Hi All,
I know there is a lot of information and opinions around on this forum and others regarding the pros and cons of redraw and offset loan facilities. I have read quite a bit about it already but I am still not sure of the best way to structure my current loan. I'm hoping someone out there can steer me in the right direction or is it time for me to seek professional advice?
My Situation;
I purchased an IP in 2005 with a principal and interest loan (standard variable rate with a redraw facility) with CBA. They gave me 0.7% discount off standard variable rate for loan life due to wealth package if that makes a difference to questions below.
I rented the IP out directly after purchase.
I stopped renting the IP out early 2011 and moved in myself due to changed employment status (ie now my PPOR) (This is the first time I have had a PPOR as I have always previously rented elsewhere).
I started to live off redraw monies and still have around 100K of extra payments sitting in redraw.
I am currently still living in the property but intend to move out next month and rent it out again as an IP (work status change).
In the future I intend to keep this IP rented out and use the monies currently in the redraw as a partial deposit for purchase of another IP (not a PPOR).
How will the interest on the loan be treated from a tax deduction point of view given that I have been living off part of the redraw? I assume that the ATO would not allow that portion to be claimed as it was monies used for personal purposes? Would having an offset account instead have helped me better in this regard?
If I use the redraw monies as a deposit to purchase another IP will I be allowed to claim the tax deduction for the interest given the monies are not going for personal purposes?
Should I even have a redraw facility (although I understand the interest costs are cheaper than with an offset account)?
Does the CBA allow people to swap from redraw to osset easily (I assume they increase the interest rate)?
I am disciplined with my money and am able to pay about twice the minimum payment (if that makes a difference).
I would appreciate all views/opinions/suggestions etc as I'm really battling now to know what to do….
PLEASE HELP!
RZ
Hi Raz,
Sorry to say, your loan has been set up wrongly for your purpose anyway.
1. Any amount you live off in the redraw is technically not tax deductible in the ATO point of view…i mean if you redraw $100 there and $200 there …i guess it should be much of a concern because the amount are low…but once you start redrawing $1000+ etc…then they would like to see some proof of the funds purpose in order to claim the tax deductions. .
2. Redaw- in the customers point of view it’s YOUR money because it’s extra you have placed into the bank…but really in affect once you have given it to the bank ..it’s their’s and your really “borrowing” this fund again. Hence why your loan amount and repayments goes up
3. Offset on the another hand is different. There is no purpose test + the money is YOURS…no need to ask the bank.
4. since you have an wealth package- your entitled to a free offset account…CBA calls it a MISA account…to be honest it’s stupid ( excuse the french) in my eye’s it’;s not a real true 100% offset account…as you have to manual transfer the funds over…
5. Your interest would be lower with a WP
6. Your getting ripped off from CBA, if they are only giving you a 0.7% discount…the standard CBA discount these days is 0.8% +
Sorry for the bad news, but it’s best you hear it now and act on it..rather then later.
IMHO consider a diff bank OR re-negotiate a better deal with CBA + apply for the offset account ( free)Regards
MichaelMick C | Shape Home Loans
http://www.shapehomeloans.com.au/
Email Me | Phone MeSame Banks. Better Rates. Served With a Passion.
Hi Michael,
Thanks for taking the time and the detailed response.
I was sort of thinking that I may have done the wrong thing. Oh well, live and learn I guess. That is the beauty of this forum. I can benefit from others knowledge and they can benefit from my errors….
They rate discount of 0.7% was what I obtained 6 years ago and I expect you are right about being able to obtain a better one nowadays.
So I'm off to the bank to see what they have to say about the offset.
So once I get an offset account do I then just transfer over the redraw monies to the offset account and all is now good with the ATO as far a deductability of interest goes?
Is it normal for people to have their salary put into their offset account or do people have a separate "living money" account which receives their salary then they transfer over what the max they can each month to the offset account?
Any further comments appreciated.
I would like to optimise my position this time aand not be such a goose!
RZ
I say shop around and get a new loan. Talk to a good broker and an accountant.
I had a CBA redraw type loan with wealth package originally on my PPOR and had made a tonne of extra repayments. This was a crud setup for investing due to the tax implications. I changed it to a St. George Portfolio loan, released the equity and went on investing from there. The loans are cross-collateralised which I now know is a bit of a no-no so I am now evaluating a migration of this structure to standalone. Hindsight is a beautiful thing.
Yours is a little more complicated due to the PPOR -> IP conversion and the tax "nexus" problem. Thus I advise talking to a good accountant to navigate the little minefield.
rz2010 wrote:They rate discount of 0.7% was what I obtained 6 years ago and I expect you are right about being able to obtain a better one nowadays.Yep, I arranged 0.9% off for a client last week. If they don’t reduce your rate, there’s a couple of more competitive lenders that will happily take on new business and offer up to $1,000 to cover your exit fees from your current lender.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
EV:
My situation involved IP –> PPOR –> IP conversion with personal use of redraw in between so I think you're definitely right. It is time for me to get professional advice and start buiding the "critical" team of people around me that people so often talk about. Makes sense.
Jamie:
0.9% beats 07% any day of the week. I'll be interested to see the premium (with regards interest rate difference) lenders charge for offset over redraw. Only one way to find out and that is ACTION.
Thanks for sharing guys. I reckon this forum is great. Always timely and detailed responses.
Keep 'em coming for us less knowledgeable types…….
Hi rz2010
Lenders don’t necessarily charge more for an offset account. However, a lot of the loans that come with an offset are part of pro packs which generally have an annual fee.
That said, lenders like AMP offer a really competitive product with an offset account and don’t charge any ongoing fees.
The banks are being very aggressive at present so if you suspect you’re not getting the best deal it’s an ideal time to look elsewhere.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
We're with CBA and have the wealth package with a re-draw facility and an off-set account. This was the standard set-up 5 years ago, so are you sure you don't already have an off-set account, they call it a MISA??
Having money in the re-draw or off-set, makes no difference to the interest rates, there no extra fees for having money in both, one, or swapping it around. Though in the MISA, there is a minimum transaction limit of $500 for withdrawals and deposits which can be frustrating at times.
Good luck!!
Yea Misa is the worst offset account EVER!! – the advantage is always on the banks side…
Most lenders these days dont charge much for the offset; like ING only an extra $8 per month…it’s pennants from the amount of savings you get.
Regards
MichaelMick C | Shape Home Loans
http://www.shapehomeloans.com.au/
Email Me | Phone MeSame Banks. Better Rates. Served With a Passion.
I don't have a MISA just a standard redraw and no offset. I just wanted the least amount of features. At the time I figured that would mean that the bank would be more flexible on negotiating a better interest rate.
Obviously I didn't know back then about the way the ATO treats the use of redraw funds when coming to claiming interest deductions. Otherwise I would have gone the offset.
Actually to be honest I still do not understand why having the extra funds in an offset as opposed to a redraw facility makes any difference at all to the ATO. Why should someone be penalised for having redraw facility as opposed to an offset facility if they are in essence the same when it comes to interest liability calculations or am I missing something.
If they are the same thing has anyone sought a private ruling from the ATO on this?
In the mean time (while pondering the above) I will read my current loan contract before going out to the lenders to see what I can get…….
Cheers RZ
RZ
It is simple:
1) A redraw is considered a new loan and depends on the purpose.
2) An offset account is not.ATO looks at the purpose of the funds to ascertain deductibility.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Its messy and will be hard to apportion interest at tax time.
eg. You had a $100,000 loan. paid it down to $80,000 and then take $1000 out each month to live on. Only the interest on $80,000 is deductible. This would be easy to work out if it was IO, but being PI makes it much harder.
at month 1 your ratio is $80,000 borrowings for investment and $1,000 for private = about 99% claimable.
Interest is added to the loan, 99% of this may be claimable.at month 2 your ratio is $80,000 + $2,000. 98% may be claimable. But it is even harder to work out as you have to take into account the interest. – part of the money you borrowed, the $1,000, may have been used to pay the interest, so part of the interest on the extra borrowings may be deductible etc etc.
after several months this will be a real headache. whether a ATO auditor would be this meticulous I doubt it, but it is still best to avoid if possible.
I suggest any new borrowings for investment deposit should be set up with a separate loan, ie no redraw. The main loan should be changed to IO and the new property loan be IO as well. An offset account should be set up too. And you should leave CBA.
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 to everyone.
It's clear to me now.
I have used redraw many times since first establishing the loan and I reckon I would be pretty unlucky to get an ATO auditor to be so meticulous as to go through everything.
I now plan to convert existing loan to offset before using the extra payments for deposit on second IP. I will set up the second IP loan with offset also (no cross-collateralisation between IPs). Also will make both loans IO.
And yeah definitely shop around for best deals. I agree with you Terryw about CBA. Time to break up with the bank!
Thanks everyone for their input.
RZ
rz2010 wrote:I now plan to convert existing loan to offset before using the extra payments for deposit on second IP. I will set up the second IP loan with offset also (no cross-collateralisation between IPs). Also will make both loans IO.And yeah definitely shop around for best deals. I agree with you Terryw about CBA. Time to break up with the bank!
Thanks everyone for their input.
RZ
I don’t mean to confuse matters even more but it’s probably unnecessary to set up an offset against your second IP. There would be no need to place funds in this offset whilst you have a non-deducitble PPOR debt (place your money in that offset instead).
When shopping around – ensure that you’re not having an application lodged each time. This can wreak havoc on your credit file.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
Hi Jamie,
I only have one property. This has been an IP while I rented elsewhere. I then moved into my IP making it a PPOR for the last few months. I now plan to move out making it an IP again while I again rent elsewhere. All the time I have had a principal and interest loan with a redraw facility on this property. I have managed to pay extra into the loan and now have an LVR of about 30%. So I now plan to use the extra payments plus some equity release for a deposit on a second property which will also be an IP. My long term strategy is not to live in any property that I own and to always rent where I live so as to maximise deductible debt. I also hope that by temporarily moving into my current property (which settled in late 2005) I have effectively reset the six year rule when it comes to capital gain exemption.
Recently I learnt that the ATO treats the use of redraw differently depending on intended purpose. So now I plan to convert my current redraw facility to an offset facility to right the ship as far as the ATO goes before going ahead with second property purchase which will also be an IP. Thus I plan to have two IPs both with separate loans with their own offset facility. I will rent elsewhere.
Hopefully my thinking is becoming more informed everyday……….
I hear what what you are saying about the loan applications. Definitely something to make sure about!
Cheers
RZ
You must be logged in to reply to this topic. If you don't have an account, you can register here.
