Case Study – Strategy on accessing equity and debt recycling.
Strategic Points Discussed:
- Cross Securitisation – accessing equity.
- Debt recycling
Overview
John and Jane have an owner-occupied property valued at $1,500,000 and they have an existing loan of $700,000 against this property. There is a further $100,000 in their offset account.
They want to purchase an investment property for approximately $1,400,000 and purchase Shares for approximately $50,000. Their Accountant has recommended that they use the profits and dividends from the Shares to pay down their non-deductible debt and reborrow the funds for further Share purchases (debt recycling). This means they can increase the amount of debt they can claim.
Their existing Bank manager has suggested that they purchase the investment property by accessing the equity from their existing property and cross securitising the properties.
Problem
By cross securitising the properties the Bank has more control over both properties. If they want to refinance or sell one property, then the bank will value the other property and depending on the valuation on that property they will control the payout of funds. There are no advantages in this set up.
Solution
John and Jane should do an equity release of $500,000 against their existing property – this should be a separate loan split so that the deductibility of the loan is not contaminated and easy to track for negative gearing purposes. This loan will be used as a deposit for the purchase.
A second loan will be borrowed and secured against the purchase property – this way each property is standalone and not linked.
Their current bank also doesn’t allow for the ability to debt recycle. John and Jane make a $200,000 profit and want to reduce their owner-occupied loan from $600,000 to $400,000 and then create a separate split of $200,000 to reinvest the funds – they will require a lender that allows for rebalancing of limits or a lender with a Master limit product.
Results
John and Jane have structured their properties as standalone facilities and the properties are not linked; this allows them to refinance or sell either property without the lender having to value the other property.
Their lender allows John and Jane the ability to rebalance their limits anytime and eventually reduce their owner-occupied debt to $0 whilst maintaining the overall limit for investing.
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