Loan restructuring scenario - sense check

Discussion in 'Loans & Mortgage Brokers' started by MrMarket, 1st Mar, 2017.

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  1. MrMarket

    MrMarket Member

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    Hi all,

    I was hoping to do a sense check, based on my reading so far - it would be very much appreciated.

    Background
    • I own an unencumbered apartment with a loan + offset account attached - that is, the loan amount is 100% balanced out by an equal amount of cash held in the offset account.
    • The property was originally held for investment purposes.
    • My father now lives in this property rent free.
    • The loan amount hurting my serviceability, as I understand that lenders are factoring in the loan amount, even though it is being 100% offset with cash.
    Inability to claim interest deductions
    • My understanding is that if I invest using the cash in the offset account, it would not be deductible given the loan purpose is for private usage.
    • I believe that the exception to this would be if my father moves out of the apartment and it is rented out as an IP. The purpose of the loan would then convert to investment and if I pulled the cash out, the net loan amount would increase.
    Restructuring options for another investment property
    1. Convert the existing loan plus offset into a loan plus redraw facility. Redraw against this loan to buy an investment property. I understand that the loan would be now tax deductable, as the purpose of the borrowings is to acquire an investment property, using a property as collateral.
    2. Discharge the loan and take out a new loan plus offset account against a new investment property. The serviceability issue is gone, as I no longer have an offset plus loan on the property my dad is living in. I lose the future flexibility here, as the offset account established at the time was for investment purposes.
    For scenario 2, in the future, I understand that I could sell the property into a unit trust and then borrow to buy units in this trust. Alternatively, I could create a family trust to buy the property off me. In both instances for scenario 2, any income losses would be trapped in the trust, but I could use my existing family trust to stream distributions to this newly established trust to utilise the income losses. The benefit of the family trust to house the property would be the ability to stream capital gains if I were to sell in the future.

    I wonder if I have missed anything?
     
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  2. Simon Hampel

    Simon Hampel Founder Staff Member

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    I think you've pretty much got it covered.

    We had a fairly similar situation ourselves - bought a PPOR and then 9 months later got offered a very well paying job interstate, so moved and kept the property as an investment. Loan got paid out fairly quickly over the next couple of years due to higher income - so we were left with an unencumbered property and no tax deductibility.

    We sold that property to our family trust around 5 years later - the loans became deductible to the trust and because we rented interstate we didn't have a new PPOR and so the proceeds of the sale were CGT-free to us (6 year rule). Yes, the losses in the trust are quarantined - but that's why you invest in other income generating assets as well.

    First step would be to talk to a mortgage broker and assess you borrowing capacity in both scenarios 1 and 2. With recent APRA changes, serviceability models have changed significantly and what may have previously been a simple strategy will now find you hitting significant funding hurdles.

    Just to clarify though - with option 1 were you looking at redrawing the entire amount to purchase a new property, or just the deposit?

    If you can get the serviceability sorted - I would generally be looking to keep things as flexible as possible and would look at refinancing the existing loan into a LOC or similar that you can draw down on when you are ready (and only ever draw on that for investment purposes), and then use that LOC to fund the deposit on a new investment property. I think that will maximise your deductibility and your flexibility.

    It sounds like you have an existing family trust? Why not just purchase property through that? Or are you looking to keep some level of quarantine between them for asset protection purposes?
     
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  3. MrMarket

    MrMarket Member

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    Thanks for the response Simon.

    Seems like you were in the same boat, albeit with no CGT implications :) The Family Trust has stuff like Unlisted Property Trusts, so it should consume trust losses.

    For Option 1, I would be looking to redraw just the deposit amount and securing a loan with a separate lender against the IP.

    My current lender that I would be looking to redraw from does not offer any LoC. Would I not be able to restructure the loan + offset into a standard investment loan and then redraw the deposit amount?

    Do you see any benefit in setting up separate trusts for separate properties, or do you use the same family trust to house the majority of assets. My understanding is that trusts are not a legal entity and cannot be sued, only the Trustee. Given that my Trustee is a Company (worth $1), there should be some level of protection here?

    Thanks!
     
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  4. Simon Hampel

    Simon Hampel Founder Staff Member

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    Possibly - but that would likely need to occur at the time of financing your new property - since the draw down MUST occur at the time you pay the deposit (when I say "deposit" I specifically mean, the amount not financed by the loan taken out on the new property - which is due at settlement).

    Otherwise, you'd need to check with your lender as to whether they are happy for the loan to remain undrawn until you are ready to settle. You can't draw down the loan, deposit it into your offset account and then take it out of the offset to pay the deposit - that would not constitute "borrowing for investment" and the ATO would not consider the interest on that loan deductible.

    It sounds like a fairly minor detail - but the deductibility of the interest on the loan may be affected if you do it wrong, so make sure you go through the plan carefully with your mortgage broker to ensure that the bank will do what you need - and potentially with your accountant to double check that everything will qualify.

    The lender may have an issue, since they typically want to know what the purpose of the loan is (since it affects their serviceability criteria), and so they will want you to draw down once your loan refinance is settled. Some lenders may be more flexible and will allow arbitrary repayments / redraws, but you'd need to check.

    I'll try and get some mortgage brokers to add their thoughts to this thread.
     
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  5. Corey Batt

    Corey Batt Well-Known Member

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    Nice and simple - definitely either sell into a trust or refinance to a lender who will enable you to store the funds/draw the funds as necessary either through a LOC or a term loan wherein the loan is not closed automatically when the balance owing is zero. Be VERY careful with lender choice here - you do not want to be caught out when it comes down to the crunch and you find your loan account is closed without you knowing, or the tax deductibility is compromised by the type of product.

    Lender selection isn't just based on sorting lowest rate to highest either in these circumstances - if you're wanting to have the capacity to have access to more debt in the future having a strategic plan in terms of lender use will be a far more effective way to assist in your portfolio expansion.
     
  6. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Heaps.

    One example is to consider selling to your father.

    If he is living in your place he probably doesn't have a main residence himself. That means he is not claiming a main residence CGT exemption and land tax exemption.

    You need some legal advice on how to structure this, but one way (out of many) to do it would be to sell to him at market value and for him to borrow to buy it. He may not be able to get a loan with a bank but you could lend him the funds to buy it. This could be at 0% interest with you taking a mortgage over the property.

    If your father dies before you he can pass the property on via his will with your getting the loaned money back. He could leave the property to you via a testamentary discretionary trust so your children could get the benefit of income at adult tax rates and added asset protection and general tax flexibility.

    If you die first he could continue as is with your loan still owing to your estate. You could set something up in the will so that the loan is assigned to a trustee.

    Transferring now would result in CGT and stamp duty, but the future benefits could make this worthwhile.

    There are many alteratives to the above too.

    BTW your property is probably not unencumbered if there is a loan on it - there would be a mortgage securing the loan (but this could be on another property?)
     
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