In today’s article I would like to blow the lid on an under-utilised loan available to investors who also have an owner occupied (or principle place of residence – PPor) home loan. It’s not for everyone, but it does have the seal of approval from the Australian Tax Office (ATO). In a nutshell you can get your PPor home loan interest rate down to as low as 1.9% (and possibly lower) and claim a higher tax deduction for the interest owing on your investment property loan.
The ATO approved scheme originally started in 2015 for a 2-year period and rolled over into another term, see tax ruling TR2017/13. Why you ask? Well simply put the Government wants you to realise the dream of owning your own home earlier, but without being a tax cheat. You may remember the loan capitalising scheme of the 1990’s where the banks allowed all in one loans and interest on investment loans to capitalise whilst the PPor owner occupied home loan was paid out first. A topic of discussion for another time!!
So, what is this set up called – it’s a PIVOT LOAN. Sound too good to be true? Well it might be. Not everyone qualifies for it.
So what exactly is a Pivot Loan?
I won’t give you the technical definition from the tax ruling, but in its simplistic form it’s a loyalty bonus or a customer loyalty rebate that allows some of the PPor (owner occupied) home loan interest rate to shift to the investment loan rate.
Therefore, a PPor home loan rate circa approximately 3.40% may reduce to 1.90%, with the balance rate (i.e. 1.50%) shifted onto the investment loan rate, from circa approximately 4.00% to 5.50%. Essentially since interest on a home loan is non-deductible (high cost of ownership), and interest on an investment loan is tax deductible (an income producing asset that in theory builds your wealth), the ATO is simply offering you a legitimate tax dodge. Provided you stay within the rules.
The technical term is a Pivot Portfolio Loan Facility OR Synergy Pivot Portfolio Loan. Switzer Home Loans, Synergy Home Loans Australia Pty Ltd, some lenders and very few brokers can offer these loans.
Here are the rules according to Tax Ruling TR 2017/13
There must be a PPor home loan and investment loan with the same lender
The loans are usually secured by both securities (owner occupied home and investment property)
The total loan exposure if the investment property is also a residential property is 80% of the total value of all securities (e.g. if the value of both properties combined is, say $1.2 mill, then the total loans cannot exceed 80% or $960,000).
Each discounted rate period is locked in for 12 months and it may be reviewed annually.
The owner occupied home discounted rate is subject to a floor rate of 0.40% above the RBA cash rate. If the rate drops lower than this any further discount will be applied to lower the investment loan rate
The investment loan will be based on the stand rate subject to a maximum ceiling rate not exceeding the highest interest only investment loan rate offering by any of the four major Australian Banks.
The Pivot Loan cannot be part of a linked or loan split facility as per ATO Ruling TR98/22. This ruling sets out the rules to prevent owner occupied loans and investment loans set up in a way that allows borrowers to obtain unfavourable tax advantages e.g. those 1990’s loans mentioned above;
The Pivot loan term commenced on the 27th September 2017 and will expire on 30th June 2020. It may roll over again to another 3-year term but this will be at the discretion of the ATO;
Once the transaction structure has been entered into to it cannot be changed; and
Only Australian residents for tax purposes can utilise this arrangement.
So if the ATO says its legit should we all just jump right in. Well that depends on what type of investor you are, your financial profile and what is your ultimate purpose for investing. You may be thinking that a low PPOR home loan of 1.90% sounds great but a 5.50% investment loan sounds too high given the current low interest rate environment. However, the rate averages out to approximately 3.7%. Which is quite competitive in the scheme of things. The benefit really is that you may be leveraging the interest payable on the loans in a tax effective way. I would also like to add that sophisticated investors do not focus on the rates for investment property loans. They focus on their overall wealth strategies.
There are two types of investors: single property investors or the sophisticated (multi property) investors. Which one are you? Neither is right or wrong. It’s your personal journey that matters. Not all investors are comfortable with being highly geared or managing complex strategies.
The Single Property Investor
Typically your mum and dad investors who start with their principle place of residence (under finance usually), build equity in this home, some years down the track they leverage this equity to buy their first investment property, see their bank or broker, get another loan and off they go!!
Too often these investors don’t consider obtaining any advice before investing. They go it alone and without a clear purpose in mind. Is this you? Have you ever asked yourself what your “Why” is? Is it to fund the quintessential Australian dream – to own your own home or to leverage to grow an investment property portfolio or both? Why do you want to own your own home or build an investment portfolio - Is it for financial freedom – what does that look like for you? Is it so you can live your life on your own terms and do what you want whenever you want, like travel, eat out more often, help your kids etc?
Two things can happen with this strategy:
One – the loan structure is usually incorrect and doesn’t consider the ultimate Why (or the investment goal) – this is fundamentally important especially if you are using the equity in your owner-occupied home to fund entry into your investment property. Either the loan is structured as an all in loan (where the two properties are cross securitised) or equity is drawn against the owner occupied home (so the home loan is increased, by say 20% deposit plus costs and used to buy the investment property) and another new loan is set up for the investment property on a stand-alone basis. The transaction is only considered for that moment in time without the flexibility to consider changes in borrower circumstances or other investing opportunity. In other words, this is not a strategy but a transaction.
Two – the ownership structure is equally not considered for tax effectiveness or asset protection. For example, let’s assume mum and dad are buying an investment property. Let’s also assume mum has a stay at home status and dad is out working. Finally, the property investment is negatively geared. Dad being the higher income earner should consider owning the property to reduce his tax bill. Conversely if the property is positively geared and mum is not working – then she should consider owning the property as she may pay little or no tax on any profits. (This is a simplistic example and there are may factors that affect the ultimate ownership strategy). Similarly putting the property in both mum and dads name is typical of single property investors and is not a strategy.
The Sophisticated (multi property) Investor
Whilst all investors start somewhere and usually their transactions may begin much like a typical investor, there is one distinguishing characteristic. The sophisticated investor seeks advise from many professionals and investigates all options before making their move. Their aim is to build a property portfolio that will provide a passive income stream and asset wealth at retirement.
So who might make up their team of specialists:
Accountants and/or Financial Planners - to understand the figures, tax implications (and/or ownership structure), risk insurance;
Solicitors – to understand contract implications, asset protection issues (and/or ownership structure), implications to their Wills and businesses if they have them;
Real estate agents or property investment agents – to get the best advice on locations and property trends; and
Experience bankers or brokers – to obtain the best possible lending options to suit their ultimate strategy and goals – usually brokers who are specialists with investors.
So why all this fuss. Well sophisticated investors know their true “why” and the purpose of investing. They focus on a carefully engineered strategy.
Now I am not advocating for anyone professional here at all, but I simply wish to reiterate that you should consider investing time into establishing what your ultimate goal is before investing. Spend a little now to save you from being burnt down the track. Not every property purchase will deliver the ultimate return. You only need to look at the impacts of the GFC and our current economic market conditions to know that certain locations have plummeting house prices whilst others are on the up and up. Equally not being aware of your financial position and how that impacts your lifestyle, where you want to be in the financial freedom spectrum and anchoring this to your investment strategy are all important considerations.
Sophisticated investors have leveraged Pivot Loans as a strategy to own their homes earlier and build their wealth through investment. According to an article written by news.com.au on the 23rd May 2018 one borrower shaved 15 years off his home loan by using a Pivot Loan strategy. Of course, individual results may differ, and everyone’s financial profile is not the same.
The results and impact of a Pivot Loan are variable and for that reason no financial examples are provided. Complex financial modelling is required to assess individual circumstances to establish if this is the right loan structure to support your investment strategies.
I encourage you to hop onto www.switzerhomeloans.com.au and have a play with the pivot home loan calculator, speak to the right professionals to investigate all your options and most importantly decide on what your “why” is to ensure you reach your ultimate financial goals now and in the future.