Revalue Home Loan and invest in shares

Discussion in 'Share Investing Strategies, Theories & Education' started by DareDevil, 22nd Jun, 2017.

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  1. DareDevil

    DareDevil Well-Known Member

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    Hi All
    I am new to share investing, I have a home loan which now has some equity left, I am thinking to revaluing this and get a separate loan for share investing, what is the best structure for this
    Just get a separate loan for share investing or ask for a line of credit, how best to keep this loan/money separate so it wont be mixed purpose loan and can i tax deduct the loan interest i use to buy shares?
     
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  2. Simon Hampel

    Simon Hampel Founder Staff Member

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    A separate loan can be problematic because you may have to drawn down at settlement (not always - check with your lender, loans redraw facilities may allow you to leave the money in the loan account) ... if so, you'll end up with money drawn down that you can't put into a bank account because that would potentially change the purpose of the loan and affect deductibility.

    LOCs are useful because they allow you to draw down and make repayments at any time.

    But either way - it should definitely be a separate facility to your home loan - most lenders will allow you to have multiple "sub loans" for these purposes.

    When we refinanced our PPOR many years ago, our mortgage broker set us up with two $25K LOCs (so there were three accounts - PPOR loan, LOC1, LOC2) ... which gave us a lot of flexibility in how we chose to draw down on those funds and could use one of the LOCs for personal use if we chose without affecting the other loans.

    The only downside is that it dramatically increased the amount of paperwork - this was back before banks sent electronic statements, so we'd get 6 loan statements at a time (3 for me, 3 for my wife) :eek: ... much less of an issue these days.
     
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  3. Corey Batt

    Corey Batt Well-Known Member

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    The best thing would be to setup a global limit facility so you can effectively debt recycle - this will enable you to reduce down your non deductible personal debt, increase the funds available to keep growing your investment portfolio and not require constant applications for any future equity growth from debt recycling.

    There was a thread on this recently which has spoken about this:

    Who's doing debt recycling?

    Careful - most lenders won't want to allow you to release equity for shares specifically so it's best to get the right structure in. Thankfully one of the best lenders in this space is also very competitive in their interest rate/costs too so you can have the best of both worlds.
     
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  4. Terry_w

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

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    Set up a new loan split. Borrow directly from the loan to invest without any detours and without any mixing and your should be fine.

    Keep in mind interest will only be deductible if borrowing to buy income producing shares.
     
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  5. DareDevil

    DareDevil Well-Known Member

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    Thanks Simon, Corey and TerryW
    I will ask from my bank the possiblility of either a split loan or a LOC facility, Also what you mean by income producing shares? i am hoping to invest in few LICs and ETFs to start with
     
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  6. Terry_w

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

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    Shares that pay dividends or expect to pay dividends. If you borrowed to buy Berhshire Hathaway shares for example you could not claim the interest against income, only against CGT when sold.
     
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  7. DareDevil

    DareDevil Well-Known Member

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    Thanks TerryW
    That is interesting, I am not hoping to invest in individual company shares like BRK, but does anyone know how to check this with noraml ETF/LICs given they invest in wide variety of companies like MFF,MFG, ARG, VAS, QVE etc..
    What if they invest in companies that wont pay dividends out is this going to be an issue.
     
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  8. Terry_w

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

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    It doesn't matter if they invest in some companies that don't pay dividends as long as you expect that you will receive dividends is the main thing.
     
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  9. Lightning12

    Lightning12 Member

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    Aren't true LOCs more expensive then a standard loan. Could you just get a std loan with a 100% offset and move borrowed funds into the offset to use as a makeshift LOC?
     
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  10. Terry_w

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

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    yes they are more expensive.

    if you borrow and park in an offset account you run the risk of making the itnerest not deductible.
    See
    Tax Tip 1: Parking borrowed money in an offset account https://propertychat.com.au/communi...ing-borrowed-money-in-an-offset-account.1313/
     
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  11. Lightning12

    Lightning12 Member

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    Thanks Terry, so in the case of an offset, as long as you keep all borrowed money for investing only and don't contaminate with other funds coming into or out of the account the interest should be deductible?
     
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  12. Terry_w

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

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  13. Corey Batt

    Corey Batt Well-Known Member

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    There's also lenders who as an unintentional quirk offer term loans which actually can still act as a LOC with the ability to draw in and out of the account.

    Take it as a good time to look at your overall lending situation - you may be able to reduce the costs and get a better structure on your existing lending, whilst setting up something effective for you to invest in equities.
     
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  14. DareDevil

    DareDevil Well-Known Member

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    Actually I have requested some pricing from my bank and got a quote of 4.6% for a seperate investment loan with 100% for 50k or 4.8% for LOC at 50k
    I think a seperate loan with the offset is the way to go here. One question i have here is lot of people discuss about the margin loans for share investing, but given they have higher interest rates and being able to call anytime is it just because they dont have equity to borrow a normal loan or is there any other advantage of taking a margin loan over a normal investment loan?
     
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  15. Corey Batt

    Corey Batt Well-Known Member

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    99.9% it will be because they do not have sufficient equity to qualify for a loan to draw funding.

    Historically there was also borrowing capacity differences - it was easy as peanuts to get a large margin loan. When I was 18 I had a margin facility with approval up to 3mil limit without further assessment - you wouldn't see that these days unless on a very significant income.
     
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