Offset and LOC for IPs

I had a client recently who had their own PPOR with mortgage ($270k) and due to her work, had built a considerable offset balance ($170k). She had been wanting to purchase an IP for some time, came to a seminar I spoke at and decided to take the next step.
I refinanced her PPOR back up to 79% LVR on a full doc with the same lender (too difficult to go higher and she did not need to) and set up a new LOC facility ($123k) to use as the base to purchase an IP.

She questioned me why do that rather than use her own funds in offset. While I knew instinctively why and could explain the concept, I decided to modify one of my spreadsheets I do for clients to show the dollar difference to her in hard numbers using the right finance structure.

Based on purchasing a $450k IP, the difference in using her LOC facility as the base to settle and borrow the remainder (80 to 85%) from another lender (to avoid cross guarantee) as opposed to her using her offset, the difference in her after tax disposable cash after paying her mortgage was $17k pa better off.

By purchasing the IP and using a debt funding strategy, she will be over $7k pa better off cash flow after tax than if she does nothing at all. This ignores the capital growth and debt recycling benefits as well.

Getting the finance structure and use of products right can make a huge difference for some investors.
Good luck and get the right advice
Greg

 

Nice work!

So just so I have this in my head right you refinanced on her PPOR to gain access to the equity, rather than simply using the offset funds. This is so the new LOC is tax deductible while the offset amount remains put and retains the flexibility of allowing her existing PPOR to become an IP yeah?

Cheers

 

Vagon,
Correct.
The main intention was for tax effectiveness, using debt funds rather then her own $'s. The LOC secured against her PPOR is used as the funds to settle the purchase of an IP and the LOC interest will be tax deductible.
By keeping her offset, this reduces the non-deductible interest incurred on her PPOR.

An added benefit as you said, is that if she ever decides to convert her existing PPOR to an IP, she retains that option by keeping her existing IO loan in place and if she buys another PPOR, she simply uses her offset funds.

Nothing new but many do not even think about how you can use finance wisely to take advantage of the tax rules, or even know. I thought I would put out there for the group to consider if applicable. Not many clients I have come across have $'000's in an offset but combined with a debt recycling strategy, it can soon build up.
Greg

 

That's good advice Greg. It's a pity that many finance providers don't understand tax at all and so the way they structure things ends up costing the customer a lot of money.

They don't need to give tax advice, they just need to not stuff things up!