WHAT CLIENTS ASK THE MOST

We always make sure our clients are satisfied and totally onboard with everything we do. If something isn’t clear after going through our site, take a look at these commonly asked questions regarding mortgages, refinancing, and other related subjects. Still can’t find what you need? Feel free to contact us for more assistance and information.

Over the years of mortgage lending, we have came across many different types of borrowers and scenarios that we would like to share with everyone.

What you will find in the below topics are scenarios that cover the niche and quirky sides in mortgage lending that you may or may not heard of or even thought possible.

To avoid any potential conflict, we will be using a fictional person named Anna as the main character.

What is Debt Recycling?

Debt Recycling

In simple terms, debt recycling is a strategy that helps you turn your current none tax deductible debt into tax effective deductible debts. Or some would call it turning a supposed “Bad Debt” into “Good Debt”.

Anna earns approx. $180,000 a year, 3 years ago she bought her first Owner Occupied property with a Home Loan of $500,000 with principle and interest repayment. Over the 3 years she had paid off approx. $50,000 worth of principle. Now assume the property value remain the same, that’s effectively she has $50,000 in equity.

With the advice from her Financial Adviser, Anna then apply for a separate Line of Credit facility utilizing the equity that she accumulated from her Owner Occupied property and use the funds to invest in assets that gives her a regular cash flow. This additional source of income then enables Anna to again put extra payment into her home loan.

By repeating the above steps and slowly transferring the $500,000 Owner Occupied Loan into a Line Of Credit, Anna has effectively accelerated in paying off her Home while creating a potentially $500,000 worth of shares portfolio using the Line of Credit. And don’t forget the income tax savings she get from the interest charge given Anna’s income tax bracket.

This in a nutshell, is called Debt Recycling. You are basically “recycling” your none tax deductible debt into tax deductible debt.

How to Un-Cross a Cross-Collateralized Property Portfolio

Un-Cross a Cross-Collateralized property portfolio

In simple terms, Cross-Collateralization refers to lenders using two collaterals or more to secure a loan to maintain an acceptable Loan to Value Ratio (LVR) that suits the lender’s risk appetite.

Anna has successfully paid off her Owner Occupied property early using the strategy of Debt Recycling(Refer to my previous topic 1), and since she had a taste of the debt recycling success, she applied this strategy and bought two more investment properties by cross collateralizing with her owner occupied property. But now she found herself in a situation where her Owner Occupied Property is tide to her Investment loans. Anna would like to separate her Owner Occupied Property from the rest of the loans as she is thinking of selling in the future and worried that if the market dropped she could run into a negative equity situation and get stuck. Now here are the number of options Anna may consider:

- Anna should contact her lender to request for a security variation or simply tell the lender she would like the two investment properties to stand on its own, while she sort out the Line of Credit loan, Anna has the option to simply liquidate the shares to pay off the LOC.

But wait, what happens if 1 of the investment property (Property A) hasn’t gone up as much as she expected and are not able to stand on it’s own at 80% LVR, here are two options Anna should consider:

1 - Luckily, Investment property B has gone up in value, Anna could do 3 split loans as per below:

- Loan A Secured by Property A at 80% LVR

- Loan B Secured by Property B at 70% LVR

- Loan C Secured by Property B at 10% LVR (This way Property B was able to use its equity to absorb the LVR shortfall from Property A while still remain a clear loan structure for tax purposes without crossing the securities)

2 - Both investment properties did not performed as well as Anna expected, in this scenario, Anna maybe up for Lenders Mortgage Insurance (LMI) cost since those two Investment properties were originally crossed with her owner occupied property with the idea of avoiding LMI at the first place.

An additional option for Anna, depends on her profession, some lenders offer professional packages where the applicant can borrow up to 90% LVR without LMI (T&Cs apply).

How to fix a mixed purpose loan

A mixed purpose loan happens when a borrower mixed up the available redraw from a supposed tax deductible loan for purchases that are none tax deductible, or the other way around that have caused a nightmare for the accountant and potential tax issues.

Anna have two loans, 1 Owner Occupied Loan and 1 Investment Loan. Unfortunately, Anna wasn’t aware of the tax implications around mixed use loans, and she has withdrawn available redraws from her owner occupied loan to pay for some repairs on the investment property, while she use her available redraws from the investment loan to purchase a car.

Now, the fix is rather simple, first and foremost, Anna needs to work out the correct proportions for both Owner Occupied/ None Tax deductible, and Investment purposes/ Tax deductible, and do the followings:

- Anna will need to engage a lender, and simply refinance (either internal or external) with the correct loan types and loan amount.

- Anna need to read up Taxation Ruling TR 2000/2 if any of the rulings are applicable to her situation and if she should apply for any of the rulings. https://www.ato.gov.au/law/view/pdf/pbr/tr2000-002.pdf

Once Anna worked out the correct portions, she just need to restructure her loans and make sure she do not mix use the funds from each loan account. In this scenario an offset account would have been beneficial.

One extra tip I would like to share, I have came across many borrowers wanting to bump up their investment loan limit when refinancing thinking the extra borrowings are also tax deductible, this is technically not true from a tax perspective.

Yes you can take out additional borrowings for investment purposes, the correct set up should be creating a separate investment loan account with its own offset, park the additional funds in the offset account ready to be used toward a future investment related expenses. Or, another effective way to turn your none tax deductible loan into a tax deductible loan is by practicing debt recycling, which I have covered in Topic One.

For additional reading regarding investing and tax, please refer to moneysmart website.

Having a 5 to 10 year plan when taking out your mortgage is important so you can plan for the future, once your first step is right the following steps would be much easier.