Hi All – I have a home valued at $1.2 million. This PPOR is mortgaged to a bank. The outstanding principal on this loan is now 230k, with monthly Principal+Interest repayment. The loan is a package homeloan (i.e. I pay an annual fee of $395).
I am about to buy an investment property for $360k plus costs/stamp duty about 14k, so total acquisition costs = $374k.
I am proposing to borrow $374k to buy the investment property by taking another loan under the homeloan package. The loan is not going to be a Line of Credit. It will be a regular loan (at same interest rate as my PPOR loan). I think it could be called a "split loan" and comes with a separate statement. This loan of $374k will be drawn down to pay the investment property. This loan account will be Interest-only repayment.
As such, the investment property itself is NOT mortgaged to the bank i.e. the title is unencumbered. Only the PPOR title is mortgaged to the bank for both loans (the existing outstanding principal of 230k and the "split" loan of 374k).
The question i am hoping someone could clarify for me is whether the interest on the 374k loan will be tax deductible given the title of the property itself is not mortgaged. I believe it is since tax deductibility follows the purpose of the loan; and not where the security for the loan lies.
Appreciate any comments on this proposed loan structure.
Yes it should be deductible given the purpose.
Ask your lender to provide a rate discount on your existing loan too given your overall borrowings is increasing.
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]
Sounds like cross-collateralisation to me.
If I am right I think you can get a better structure. Structure is more important than interest rates.
Agree with Jamie on deductibility issue.
Thanks Jamie and Derek.
Yes, it is cross collateralising the PPOR loan and Invt Property loan. I came up with this because this allows me to keep the investment property title unencumbered. Another way of seeing it is that the bank is not over collateralised. The alternative to this structure is a 3-loan:
loan 1: PPOR loan of 230k, secured by PPOR title
loan 2: investment loan of 86k for the 20% purchase price, secured by PPOR title
loan 3: investment loan of 288k for the 80% purchase price, secured by investment property title (80% to avoid LMI)
This would mean the bank receives both properties title as security totalling 1.56 million whereas total borrowing is 604k.
This is how I rationalised going the path of just using one property to secure the borrowings to buy the investment property now.
The PPOR loan which is non tax deductible is likely to be fully paid off in 4years upon which I think the two options is to either refinance the investment property loan of 374k OR ask the bank to consent to swapping the security (assuming investment property value at that time meets the 80% level).
With the above structure or the initial split loans against the PPOR, they should both have the same affect deductibility wise.
As you mentioned you have a package account, you would most likely have an offset account. Just link that to the PPOR loan portion to use as a tool to pay off the non-deductible debt sooner.
Cheers
Tom
My view is that you should always have a plan for the worse, I wouldn't be putting my house on the line whilst having your investment property the one unencumbered. I'd rather lose 5 investment properties in a row and still own my PPOR so I still have a roof over my head.
Id rather take out LOC of 85k to fund the 20 percent deposit and stamp duty with a separate loan for the new investment property.
Why do you want it set up as you said? Is the property unlivable ? So you don't want a valuation on the property?
* as you said in first post
Structure is fine as long and interest on the entire loan will be deductible.
I would however be wanting to read the small print of the offer document to ensure that "by mistake" the lender didn't slip the PPOR as collateral security for the IP.
I have seen so many times before and usually once a borrower realises it is too late to change it
I would also as your lender if their Standard Mortgage Deed contains an "All monies clause" and if it does ask them to remove it.
If they say No then you should be running a mile and using a separate lender.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Hi Richard – actually it is my intention that the PPOR property is used as security for both loans (original loan to buy the PPOR 2 years ago; and the new one to acquire the investment property). By doing, the investment property title is not mortgaged to the lender bank. Earlier it was asked why I chose to used the PPOR as collateral for both loans (as opposed to the usual preference of mortgaging the investment property). I chose this structure because I realise that the only other alternative is for BOTH property title to be mortgaged.
The total borrowing from the bank is 600k. The market value of the PPOR house is 1.2m. The market value of the investment property house is 360k. So if I end up mortgaging both to the bank, the borrowing of 600k will be overcollateralised by 2.6 times.
My two starting points are:
(1) I want to maximise tax deduction on the investment property, to that end I want to borrow the entire purchase price, plus stamp duty/legal fees and other costs – totalling 374k.
(2) I dont want to pay for Lender Mortgage Insurance (which I would have to since my total borrowing is over 80%).
To achieve both these points, my initial structure was to borrow 20% under a separate "Loan 2" which is secured by the PPOR property. And a third Loan 3 is taken out for 80% secured by the investment property (Loan 1 is the existing loan taken 2 years ago to buy the PPOR. Original borrowing was 780k but has been paid down with an outstanding balance of ~226k). I was about to instruct the bank to go ahead and setup Loan 2 and Loan 3 when it became clear that I could actually borrow what I need all under security of one property.
The worst case scenario is that the economy tanks, I lose my income to keep up repayments, property values fall dramatically. In that scenarios, supposing my PPOR value falls 30% from 1.2m to 840k, I am effectively still overcollateralised for a debt of 600k (bearing in mind too that the 600k principal is reducing every month as the Loan 1 repayment is Principal + Interest). Effectively if the bank foreclose the PPOR and sold/auctioned for 840k, I should (still) stand to be receiving some balance from the auction/sale proceed, the debt all repaid and an unencumbered property to live (admittedly not as desirable an abode as the PPOR but livable – beggars cant be choosers at the point).
I think all banks standard mortgage terms will have All monies clause. Retail borrowings are too small to negotiate in a "Limited Recourse" provision, but I stand corrected on this.
'All banks standard mortgage terms will have All monies clause" Sorry i disagree there and if a Bank wants your business badly enough it will change anything.
Totally disgree with the structure but that is upto you.
There are other ways to achieve what you wanted without mortgaging your PPOR to the hilt.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
woolies2122 wrote:Hi All – I have a home valued at $1.2 million. This PPOR is mortgaged to a bank. The outstanding principal on this loan is now 230k, with monthly Principal+Interest repayment. The loan is a package homeloan (i.e. I pay an annual fee of $395).I am about to buy an investment property for $360k plus costs/stamp duty about 14k, so total acquisition costs = $374k.
I am proposing to borrow $374k to buy the investment property by taking another loan under the homeloan package. The loan is not going to be a Line of Credit. It will be a regular loan (at same interest rate as my PPOR loan). I think it could be called a "split loan" and comes with a separate statement. This loan of $374k will be drawn down to pay the investment property. This loan account will be Interest-only repayment.
As such, the investment property itself is NOT mortgaged to the bank i.e. the title is unencumbered. Only the PPOR title is mortgaged to the bank for both loans (the existing outstanding principal of 230k and the "split" loan of 374k).
The question i am hoping someone could clarify for me is whether the interest on the 374k loan will be tax deductible given the title of the property itself is not mortgaged. I believe it is since tax deductibility follows the purpose of the loan; and not where the security for the loan lies.
Appreciate any comments on this proposed loan structure.
There are a few issues you haven’t considered.
I am assuming the owners of both properties is exactly the same? ie mum/dad own PPOR and mum/dad own investment?
Under the conveyancing act a property left to someone in a will takes the loan secured on that property unless specified otherwise in the will. (NSW, but probably similar other states).
This means if you are leaving the IP to one person and the PPOR to another the second person getting the PPOR will lose out because the loan for the property goes with it.
Tax deductibility depends on purpose and use the funds are put to. Security doesn’t matter. But deductibility will depend on how the loan is set up because if you borrow extra money and park it in a savings account before writing a cheque then this will destroy deductibility.
I don’t really see any other issues with using the PPOR as security for both. The loans wouldn’t be cross collateralised because only one property is being used as security. I myself would probably not do it this way, I would probably get a LOC on the PPOR and then borrow the deposit from this and the remainder from another lender. But if you don’t intend to buy any more properties then it may not be much of a issue.
I wouldn’t really worry about the bank holding too much in security. They are secured only up to a certain amount anyway. If you default they could repossess either property if both secured, but your way they could only repossess the PPOR straight away. But if you did default they would probably quickly obtain a judgment and that would allow them to apply to seize both properties.. Still, it is generally a good idea to give them as little security as possible
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 Terry for pointing my mind towards these issues. Yes, hasnt considered these points.
[/quote] There are a few issues you haven't considered. I am assuming the owners of both properties is exactly the same? ie mum/dad own PPOR and mum/dad own investment?
Woolies2122 – yes, the PPOR is owned jointly by myself and wife (that ownership type where if one owner dies the surviving owner automatically inherits full ownership). My wife does not work, have zero income whereas I am paying tax in the highest bracket. So the IP is bought in my sole name with the Loan 2 for 374k borrowed in my sole name as well. Obviously so I can claim the full tax deduction against my income (as opposed to just 50% of the deductibility). My wife will sign a guarantee for Loan 2 (since PPOR title is half-owned by her).
Under the conveyancing act a property left to someone in a will takes the loan secured on that property unless specified otherwise in the will. (NSW, but probably similar other states). This means if you are leaving the IP to one person and the PPOR to another the second person getting the PPOR will lose out because the loan for the property goes with it.
Woolies2122 – actually this reminded me to get a will in place. I dont have one yet (ashamedly). My contingency in the event of death is for the total borrowing of $600k secured against the PPOR value of 1.2 million, is for that PPOR to be sold off, the proceeds to payoff the bank; and family to move intto the IP house. The PPOR is in NSW, IP house is in Brisbane (where other relatives are). In any event, my rationale is there is at least a Death & TPD payout (default insurance under super fund) of at least 800k.
Tax deductibility depends on purpose and use the funds are put to. Security doesn't matter. But deductibility will depend on how the loan is set up because if you borrow extra money and park it in a savings account before writing a cheque then this will destroy deductibility.
Woolies2122 – to avoid destroying deductibility, should Loan 2 account therefore be attached to a NEW, separate transaction account only used for paying IP costs? My existing Loan 1 has an offset/transaction account linked to it. I can ask the bank to set up a NEW, separate transaction account linked to Loan 2. For that matter, should rental income from IP be deposited into Loan 2's transaction account; or is it fine to have rental income deposited into Loan 1's offset/transaction account? My understanding is it should be fine to go into Loan 1's offset/transaction account.
I don't really see any other issues with using the PPOR as security for both. The loans wouldn't be cross collateralised because only one property is being used as security.
Woolies2122 – thanks for confirming. Very re-assuring.
I myself would probably not do it this way, I would probably get a LOC on the PPOR and then borrow the deposit from this and the remainder from another lender. But if you don't intend to buy any more properties then it may not be much of a issue. I wouldn't really worry about the bank holding too much in security. They are secured only up to a certain amount anyway. If you default they could repossess either property if both secured, but your way they could only repossess the PPOR straight away. But if you did default they would probably quickly obtain a judgment and that would allow them to apply to seize both properties.. Still, it is generally a good idea to give them as little security as possible[/quote]
Woolies, that changes things dramatically.
I think you need rethink and get some legal advice
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
I agree things seem to go from bad to worse.
Definitely get yourself urgent legal advise as your comments have outlined some real potential concerns.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
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