One Mortgage for Two Properties, or Two Separate Loans?

railspider on 30/06/2019 - 22:54

I own an investment property and plan to by a new place to live in. The IP mortgage is "paid off" (account balance is $1 with lots of redraw available).

My plan was to extend the loan to cover the costs of the new place, and use both properties as security. But after calling the bank, the phone consultant suggested taking out all the redraw and using it as a 20% deposit to open a new, separate loan for the new house. They wouldn't - over the phone - tell me which option was more cost effective.

Has anyone been in a similar situation? Any pros/cons to having two properties secure a single loan?

Financial

Comments

  • [Deactivated] on 01/07/2019 - 01:04

    It's tax time. Ask your accountant can you negative gear on a loan that is pretty much paid off, and on a rental property. To a loan that is a property to live in??? Good luck if the answer is yes but worth the risk probably yes.

  • [Deactivated] on 01/07/2019 - 06:04

    Tax wise - what you intend to do is not good.

    But to answer your question. I had two separate investment properties on the same loan with both mortgages held by the bank. When I informed the bank that I was selling one of the properties, the bank transferred $50,000 of extra repayments I had made from the property I intended to sell, to the property I was keeping without informing me or gaining my consent.

    You could just pay off your IP and use the equity as your deposit on the new place but that wouldn't be tax effective.

    Is the money you have in your IP in redraw or offset? as this will make a massive difference as to what you can do.

    • railspider on 01/07/2019 - 09:11

      It's in redraw, which I think was a stupid move. My understanding is if you pull money out of redraw, you can't claim the increase interest costs as tax deductible.

      So for the new property everything will live in an offset account, in case I ever decide to rent it

      • Seraphin7 on 01/07/2019 - 09:35

        This is basically correct. Once it's "in the loan" you've paid it off and can't just then redraw it and claim the interest. If it's in offset, it's not "in the loan" so you can potentially use this more efficiently.

        Just be aware that an offset is treated as a deposit. In the event that your bank collapses (however remote a possibility that may be), that money in the offset may be at some risk pending its treatment under the government deposit guarantee provisions.

        • railspider on 01/07/2019 - 11:23
          +1

          Thanks, some good advice here. More useful than the ING loans salespeople.

  • chumlee on 01/07/2019 - 06:47

    The ATO is clamping down on IP redraws & then using the funds for non tax deductible investment and claiming the interest payments.

    So long as you are not redrawing the funds and claiming the interest on tax I would go down this path

  • samprofs on 01/07/2019 - 10:41

    If it was me:

    Loan 1 Split- Current Debt and max equity IO loan acting as a line of credit. No repayments with maximum funds available for future investment lending opportunities/essentially their 'at call'

    Loan 2 Split- 20% deposit plus all associated fees for new property

    Loan 1 and 2 linked to current asset

    New Loan at 80% LVR of new asset

    Pro: *Not cross collatoralising- making it simple if selling/refinancing in the future *Tax-Makes your accountant's job easy as they can now treat Loan 2 and New loan as tax-deductible and linked with the new asset purchase *Not cross collaralised- you can technically do the new loan with a different lender also *It also makes it easier when selling- no need to revalue anything/remaining security.

    Con:*Zero Cons

    • mortgagebroker on 01/07/2019 - 16:58
      +2

      As they will be living in the new house there is nothing that is tax deductible.

  • mortgagebroker on 01/07/2019 - 17:06
    +1

    Current Property - Future Investment Property
    Lender 1
    Pull funds from redraw to pay for 20% deposit and apply with new lender. As this money is used for non-investment purposes it is not tax deductible.

    New property - Future Owner Occupied property
    Lender 2
    Use 20% to pay deposit.

    Optional - another investment property
    Lender 1
    Cross collateralise above investment property and buy another investment property.
    All funds for this purchase are tax-deductible
    Split 1 - 20% deposit for Owner Occupied - not tax deductible
    Split 2 - Everything else - tax deductible

    • railspider on 01/07/2019 - 17:47

      Thanks. Looks like separate loans is the way to go. Is there any reason you recommend a new lender instead of using my existing (ING) for both loans?

      I obviously want the best rate, but the convenience of using my existing bank and offset account is appealing

      • mortgagebroker on 01/07/2019 - 17:53

        To keep the securities/properties separate.
        If you want to sell one, later on, there will be no reason to involve the other property. This can be an issue if property prices fall.
        Banks often have an All Monies clause so they could go after both houses if you default on one property.

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