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Best way to proceed?

Discussion in 'Real Estate' started by gonz_7, 6th Mar, 2009.

  1. gonz_7

    gonz_7 Member

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    Hi all

    I am new to this forum. Thanks to all contributors - it is a fantastic read.

    I have put myself in a less than ideal situation. Late last year I renegotiated my loan contract to get a lower rate. I got a good deal with an online lender but only a redraw account and no offset. At the time I wasn't aware of the tax implications of using a redraw account for a property that will eventually become an investment. I have been paying down the loan and redrawring regularly for the past few months.

    To get out of the loan ($280,000) will cost me $1400. Obviously I am extremely reluctant to pay this fee having just entered the loan.

    Has anyone got advice of the best way for me to proceed? I will probably be looking to turn the property into an investment in about 4 years, which is about the same time I can exit my current loan without incurring and ERF. But as I understand the damage will be done to the loan by then (I could conceivably have $100,000 available in redraw, which I would need to use a deposit on a new PPOR). I guess my other option is to just sell my current property and purchase a new IP and PPOR, but that would come at significant real estate cost etc.

    Has anyone encourtered a situation similar to this before? Any words of wisdom that could help me out?
     
  2. Billv

    Billv Getting there

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    As you know yourself you have chosen the wrong product.
    I'd approach the lender and ask them to switch to interest only.
    That should be possible.

    If they don't offer IO, then perhaps they will let you choose a different product for the cost of a couple of hundred $ without a penalty.

    Good luck
     
  3. gonz_7

    gonz_7 Member

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    Thanks for the reply BV.

    I do have the option to convert to IO. What would be the advantages of doing that? Are you suggesting that I could convert to IO and then stop using the loan account for deposits and redraw?
     
  4. ashwright

    ashwright Well-Known Member

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    I wonder if the damage is already done, what have you been using the money which has already been redawn for?
     
  5. gonz_7

    gonz_7 Member

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    I have been treating it just like an offset account - putting my pay into it and using it for all my everyday and other transactions since November 08.

    I had a feeling the damage might already be done, but wasn't sure. I have probably had $65,000 in total redraws since November. Am I right to think that because I have used the redraws for a non-investment purpose, the interest on the whole $65,000 won't be tax deductible when I make it an investment property in 3 or 4 years? If this is true, if I stop redraws now will the interest on the remaining $230,000 still be deductible?

    If I was to pay the ERF and get a new loan with an offset account, would the $65,000 of redraws made with my current loan still count?
     
  6. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Unfortunately this will likely require an accountant to sort out. The issue is that the ATO tends to treat any payments into a mixed loan firstly as repayments of principal off of the investment component, and any redraws as coming out of the non-investment component.

    This means that if you keep putting money in and taking it out again, the actual amount the ATO will consider to be deductible will drop well below the actual balance of the loan.

    Eg:

    Loan $100K, $100K deductible debt
    Deposit $5K from salary, outstanding loan $95K, $95K deductible debt
    Withdraw $2K for expenses, outstanding loan $97K, $95K deductible debt
    Deposit $5K from salary, outstanding loan $92K, $90K deductible debt
    Withdraw $2K for expenses, outstanding loan $94K, $90K deductible debt
    Deposit $5K from salary, outstanding loan $89K, $85K deductible debt
    Withdraw $2K for expenses, outstanding loan $91K, $85K deductible debt
    Deposit $5K from salary, outstanding loan $86K, $80K deductible debt
    ... etc

    As you can see, the deductible amount decreases with every deposit, but does not go up with redraws (assuming redraws are for personal use).

    It is very messy and really needs an accountant to sort out for you so you can maximise your borrowings from this point moving forward.
     
  7. Billv

    Billv Getting there

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    The biggest advantage is that you'll be able to maintain the tax deductibility of your investment loan.
    You really need to be talking to an accountant about this and to work out a plan on how to fix this mess.

    This is what I'd do.
    Find out if your pay is going into the loan or into a separate savings account which is linked to the loan.
    If it's going into the loan you can temporarily open up a separate savings account for your pay and other income to go in.
    Stop withdrawing money immediately.
    Change the loan to IO.

    cheers
     
    Last edited by a moderator: 10th Mar, 2009
  8. gonz_7

    gonz_7 Member

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    Thanks Bill and Sim. I think you're right that I need to speak to an accountant about my specific situation, but your information has made things a lot clearer for me.

    Cheers

    Andrew