Loan Structuring and Getting a Forecast that works Without Hassle

Craig Seddon:

Hi, everyone. It’s Craig here from Westcourt. Well I’m here with Jenny as well.

Jenny Dutosme:

Hi.

Craig Seddon:

Today we’re talking to you about loan structuring and how to get it right. And not create any unnecessary work yourself or your beloved tax agent.

Jenny Dutosme:

Cool. So one of the main things, I guess, to think about when you are getting in loan is the purpose of the loan. So for instance, if you’re getting the loan because you want to buy a rental property or are you getting it because you want to get your home loan. Basically, that will lead into the deductibility of the interest on that loan. And obviously there’s tax implications that comes with that. So for instance, if you are getting a loan to get a rental property, the interest on that loan is deductible, so that’s a really good thing. That’s what we want. However, if you are getting a loan for personal reasons, then that’s not deductible.

 

Also, if you do get a loan and for some reason you draw down on that loan and it becomes a mixed-purpose loan, and that’s another layer to consider. Because then you’ll have to do allocations on the interest because you can’t pick and choose what portion of that loan is to do with business or to do with private. You just pay the loan as it is then we got to work out what portion is what. So that’ll affect how much interest you can then deduct.

Craig Seddon:

That’s right. And the importance of that comes down to what was the money actually used for. As Jenny was saying, that’s what the purpose is. So if you have a mixed loan, which some people would like to think they’ve had a house they’ve lived in, they’ve paid down the mortgage. They want to buy another place to live in, but keeping in original as an investment property that is going to redraw off that original loan.

The increase in loan isn’t deductible, because it comes down, what is that money being used for? That money is being used to buy a new family home or main residence. So the interest on that isn’t deductible, even though the actual loan itself has increased, it comes down what is the purpose of the funds? And that’s where the deductibility comes through on that situation. One thing to circumvent that situation is creating an offset account.

So you might have your property purchase, which is where the common scenario is. You’ll have a loan. You’ll actually have a… Running parallel to that will be an offset account. So surplus cash can go into the offset account. That’ll allow for a reduction in the interest calculated on the original loan. So then if the purpose of that property changes, say you decided it’s gone from your main home into an investment property, you can then withdraw funds out of the offset account and then the interest on that loan retains its integrity, so the interests can then be deductible if that property is now being rented out. But if you did a redraw, that integrity of the funds is different. So that’s where an offset account could be really valuable having a long-term plan for a property by having multiple uses for it.

Jenny Dutosme:

Cool. Also, something to think about is not cross-collateralizing your loan. So for instance, if you have several assets, business, real estate, and you want to get a loan, it’s better to, I guess, branch out and have multiple loans if that suits. Just because if you do cross-collateralize, so what I mean by cross collateralize is if you have those multiple properties and you get a loan from the same bank, so you’re using all your assets for one loan.

Craig Seddon:

It creates like a spider web.

Jenny Dutosme:

Yeah.

Craig Seddon:

So you might have your house, investment property, business, or multiple investment properties, each loan relates to each asset. But the securities or cross-webs… and retailer’s say banks love to do it because it just means it’s an all-in approach. The downside is if you want to sell an asset to then free up cash, it can be really difficult because the bank will then say, “Well, that asset was secured against all these other ones.” And they can just basically gobble up all the cash. So your plan to then free up cash has now been eliminated because the banks have taken all the money for their purposes because the securities across everything like a spider’s web. So in a ideal situation, you have the line of security in a silo basis per asset. So that way if you need to offload, it can be done in a much cleaner manner and keep life simple at the end of the day as well.

Jenny Dutosme:

Yeah. And also, if you’re struggling with cash flow, some banks do have a limit on that debt that you can get. And if you do get it from one bank, then you’re maximizing that and you’re limiting yourself from getting more access to funds, I guess. So if you branch out then that limit, I guess gets bigger.

Craig Seddon:

Yeah, because different banks have different policies depending on whether it’s a big four or a second tier. And being able to be spread across multiple lenders means you can also play them against each other to get outcomes that suit your situation. So we don’t want people to be just borrowing money for the sake of it. But if you need to flex a bit of muscle against the bank, for lack of a better word, it’s easy to do it when you’re scattered across the local lenders as opposed to one, because then if you had one bank on you, essentially.

Jenny Dutosme:

Yeah. So, if you do have I guess, plans to get loans we’re here to help. We do a bit of work around loan structuring and checking loan agreements and all that with clients. So we have tax agents here that can help you out. Yeah, reach out whenever it comes, I guess.

Craig Seddon:

Thanks everyone.

Jenny Dutosme:

Thank you.