www.apim.com.au
APDM: http://www.apim.com.au/apdm.htm
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Its a very good idea but the equity (LOC) loan should be the same as the
p&I loan.Check out St Georges Portfolio loan.
Cheers [
]I am currently refinancing my PPOR to get access to the equity to use to invest with. My broker has suggested the following arrangement:
1. Refinance to 90% of valuation figure of $405k.
2. Create a separate interest only loan for the amount of $67.5k which is the equity I will have access to.
3. Fully draw the new loan as an investment loan and place into existing home loan redraw facility.
4. Use the redraw on existing loan to fund IP’sAccording to him, the benefits of this are the interest on the PPOR loan will be reduced as it will have the extra money paid off the priciple until it is redrawn and the interest can be claimed on the full amount of the second loan as it is an investment account for tax purposes.
Can anyone see any potential problems with this setup?
Cheers,
Mathew.
(I hope I have explained this correctly)
good people, all you brainiacs out there adivce is needed. to Mathew- Here’s my take on this: the ATO will only allow tax deductions for interest on money used as an investment – not incase you buy one in the future. just because a loan is set up for investment purposes dosnt mean it is tax deductible – isnt the ATO’s theory that our IP’s purpose is to eventually make money & therefore make them money? & that’s why they let us deduct costs until it makes them money.
hope that makes some sence?Ok here’s my two bob…
Hurricane – I think APIM is correct. The capitalised interest is not deductible. Therefore, from a tax stand point this structure is not really beneficial.
From a practical perspective I think its very likely that the government will legislate that capitalised interest is not deductible irrespective of the outcome of the ATO’s appeal.
APIM –
What he wants to do is NOT repay the IP loan at all and let the interest capitilise. Form a taxation point of view, only claim the interest that is NOT capitalised (the ATO doesn’t like the capitalised part.) You will still be heaps in front. However to do this you will need a “special” type of loan.I’m not sure I understand why you say that you will be heaps in front if the capitalised interest is not deductible. These arrangements only make sense if the interest is deductible. That is, you are better off paying non-deductible expenses before you pay deductible.
Not sure if I’ve made sense…
Matthew – What you’re suggesting sounds very convoluted. Why not just set up the $67.5k loan and not draw it down until you need it? If the product doesn’t allow it then what you do is take out the loan. On the same day as its set up repay all the funds back into the loan (except for $1) and then you can use the redraw to access the funds when you need them. Be careful with this one – make sure doing this will not trigger any early repayment fees.
Cheers
Stu
Property & Finance News
at http://www.prosolution.com.auHurricane
What about this:
1) home loan
2) Ip loan
3) LOC sucurred on homeUse 3 to borrow money to pay for all expenses relating to Ip except interest payments on 2. Eg rates, insurance etc. All future deposits can also come out of this account. This method should help in reducing the home loan balance faster than normal and increase your tax deductions.
Terryw
[email protected]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,
This is what our finance guy has just set up for us from what I understand of what you wrote. The idea being as you said to pay out home loan ASAP.
The examples shown and the details he ran through all made good sence….see how reality goes hey !I think I understand what your suggesting Terry. Essentially you’re converting non-deductible debt into deductible debt – is that correct?
One thing that leaps to mind is this arrangement may have Part IV A (anti-avoidance provisions) issues.
Just a word of warning…DON’T TAKE TAXATION ADVICE FROM MORTGAGE BROKERS OR OTHER UNQUALIFIED PEOPLE.
Whilst I am a Chartered Accountant I still recommend people get professional advice becuase it’s a mine field out there and you need to take advice from people that are well skilled and practice in that area day in, day out.
Be careful RickHy because your finance guy might not be much use if you get audited by the ATO.
Cheers
Stu
Property & Finance News
at http://www.prosolution.com.auMathew,
I see a BIG problem with what you wrote. I don’t know where you got your info from but it is wrong. (or did you explain yourself wrongly. It makes me worry that people are giving this kind of advice.) I agree with what lynne14 said.
Stuart,I am not sure I understand what you mean by:
That is, you are better off paying non-deductible expenses before you pay deductible.What I am saying is that you are allowed to claim the interest on the IP if the interest isn’t capitalised. So what I am saying is: let the interest capitalise BUT only claim the interest component AS IF it was not capitalised. Do the sums and you will see that you are still way in front.
Terry,OK, I think I understand what you are doing, but you forgot to say WHY it repays your PPOR loan faster, becasue ALL the RENT form your IP goes into your PPOR loan, so now you not only have your own income to pay back your PPOR loan but the rent from your IP as well.
Also the tax deductions DO NOT come from the loan structure you are using (in itself) but rather from the fact that you can claim depreciation on your IP. (and if the property is negativeely geared you can also claim that, whoever BEWARE! (You must know what you are doing)).However make sure that you do not claim the capitalised PORTION of the interest on your IP loan as the tax man doesn’t like that.
Also a good advantage of using this method is that you are “essentially” moving equity form your IP into your PPOR so that when you sell your PPOR you make a greater profit WHICH is NOT TAXABLE!
However you must make sure that you do not sell your IP too quickly as you could loose there. (I guess that what you loose you gain on your PPOR.) Just make sure you guys know what you are doing.
Also for those that have big incomes there is also a way to do even better. (save about 5 to 10K a year, depending on your situation.)
Can anyone tell me why you were not advised to have a LOC on your PPOR with two accounts. One for the PPOR and the extra equity in an “investment account”? Were you even told about this? Just curious that’s all.
Stuart,Interesting web site. Do you know why banks don’t push LOCs on PPORs? Is it because they don’t make so much money from them (i.e. can’t rip people off as much)? or is it that they are worried that people don’t know how to use them?
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Australian Property SoftwareAPIM: http://www.apim.com.au
APDM: http://www.apim.com.au/apdm.htm
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Hi APIM
I’m pleased that you found my website interesting.
By the way, I have done the sums on LOC (and offset) products. They don’t save borrowers very much. At best, the saving might be 5% to 8% of interest over the life of the loan.
See my article at: http://www.prosolution.com.au/ps_docs/prosolution_doc060703_095004.doc
Plus also see Personal Investor magazine article at: http://www.prosolution.com.au/ps_docs/prosolution_doc021403_150841.gif
The Australian Securities and Investment Commission agrees with me. It warned Westpac about its advertising late last year (i.e. Westpac was advertising that offsets and LOC’s can save borrowers up to 40%). It’s simpily not true.
You better of to find the cheapest loan and make extra repayments.
Cheers
Stu
Property & Finance News
at http://www.prosolution.com.auAPIM
I wasn’t talking about capitalising interest. it is kind of hard to exlain, especially on a forum like this. So I will try to give an example.
A)You have a LOC, balance Nil
A home loan, Balance of say $100,000
C) IP loan, IO balance of $100,000.
D) a 100% offset account linked to the home loan with $10,000 in it.All rent and other income goes inot your Offset account (D) so that it reduces your non deductable debt.
The IP interest is added to the IP loan, and you pay it via a direct debit from (D) the offset account.
Now the good bit, Your rates for the IP are due, $500. You could pay them from the offset account, but doing this would mean the interest on you homeloan would increase as money comes out of the offset which is linked to the homeloan. SO YOU BORROW THE MONEY FOR THE RATES FORM THE LOC.The effect is you can claim interest on the payment for the rates, while at the same time decreasing the non deductible debt on your home loan. This is like converting your non deductible debt into deductible debt.
You won’t make much of a saving (Eg $2000 in expenses per year = $120 in interest claimable = $60 saved???), but if you have a few properties, it can all add up.
Like Stuart said, I am a mortgage broker not an accountant, so not qualfied to give tax advice. And I don’t know how the ATO would treat this. Part IV A (anti-avoidance provisions) may apply-but I see this as borrowing for a legitimate business/investment expense. Beware! Would any accountants out there like to comment.
Terryw
[email protected]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
Hi Stu,
Thanks for the links. I read them and found them well balanced.
You are correct in comparing apples with apples. If people put their diposabe income back into their loans they would be in front either way. However I am not sure that many people do this. The worse would be for them to but their disposable income into a savings account that only give them 4% p.a. AND is taxable.
Even though your pay an interest premium on a LOC I do believe that it gives the greastest flexibility. (especially for buying properties down the line.)
I used your example and did some sums, and this is what I got (from worse to best).
1) If the person does not know what they are doing it will take them 30 years to repay their loan and cost them $294,000 over the same period. (interest 6.07%)
2) If they are disciplined and put their extra $800 back into their P+I loan (at a 6.07% interest rate) they will repay their loan in 12.5 years and this will cost them $106,600 over the same period.
3) If they use a LOC (at 6.57%) and are NOT disciplined and spend their extra $800, but put all their expenses on a credit card that has a 40 day interest free period and pay that in full when the 40 days are up. They will repay their loan in 11.17 years and this will cost them $102,760.
4) If they are disciplined and leave the extra $800 in they will repay their loan in 7.75 years and this will cost them 69,310.
5) If they know what they are doing and are disciplined they can repay their mortgage in 5.67 years and this will cost them $49,500.
6) OK, now if they are really switched on and are disciplined they can pay back their mortgage within 4 years and this will cost them less than $38,000.
Wow, Imagine in 4 years the banks have made $38,000!!!! This makes me feel sick [xx(]
But imagine the people in the first situation…*************
Australian Property SoftwareAPIM: http://www.apim.com.au
APDM: http://www.apim.com.au/apdm.htm
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Hi Terry,
Ok thanks for the explanation. I understand what you are doing now. I agree that this seems legitamate but I am NOT an accountant either. (not even a mortgage broker for that matter!).
Not sure I find it very useful though. Will keep it in mind however.
APIM
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Australian Property SoftwareAPIM: http://www.apim.com.au
APDM: http://www.apim.com.au/apdm.htm
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I’m a real newbie to all this and learning more each day! Could someone please explain what you mean by “capitalised interest”? How does it differ from ordinary interest? Thanks!
Hi Lindy-d
Capitalised interest is is where any interest payment that is due is added onto the loan. In other words, you don’t actually pay the interest at the time that it is due. It is capitalised (added) onto the total amount that you owe the bank and paid back at some later date (hopefully)
So if you keep capitalising the interest on to your loan then your total loan keeps getting bigger and bigger.
Might be a useful tool in the short term when funds are a little tight.
Hope this helps
Take care
Dave []Thanks Dave! [
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A home loan, Balance of say $100,000
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