Should I Be Able to Split a Redraw Home Loan?

• 

  dtc on 29/06/2024 - 23:03

  +7

  I/O rates tend to be higher than P&I rates.

• 

  bobbified on 29/06/2024 - 23:04

  +2

  I immediately transferred $200k onto the loan so I am only paying interest on $600k.
  ….I want to split the loan. $600k for the original loan and $200k for a new interest only loan.
  The bank wins twice here. They get to charge me interest on $200k more than they were when I had overpaid the loan, and charge it for longer as I am only paying interest.

  Am I reading this correctly?

  If you take out an $800K loan and immediately offset it with $200K, your total debt is $600K and that's what you'll be paying interest on.

  If you split the original $800K loan so that it's $600K for the PI loan and $200K for the interest-only loan, you can still put the the $200K to offset the $600K loan so that you're paying interest on $400K (ie $600K minus $200K offset) plus the $200K investment loan. That is a total of $600K in net debt.

  How does the bank win twice?

  • 

    Mr BoMBAStiG on 30/06/2024 - 05:00

    -5

    Imagine I took a 800k loan and this was given as cash to the previous owner for the house.
    I then prepaid 200k of this back to the bank. That 200k is technically the banks money, they just let me take it back temporarily if I want.
    If I do take it back, my debt owing is back to 800k. If I then split it to 600k and 200k and ask the bank for 200k cash to pay for the new investment property, they will laugh in my face. They already paid that money to the previous owner of my house.

    Another way to think of it is I currently only have a loan of 600k and simply want to borrow 200k more.

    • 

      Mr BoMBAStiG on 30/06/2024 - 12:29

      Whoever downvoted, please correct my math!

      @bobbified literally invented 200k

      If you split the original $800K loan so that it's $600K for the PI loan and $200K for the interest-only loan

      This is impossible. There is still 800k owing on the house. I cannot just take another 200k for IO and use for an investment.

      you can still put the the $200K to offset the $600K loan so that you're paying interest on $400K (ie $600K minus $200K offset) plus the $200K investment loan.

      The only reason there is 600k owing on the PPOR house is because I already used up that 200k getting the debt to 600k. You need to ignore the fact that it is withdrawable if you are talking about 600k owing on the PPOR, it is gone.

      That is a total of $600K in net debt.

      The 200k investment loan would then increase my total debt back to 800k.

      There are two simpler ways to look at this.

      1. I have a loan for 800k and 200k cash. If I split the loan to 600k/200k I still need to use both loans against the PPOR as there is still 800k owing on the house. The bank will not let me just use their 200k for an investment property. I could then just use the 200k cash to put toward an investment. Bad move, no deductions.

      2. I technically have a loan for 600k and the possibility of increasing this loan to 800k. This is because I have been tested and approved for 800k of debt with them. The bank does this by either deleting the first and creating two loans, one for 600k and one for 200k. Or they could just create a new loan for 200k. I can then take that 200k to spend on an investment property.

      • 

        freefall101 on 30/06/2024 - 14:17

        +2

        Your math is right, you just need to lay off the spin you’re trying to use to make it sound like there’s no change to the loan. It heavily confuses things (particularly saying the bank “wins” on anything).

        What you’re missing is you’re changing the repayment structure and risk structure, thus paying more interest. Simple as that. Splitting a loan in two with an interest free portion is riskier than you pulling the $200k out.

      • 

        bobbified on 01/07/2024 - 13:30

        How did I invent $200K? You said you took out a loan of $800K and immediately put $200K in the offset!

        I immediately transferred $200k onto the loan so I am only paying interest on $600k.

        I was asking why you think the bank "wins twice"… (but it sounds like you're just referring to the difference in different interest rates for the loan types. As others have said, the rates are different based on different risks).

• 

  tooblue on 30/06/2024 - 00:48

  Very confusing post.

  It is a PI loan

  What is a PI loan? Is it typo of IP or P&I? I don't understand "The bank wins twice" either.

  If the first loan is owner occupied, there is no tax deduction. So there is no tax implication whether you redraw or deposit into the loan.
  If the first loan is investment, there will be tax implication when withdraw from the loan. However, you can still claim full deduction on the amount as long as all the money withdrawn is used to generate income. You will need to provide trace of the fund to ATO though.

  • 

    Mr BoMBAStiG on 30/06/2024 - 05:04

    PI is meant to be Principal and Interest.

    There is no immediate tax implication if I withdraw from the PPOR redraw facility but if I use that withdrawal to invest and generate income, then it becomes a tax deductible debt.

    Back wins twice:
    Right now they are earning interest on 600k and I am continuing to quickly pay down this debt by reducing the principal.
    I am offering to go back to paying interest on 800k, win.
    I am also offering to stop paying down part of that debt by only paying interest and extending the time I pay them interest, win.

    • 

      tooblue on 30/06/2024 - 11:18

      There is no immediate tax implication if I withdraw from the PPOR redraw facility but if I use that withdrawal to invest and generate income, then it becomes a tax deductible debt.

      That's the confusion. There is no tax implication for the OO loan, whether you withdraw the $200k for oversea trip, for a wedding or to pay off debt; When contributing the $200k to the investment loan, there is no taxation difference whether the fund is from salary, lottery or capital gain unless it is from another tax-deductible debt, which does not apply to your case. Please correct me if I am wrong.

      Does it make any difference in these two scenarios?

      • You withdraw $200k cash from the OO loan in bank A and deposit it into the investment loan in bank B across the street.

      • You do a bank transfer of $200k between bank A and bank B.

      Converting/Splitting owner occupied loan to investment loan have complete different criteria and processes from bank's perspective. This is how financial institutions process loan applications.

      Am I crazy to think this is crazy? The total debt is the same.

      Two people try to borrow $200k from you. A is putting it in a term deposit backed by FCS; B is putting it in Casino. Would you offer them the same rates and terms? The total debt is the same.

      • 

        Mr BoMBAStiG on 30/06/2024 - 12:56

        Please correct me if I am wrong.

        I am pretty sure we said the same thing!

        I could take out the 200k from my redraw right now and spend it on a holiday. ATO would not care. I would just have 800k to pay back on my house. All of this debt remains non-deductible debt.
        When I use 200k for an income generating investment (property or shares) and I can prove to the ATO that I am incurring interest against that investment, that interest is tax deductible.
        It's all about proving to the ATO that the interest I am being charged on the funds I used to obtain the investment was specifically for that investment. I.e. don't take money from a loan, put it into a bank account and then buy a property. You need a good evidence trail.

        Two people try to borrow $200k from you. A is putting it in a term deposit backed by FCS; B is putting it in Casino. Would you offer them the same rates and terms? The total debt is the same.

        You are missing the point about the collateral. If person A and B both said that I could have their house if they defaulted on the debt then who cares what they spent it on?

        You get a $1m mortgage for your PPOR. You then put $1m into the redraw/offset so you are paying no interest. Bank is kind of happy since their risk has gone to 0. You then withdraw $1m from the loan and spend it all at the casino. Does the bank care? No, they still have your house.

• 

  theHMASfriendship on 30/06/2024 - 00:51

  +3

  I'm sorry to hear you are having trouble financing an investment property and can not contribute to the ongoing unaffordability for first home buyers.

  • 

    MITM on 30/06/2024 - 08:58

    -5

    OP is trying to provide you with a rental - saving the govt having to (inefficiently) provide and therefore increase taxes to pay, hampering first homebuyers from saving(sacrificing)

    • 

      filmer on 30/06/2024 - 09:57

      +3

      if OP is buying an established house they are providing nothing.

• 

  SmiTTy on 30/06/2024 - 01:36

  I believe the banks right. If the loan is already established, you can't go and change that by splitting it up. You could ask to take out another loan against the property and use it towards the IP. Eg. On top of your 800k, take out another 200k as a separate account with offset.

  • 

    Mr BoMBAStiG on 30/06/2024 - 05:07

    Yes I realise this is available to me.

    The point of my post was that I don't want to. I just want 800k debt with this bank which is held against the collateral of my home. This already exists, I just want to repurpose the funds.

    • 

      SmiTTy on 30/06/2024 - 08:40

      Then I believe you're out of luck unless you refinance the whole thing as the bank has mentioned

      • 

        MITM on 30/06/2024 - 08:59

        Not necessarily.

• 

  joka on 30/06/2024 - 07:23

  Investment loans attract a higher interest rate too

  • 

    Mr BoMBAStiG on 30/06/2024 - 13:03

    I like what you are saying but I have read multiple sources that this is not ok. ATO believes that 25% of repayments are coming off the IO investment expense, even if you have a spreadsheet to say otherwise.
    It gets very complicated when the monthly interest charge comes onto my loan. How much of that interest is deductable? I know you will say 25% but I am not willing to get years into it and then sell something and get pinged for incorrect book-keeping.
    Surely as I reduce the principal the 75/25 split starts to change.
    My tax accountant confirmed this but maybe I need a different accountant?
    This is why I want a split loan, all of these issues disappear.

    Ignore the negs, I think there are people in this thread that are struggling with maths.

    • 

      MITM on 30/06/2024 - 16:06

      Actually, you are just redrawing your own money. It’s not loaned (the banks) money. You have temporarily parked your money which the bank allows you to offset interest for interest. The bonus is not having to pay tax on what would be interest earned, unlike pensioners who safely park their money in exchange for a low return, but are penalised for being below the deeming rate-but that’s another story for another day.

      • 

        Mr BoMBAStiG on 30/06/2024 - 17:16

        You are thinking of an offset account.
        With redraw, when you take money back out it is considered a new loan with the bank.

        • 

          MITM on 30/06/2024 - 18:45

          @Mr BoMBAStiG: Ah yes, I’ve only ever had Offset.

• 

  JIMB0 on 30/06/2024 - 09:24

  +1

  Why not just get a new loan for the investment property? Unless of course the property is only $200k.

  • 

    Mr BoMBAStiG on 30/06/2024 - 09:32

    Yes, I will need a 3rd loan for the rest of the IP which I can get from any lender. I am just trying to use the $200k the best way possible.

    • 

      Jake D on 01/07/2024 - 12:35

      You're going to be applying for the new loan at some point. If it's with the same bank, just apply for a split at that point, with one split secured against your original property, and one split secured against the new.

• 

  JimmyF on 30/06/2024 - 09:44

  +1

  Am I crazy to think this is crazy? The total debt is the same.

  Different type of loans, different type of interest rates

  • 

    Mr BoMBAStiG on 30/06/2024 - 13:04

    Same collateral, same loan payers.

    I know that different loans have different rates because of different risk. At the end of the day, the debt is still attached to my PPOR and the redraw is available to me to do whatever I want. The bank's risk is the same.

• 

  MITM on 30/06/2024 - 16:09

  You may be able to obtain a $200k loan secured with your $200k redraw account.

• 

  miwahni on 30/06/2024 - 21:15

  +1

  Ignoring for now the purpose of doing this, and any tax implications - the reason that the bank wants to reassess is because your existing $800k was assessed as PI over a particular term. For arguments' sake let's say it was 25 years. Your serviceability was therefore calculated over those 25 years, at the current PI rate plus buffer.
  Now you want to split some off and change it to IO. Now you have $600k at PI over 25 years, and $200k at higher rate over shorter term ie the 25yrs of original MINUS the selected IO term, bearing in mind that your loan balance won't be reducing while the loan is IO and when it reverts to PI at the end of the IO term, you'll have a shorter term remaining to pay it off. Say you choose a five year IO term, at the end of that term you'll still owe $200 but only have 20 years left of your loan term.

  So the bank needs to assess on that basis - $600k PI 25yrs, $200k higher rate 20yrs. It's not just a bit of typing on a computer, it's assessing your ability to afford this new proposal.
  And if they know you're buying another investment property they may well throw that into the mix as well - can he/she afford investment loan on top of this current lending? Although they should take anticipated rent and negative gearing into account as well, in that case.

  • 

    Mr BoMBAStiG on 30/06/2024 - 21:19

    Fair points, thanks for the insight.

    Given I will likely only hold the IP for <5yrs and after stamp duty, the left over from the $200k will be a small portion of the IP, I was thinking of just proposing they create another identical loan which would be the same term, same rate, same PI conditions and I just pay the PI of the new $200k loan. It would still be split, for admin purposes, but essentially a duplicate of the original loan.

    Is it worth trying for this in your opinion or am I just out of luck and just need to refinance again?

    • 

      miwahni on 30/06/2024 - 21:56

      I'm not familiar with the Greater's lending policies so can't say for sure, but if what you're proposing is a PI split of $200k off your current $800k, still at OO rates, then they shouldn't need to reassess - that literally should be "just a bit of typing on the computer" as there's no change to the total exposure, rate, term etc of the loan.

      • 

        Mr BoMBAStiG on 01/07/2024 - 11:07

        Will take this strategy to them, cheers.

    • 

      dtc on 30/06/2024 - 23:17

      you are arguing over a 0.7% interest rate difference, which could be reduced to 0.4% or less after tax deductions. So around $800 pa cost if you go IO vs PI for your $200k loan

      However if you go PI on your investment loan, you will need to put more money into the investment loan (to pay the principal as well as the interest). Meanwhile you cant put that money into your non deductible PPOR loan, so your PPOR loan is now costing you more (more interest as the principal is reducing by less). Do the figures to see whether a PI loan on the investment actually saves you money - yes its lower interest rate (just) but there is a cost. Dont just look at this year's interest - your additional payments on your PPOR loan mean you reduce the principal and hence the interest over the entire life of the loan

      eg: https://www.macquarie.com.au/home-loans/home-loan-calculator…

      • 

        Mr BoMBAStiG on 01/07/2024 - 11:06

        Another good point. The other goal I have is not having to do another assessment as it is a pain to gather all the docs again!

        I agree with you and whilst my goal here is increasing tax deductible debt, it's not the worse thing in the world to also pay less interest in any scenario. So even if I am putting more money onto the 200k split which could be going onto the 550k PPOR loan, I am still reducing the interest I am paying overall by just paying off any debt I owe.

        At the end of the day, we are not talking huge sums of savings so I shouldn't be stressing too much about this.