We've just bought an IP with settlement due next week.
The purchase price for the property was $275k. We applied to borrow the whole amount from CBA as well as extra to cover all other expenses relating to the purchase – legals, stamp duty, etc. To qualify for a lower interest rate through CBA's Wealth Package we needed to borrow a little extra. So our total amount borrowed is $312k.
My question is what to do with the extra $ borrowed upon settlement, for accounting purposes? Would the best thing be to just pay the extra $ straight back off the loan?
Would like to get this sorted out now and not wait till tax time. I'd appreciate any advice in this regard,
Thank you,
SundanceSorry Derek why would you encourage Sundance to pay spare cash into his investment loan that doesnt sounds like a very Tax savy strategy to me.
Certainly the additional borrowed funds that were not taken up on Settlement should be paid into IP loan. These funds were surplus to requirements and therefore not Tax deductible if they have not been used.
Sundance do you have a PPOR loan ?If so i would set up the offset account against this loan. The CBA Misa offset account is not an ideal product going forward as it is not fully transactional but it is too late now.
More concerning would the way in which the loan was structured. Only way you can have borrowed more than the purchase price in one loan is to have cross collateralisd the 2 securities and i certainly wouldnt have recommend this course of action.
Hopefully your Banker advised you of the issues in doing this.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Dloy wrote:Hi Sundance,It would definitely be better to pay down the loan as quickly as possible so putting the money straight back into the mortgage is highly recommended. Along with any other spare cash you have. (Paying an extra $100 a week into a 30year mortgage on a $360k property will save 10years and $200k worth of interest!)
Have you set up an offset account to make payments into? If so, you can still withdraw the cash if necessary and it would be far more beneficial to have it there than in your bank account.Kind regards,
DerekSorry, I would have to advise against this.
Paying down loans is generally good, but as this is an investment loan then the person should be paying into a 100% offset account to avoid tax problems.
Remember money paid into a loan is new borrowings when withdrawn
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 for your input Derek, although I should have made it clear that what I was asking about was the non tax deductible portion of the loan in regards to taxation.
Richard – we own our PPOR outright. We do have another loan of $188k but we also have $188k sitting in that offset account IO so not paying anything. Yes, we will be setting up an offset account on this new IP loan. Have taken on your comments re cross-collaterisation and have read previous threads on this issue but I'm still having trouble understanding what the implications are. We have cross-collaterised previously with an IP and not had any problems. The property under the $188k loan is on the market and as soon as it's sold we intend using most of the funds to pay down this new loan. The remainder of the funds will be used as a deposit to buy new IP property.
We are nearing retirement and hoping to substantially pay down several IP's to generate retirement income (refer previous posts).
Sundance implications of C/C can be considerable.
I am sure the CBA would have disclosed them to you.I am unsure why they did not loan against your own cash rather than your PPOR.
If you are close to retirement and will be in pension phase you might want to seek Accounting advice before deciding to sell any of your current properties.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Hi Richard,
No, not yet close to pension age but wanting to retire within the next three years. (I'm 52, hubby 57). Our goal is to have two IP's paid down as much as possible, sell our PPOR, downsize and then rent that out as well. The object being that the rent from the three properties will supplement our income whilst travelling. Hoping to pick up some work on the way. On returning we will move back into PPOR and keep the two IP's to supplement our superannuation. Because we would be looking to pay down the two IP's and because we intend to hold onto them for the long term I didn't think the C/C would be an issue? Please correct me if I'm wrong.
As to why CBA didn't loan against our cash instead of our PPOR I have no idea (light bulb moment for me with your suggestion). And I certainly wouldn't have even thought of suggesting it. I notice from reading your posts that you always emphasize the importance of structuring loans correctly. Other people on this forum might suggest that I should have gained more knowledge about investing before jumping in but seriously, if I had waited till I had a good understanding of it all the cows would never come home!!!! I buy the IP mags and I'm browsing the forum most nights trying to educate myself but for me it doesn't come easily. I am determined to get my head around it though so appreciate any advice you can give.
Sundance
Hi Sundance,
I agree that waiting untill you know everything before investing will mean you never invest as you will never know anything. so making a purchase and acting while you can is good, but only if you get the right advice.
E.g. If you dont know everything abvout correctly structuring loans, then get a well qualified and experienced mortgage broker on your side to set up your finance. If you dont know everything about taxation, get a good acountant on your side to do your tax returns and to give advice regarding accounting structures. If you dont know everything about development planning, get a good town planner on your side to review development sites/proposals and to give advice as to the most profitable development method.
If you leverage off other peoples skills then you have a much better chance of succeeding than battling along on your own. I am sure that Andrew Forrest doesnt dig his own iron ore out of the ground, or design his own railways.
Cheers,
LukeThanks Luke. I appreciate what you're saying but this is a bit of a Catch 22 for me. Damed if I do and damned if I don't.
Twice in the last 10 years we have acted on the advice of financial planners and been severely burnt in the process. The second time we lost a substantial amount of money. I didn't really understand what we were doing at the time but trusted the advice because these people were the experts and knew a lot more than us.
That is why I'm on this forum – to try to learn to do it myself from people who have been there done that. I expect to make mistakes along the way.
Cheers,
SundanceIts a good idea to try to educate yourself, but there is only so much you can do yourself. I have been like that and have completed course in law (including masters), taxation, mortgage broking and am now doing financial planning including super. But I am still learning new stuff everyday.
I think you have to know the basics and then use professionals. What you know should confirm whether they are broadly on the right track or not. eg. a planner recommending selling a property and investing in a plantation should ring alarm bells, but a tax specialist who recommends XXX and backs up their suggestion with references to legislation etc might make you more confident.
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 Terryw,
That is very good advice.
So going forward from where I am now. Own PPOR outright, just about to settle on first 1P. Would like to purchase another IP within the next few months. What is it I need from a professional at this stage? Would the first step be to find a good accountant? Or is it a broker? My aim is to pay down the two IP's in the next couple of years.
Any advice appreciated.
Cheers,
SundanceI think tax planning is most important with considerations of asset protection and planning for further investments.. Probably need a tax adviser and lawyer
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
Just throwing it out there.
What about putting the extra cash into some bonds with a yield over or on the interest rate of the home loan. That way the borrowings are all still ‘borrowings for investment’ and you can claim tax. Also, if interest rates go down you could make more cash (which you would pay tax on) that could be used for some of your non-deductible expenses, or to help supplement repayments if the property is negative geared.
Haven’t thought much beyond that… Just a bit of a brain dump.
Qlds007 wrote:Sundance implications of C/C can be considerable.
I am sure the CBA would have disclosed them to you.I am unsure why they did not loan against your own cash rather than your PPOR.
If you are close to retirement and will be in pension phase you might want to seek Accounting advice before deciding to sell any of your current properties.
Cheers
Yours in Finance
Hi Richard,
Our IP is due to settle this coming Thursday. When applying for the loan CBA advised they could only approve the loan if we used our PPOR as security. Would you suggest I contact them again and ask if there's another way to do it? ie against our cash as you suggested. Or, and I know I'm leaving this extremely late and may be impossible to arrange before this Thursday, would it be better to see if I could find another lender willing to not cross-collaterise?
Any suggestions welcome.
Cheeers,
SundanceHi Sundance
What they have told is you as absolute rubbish.
Might be the Banks preferred way of doing it but certainly not the sole way and in your best interest.
I hate to say knowing the speed CBA operate at i think it will be too late but i certainly would be uncrossing the securities before you buy again.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Or just settle and look at restructuing asap.
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 Richard and Terryw for your prompt repllies.
Will get in touch with CBA and see whether they're willing to do anything before settlement. Will definitely make sure I set this up correctly for IP2!!!!
Cheers,
SundanceHi Sundance,
It would definitely be better to pay down the loan as quickly as possible so putting the money straight back into the mortgage is highly recommended. Along with any other spare cash you have. (Paying an extra $100 a week into a 30year mortgage on a $360k property will save 10years and $200k worth of interest!)
Have you set up an offset account to make payments into? If so, you can still withdraw the cash if necessary and it would be far more beneficial to have it there than in your bank account.
It was just general advice from the point of view that spare cash that's in an everyday bank account would be better off in an offset that is paying down the principal and saving on interest in the long term. Hence the example I gave about the extra $100 repayments.
Would there be another way to use spare cash that's more tax savvy?
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