Tax Tip 36: Consolidating Loans for investment properties

Loan Tip and Tax Tip: Consolidating Loans for investment properties


The way I recommend structuring loans is to borrow the deposit and costs from another property and the remainder from a lender secured on the new property. This way the client can borrow 105% of the purchase price without having to cross collateralize the securities.


Generally this would be 2 loans of either

25% and 80% or

15% and 90%

This would depend on how much equity the client has and how quick they want to go forward with further borrowings.


The interest on both loans will be deductible where they are set up and used correctly.


After a while the investment property that was purchased, and securing the 80% loan, will increase in value. When there is enough equity I advocate consolidating the 2 loans by increasing the 89%/90% loan to subsume the 15%/25% loan. Both loans relate to the same purpose - that of purchasing the investment property so there is no mixing to worry about from a tax point of view.


I suggest this because overtime the 15/25% can be reused for the next property - and BTW this should be in a separate split. This will avoid mixing the deposits on multiple properties and creating problems when one is sold. It will also make it administratively easier and clearer when working how what interest relates to what property.


There is also a legal reason to consolidate loans. When a person dies they may will a property to a beneficiary, but often they make no provision for the loans attached to the property. Under s145 of the Conveyancing Act (NSW), and there are similar provisions in other states, unless a person’s will says otherwise the debt secured by a property must be paid out of that property. read about this in my legal tip

Legal Tip 74: Loans Death and Inheritance
https://propertychat.com.au/community/threads/legal-tip-74-loans-death-and-inheritance.3457/

 

(amended numbers in bold for clarity)

So in the case of 80% + 25%, you equity release into the 80% loan (increasing funds available) and then use this loan to 'pay off' the 25% loan back to zero, resetting it for the next IP?

 

Hi Terry, i would like some further clarification on this also as i'm about to take out another investment loan to purchase my second property and would like to see how this method can benefit me.

 

Exactly. Thanks for fixing numbers too

 

What do you want clarrification on?

 

Hey Terry, you're probably sick of my questions. I just wanted to clarify the larger loan subsuming the smaller loan.
So for example, I could have a $400k loan and the $50k loan (coming from another lender for the deposit on the house). Then what you are saying, is that once I get enough capital growth, I could just increase my loan from $400k to $450k which subsumes the $50k portion. Then I could use that $50k on another property?
This is somewhat similar to a structure that I'm putting together for myself. I should have about a $200k loan in borrowings which is split from my PPOR. I was thinking of splitting the $200k into $100k split, which would use $50k for the deposit, $20k-$25k for stamp duty etc, and then $25k for future property costs. However, should I just split the $100k amount into two separate splits again (one being $25k for future property costs and the other being the$75k split for immediate deposits/costs)? That way, when I get some capital growth, I can subsume the loan earlier on?

 

Putting this scenario in numbers. e.g. you have existing Property (IP/PPOR) with equity available setup additional equity of 50K (Loan A). You buy IP worth 200K for that you use the Loan A as deposit and set up 80% of IP value 160K (Loan B). Loan A & B both secured by two separate properties as per this structure. Few years down the track with capital growth your property is worth 265K you refinance Loan B and and borrow 80% of its value. This will allow you to release 52K (80%265K-160K) which can be used to pay off Loan A. should you top up loan B and park these money in redraw or setup separate split? I guess you don't wan 52K to be mixed somewhere in process before it reaches the Loan B.

Does this scenario have any tax consequences assuming Loan A is in different name than IP owner (assume years down track property was sold to relative before Loan B refinance) but related party loan exists between owner of IP and Loan A for 50K (identical to agreement between Loan A owner & its Lender)....

 

You should borrow against the IP and get $50k paid straight into loan A so it is paid off - ideally not closing it so you could use it again.

Not tax consequences because only the owner of the IP could have claimed the interest on loan A. Changing security doesn't change deductibility.

 

Consider this situation.
IP was purchased for 440K.
10% deposit +5% was paid with CBA :66K. Balance is with Westpac:$374K

IP then rises in price over time. Can I then do a 66K equity release on the Westpac loan, and directly transfer that into the 66K CBA loan to pay it off?

The initial 66K was used for legals and 10% deposit. Am I allowed to 'reimburse' myself simply from the new equity or will this cause problems?

I can then use the 66K in the CBA account as a deposit for another property?

 

menty

Are you saying you borrowed $66k from CBA and you now want to increase the Westpac loan by $66k and refinance the $66k loan with CBA?

If so then the answer is yes and this is what this thread is all about - bring all loans for one particular property secured against that property.

 

related to this question,
if I have bank1 investment loan A and offset B (linked to loan A) with $200K, then I buy another IP for $600K, so I borrow 80% $480K from bank2, the remaining 25% comes from bank1 offset B , aka $150K. ( offset B still has $50K balance now).
so when the IP value becomes $700K, so I refinance the loan from bank2 to be $560K, and repay the $80K to bank1 offset B, without losing the tax deductibility, right? since the money in offset B is still investment purpose...?

 

No, that is not correct.

 

Your mixing loans and offsets which is cash.

You have to have 2 loans, these are splits or separate lenders, then the one which is secured by the IP itself can be re financed to pay out the smaller one that could be a split on your home or another IP

Aside from using th e loan again eslewhere, and the will aspect, the outstanding monies are only secured by the one property, not multiple/s.

 

working off this scenario if you can only access say 45k from westpac but you want to use this extra 45k straight away for the next purchase how do you do this? pay the 45k directly to the original cba split account and then what? because 66k-45k = 21k still tied to the westpac loan/property. if you then take out the 45k from cba loan and use it for the new purchase/property your cba mortgage for first property is now connected to 3 properties?

i'm so confused as you can tell haha

 

Sorry Elives, I don't understand.

 

ok i'll try and explain it differently.

cba split 66k used for deposit for ip with westpac loan secured against it.

consolidating loans is the main goal once the westpac loan ip has risen pay back the 66k to the cba split and job done. how ever instead of this happening westpac ip has 45k equity available and the borrower wants to use this for his deposit for the next ip.

what would be the best way to use the 45k? increase the westpac loan to a bigger amount? have a 45k split with westpac? transfer it back to cba split then take it out again for next ip?

Elives,

 

Just split it off with a another split. This split could then be refinanced later when that property it was used for grows in value.

 

just to clarify the 45k split is with westpac so the 66k split with cba still remains? thanks terry

 

Yes.

 

Hi @Terry_w,

Could you give some clarification on the following situation -
IP refinanced with the following strutcure:

Split 1 - 450k
Split 2 - 100k (used for investment purposes such as deposits, stamp duty, etc)
Split 3 - 35k (used to pay out CC)
Split 4 - 30k (used to pay out car loan)

Have funds 100% offsetting splits 3 & 4. Obviously any interest incurred on these is currently non deductible due to the purpose of the borrowings.

To make interest on this debt tax deductible, can I just simply pay down both splits (not close the loans) and then redraw the funds back into the offset(s)?
Then once these funds are used (for investment purposes), the interest will become tax deductible?