I currently have 2 investment properties, each with their own std var investment loan. Both loans are with the same lender, and currently neither has an offset account. They both have a redraw facility, and I'm ahead in repayments on both of them.
I'm thinking about merging the loans into one loan with an offset account, secured by both properties and a limit equal to 80% of the properties value and a balance equal to the sum of the current balances.
So, for example, if the 2 properties are worth $250k apiece and I currently owe $175k on one and $150 on the other, I'd be looking at a loan with a limit of 2*80%*250k = $400k and a balance of $175k + $150k = $325k.
However, with this scheme, I can't isolate the debt on one property for tax purposes, and say "the interest against the loan secured by that property is $x". I will be able to say what the aggregate income and expenses on the combined properties are. Is this good enough? Are there any tax issues I will need to consider here? Everything associated with the loans will be for investment purposes (I think it should be ok, but I'd be interested in peoples' thoughts)
Also, I'm assuming I would be able to redraw up to the limit of the loan (ie increase the debt from $325k to $400k in this example) providing the redraw is used for investment purposes, such as purchasing another property? Is this correct?
Thanks!
Hi Gomez
Couple of points.
If you are ahead of your repayments it sounds like the loans are of a P & I nature rather than Interest only. = Not recommended.
To combine the 2 loans into one will mean cross collateralising the securities which again is not a favoured strategy.
You would be better off keeping the loans totally separate linking the offset account to one of the loans and using a split facility to identify the interest on each property.
You can certainly gear up to 90% lvr (subject to the lenders conditions) with a split loan and use the raised funds as deposit for your next IP.
Of course utilising the offset account assumes that you have no non deductible debt.
Hope this helps.
Richard Taylor | Australia's leading private lender
Hi Richard,
Thanks very much for getting back to me.
My loans are both I/O and not P&I, but they both have redraw facilities on them, so I've put some extra money into them in order to reduce the interest. That's what I meant by "ahead of the repayments"; badly worded I know.
After your comment, I read the "10 disadvantages of cross collateralizing" paper on your web site. Very interesting indeed. I see why you say it's bad, although I've read other view points too.
Would you mind elucidating a bit on your "split facility" comment? How would using a split facility be any different to me keeping the 2 separate loans and linking an offset account to one of the loans? Doing the latter I could redraw the additional money off the loan with the (new) offset account and place these funds on the other investment loan, giving me one big loan with an offset account, and another, smaller loan with the capability of withdrawing a large amount of money for my next IP.
Yes, all the debt is deductable. However, I'm assuming that withdrawals from the offset account don't need to be, they can be for everyday living expenses for example?
Thanks very much!
PS: Just as an aside, I might recommend you put contact details and your comany's name in your cross collateralisation document. I printed it out and read it in my, er, reading room, got to the point that said "please contact us if you want further information" and realised I couldn't remember where I printed it from, and hence whom to contact!
Hi Gomez
Always good to share the negatives of cross collateralising loans with a fellow forumite as most banks have it in their interest to ensure that all of your loans are crossed and one or two lenders have their staff on inventive schemes when it comes to maximising security.
All i was referring to with the split was that you would have the loans separate to easily identify what interest related to which loan.
Let us assume that you have a property valued at $300K with a loan balance of say $160,000.
You could take out a line of credit to a level of say 80% of the $300,000 which you would then use to cover deposit and acquisiton costs on your new IP's.Imagine the first IP cost $250,000 and you wanted to gear to 90% LVR.
From the LOC you would draw down an amount of say $25,000 representing 10% deposit and a further amount of $15,000 to cover your purchase costs. You would then split the loans so that you had the following splits:
1) Original interest only loan for the $160,000
2) Interest only for the $40,000
3) Remaining Line of Credit for $40,000 ($300K x 80% – $160k – $40K )Each loan has a separate statement and makes it easier to account for the interest on each individual property come June 30.
The loans dont have to be secured against the individual IP's although over time with increased equity this can be done to tidy them up.Point noted on the website with thanks.
Hope this clears up the confusion.
Richard Taylor | Australia's leading private lender
Thanks Richard, that clears it up. So really you're talking about splitting a loan secured by a single security into multiple separate accounts all under the same loan. Something like St George's portfolio loan.
Now I've just got to find a lender that offers this split facility with an offset account…
Out of curiosity, do you know if I can withdraw money off one investment loan and put in on another investment loan without tax issues? For example, if I have
– a loan with a limit of $300k and a balance of $200k
– a loan with a limit of $250k and a balance of $150k(Again, there is a difference between the limit and the balance because I've put extra payments into the loans, both of which are IO on Std Var rate)
Can I then move the money around, so I could say end up with
– a loan with a limit of $300k and a balance of $300k
– a loan with a limit of $250k and a balance of $50kI know my bank will let me do it, and I can't see any negative tax implications, but I'd be interested in other people's thoughts on this.
Then I could put the offset account against the first account to reduce the interest, and put the second account in a split account like you're talking about to fund future investment.
Thanks!
Hi there
Yes there is no issues in doing what you want to achieve but i think SGB are one of the more expensive lenders when it comes to split loans like their Portfolio rate loan.
You can do a lot better than the Dragon as under their Professional package it is a condition of the letter of offer that all loans are cross collateralised…. Not good.
Richard Taylor | Australia's leading private lender
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