Too good to be true? Decide for yourself..
I received an unsolicited in the post recently offering me a line of credit at 4.49% for the life of the loan. So I was intruiged at how they can offer such a great rate so I emailed them and arranged an appointment.
Nice people, gave me a cup of tea and explained it. Essentially they offer a product where you split up 50% of your line of credit on a 4.49% facility and the other half on 8ish% (can’t remember the exact figure). The idea being that you direct the 4.49% to any undeductable debt and the 8% to deductable debt.
This should realise significant savings to those with personal or PPOR loans as they are making better use of their money. The 4.49% and 8% negate to the prevailing interest rate for the lender so they are no worse off than if they lent the entire LOC at market rates.
I thought that was a clever idea in principle assuming the ATO are ok with it. But then the up front costs included:
1% of the total LOC valuer as application fee
$220 valuation fee (per security)
$616 solicitors fee
$95 processing outlay
$25 settlement feehmm, for me that would have been just under $4000. 1% is a large amount. Most banks will refinance nowadays for around $300
Then there are refinance penalties. 2% of loan amount in year 1, 1.5% year 2 and 3 and 1% year 4 and 5. If this is fixed interest I can understand this, (and I think it is)..
I just wonder if the major banks would ever do this? (The lender was a wholesale mob). Its quite a good idea and they still get their interest and you pay off your personal debt quicker.
So what do you think?
Paul
[email protected]EZ-Rent. The free tax and cashflow simulator for Australian property investors. Version 2 out now!
http://www.ez-rent.comI have arranged this set up for a client just recently. I negotiated 1.10% off the standard variable rate (i.e. 5.97%) for her non-deductible debt and standard rates for her deductible debt (i.e. 6.57%) with a Big 4 bank. It’s a good arrangement. We were able to get these discounts because she was borrowing in excess of $1m.
No application fees or break fees so its a much better deal.
Cheers
Stu
Ez,
Sounds good… but 1% is alot for an application fee, so they sound like a boutique lender.
Negotiate the fee down if you can, I mean if the rate negates to the standard anyway they should charge standard application fees.
$4,000 is way too much, and smells suspicious. Do an ABN search on them to see how long they have been in business. Ask if they are accredited with MIAA or similar, ask who their funders are… you know, drill them for answers so you feel confident you are dealing with a trustworthy established lender, then play hardball for a better estab fee (at least HALF that!).
Hold on… brainwave…[blink] check that the estab fee is not just the “brokers” fee, some broker still charge to make money, ask if the fee would be on the schedule of fees for the loan.
Liz Wilson
Mortgage Lender
Oh also, what is the solicitors fee of $616? Does this relate to your conveyancer cost (which is more likely to be $800 flat at best) OR are they referring to their lenders fees and disbursements?
Further to this, what is processing outlay – I think that sounds like a broker fee. If not it should be wrapped inside the establishment fee.
This deal is making me squirm, be careful.
Liz Wilson
Mortgage Lender
I wouldn’t use them anyhow as I have no non deductable debt so I get no benefit. I think such entry fees are outlandish myself and are probably more like broker fees..
EZ-Rent. The free tax and cashflow simulator for Australian property investors. Version 2 out now!
http://www.ez-rent.comHi Ezrent,
Me wonders about the legaility of this from a taxation department perspective.
As I understand it deductibility of costs fully applies when a property is leased at a market rate. I assume therefore that a similar line of thinking would apply to interest claims and the question of market rates or not.
I have a feeling that the ATO would deem such an arrangment to be ‘tax avoidance’ and therefore operating outside tax laws. For me, at best a discussion with an accountant, or even a private ruling from the ATO before embarking on any adjustment of my loan book.
Derek
[email protected]Property Investment Support Available. Ongoing and never stopping. PM welcome.
Maybe this is related to the High Court decision on split loans – what does everyone else think?
Cheers,
Simon Macks
Mortgage Broker
http://www.mortgagehunter.com.au
0425 228 985Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
Stuart, as Derek suggest, the scheme may well be unacceptable to the taxation office.
Where would that place a broker who suggest a prospective borrower to enter into such a scheme ?
Pisces
hi, i recall a non bank lender floated this style product when this case was first appealed by the ato, did any other lender go for it?
cheers
brahms
If you don’t ask, the answer is no!!
Hi everyone,
This does sound like a split loan. So no it’s not tax deductible. If it sounds to good to be true it usually is. Don’t walk run.
Good luck[biggrin]
TraceyAre these posts referring to my post (re: greater discount for owner occupy property and less for investment)?
If so, as a Chartered Accountant, I don’t think there will be any issues:
1. The differential is not extreme (5.97% for owner-occupier and 6.57% for investment).
2. NAB (the lender) has less ability to discount interest only loans (because they consider them higher risk than P&I). Therefore, it was easier to price this deal by getting a lower rate on the “less risky” loan (owner-occupy). This is a good justification for the structure. This proves the primary purpose of the “scheme” (as the ATO likes to refer to them) was not to avoid tax.I think it would be difficult for the ATO to argue this is falls within the anti-avoidance provisions (Part 4A). We have what’s referred to as a “reasonably arguable” position.
Can brokers advise on this?
Absolutely not! This was a unique situation. I am a Chartered Accountant. The client was a lawyer. I discussed the structure with the client’s accountant.Cheers
Stu
Hi Stuart,
My comments were about the ‘legality’ of the different loan rates as discussed in Ez-Rents initial comments.
By default they probably also applied to your ‘deal’ – and as you are an accountant – I hear what you are saying.
As a specific question would (in your opinion) Ez-Rents ‘offer’ fall outside part 4A of the tax act?
I picked up this little ‘heads up’ comment in this morning’s Austrtalian ” Whatever the intention, it is highly likely the ATO will be using its latest victory (against the Wealth Optimiser – which marketed itself as a tax minimisation loan) to scrutinise similar split loan structures that have tax planning in mind, but offer greater tax benefits than the ATO would like.”
Derek
[email protected]Property Investment Support Available. Ongoing and never stopping. PM welcome.
It’s been a while since I studied this but I believe that the ATO could deny any deductions (e.g. they may say that you are only able to claim 7% of interest expense and not 12%) if they believe that the primary purpose for entering into the arrangement was to avoid tax. This is a complex issue and comes back to the question of tax planning versus tax avoidance.
I would think that the 2% versus 12% is extreme and the primary purpose is to avoid tax. I don’t think this would work. (Unless you can come up with another reason for charging different rates)
I know… you can argue either way but intuitively I think the ATO would knock it on the head.
Cheers
Stu
Hi Stuart,
Thank you for your input – I noticed on rereading an earlier post you said “I don’t think there will be any issues” which indicates the ‘arrangement’ is yet to be tested by an ATO challenge, definitive ruling or even a private ruling approving such an ‘arrangement.’
Derek
[email protected]Property Investment Support Available. Ongoing and never stopping. PM welcome.
Yes, this arrangement is yet to be contested by the ATO (as far as I am aware).
Cheers
Stu
Hi Stuart,
Thanks for the clarifying comment.
According to some press on the weekend (from reputable journos) the ATO has a second wind in it’s ‘track down dodgy arrangements’ sails and I wonder if these financial structures would be in the firing line?
Derek
[email protected]Property Investment Support Available. Ongoing and never stopping. PM welcome.
Hi all
I can’t see too much that is wrong with the deal Stu outlined. The investment loan is at standard rates, and the non deductible debt is at what I guess you could call a honeymoon rate. I think that’s easy to justify.
It’s the ones where the IP loan is inflated – to 8% vs 4% for the non deductible debt that I don’t believe would pass. How could you justify 4% on a stand alone basis? You can’t – not from a major lender in this climate…..
Cheers
Mel
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