Apportioning Interest/Principal on mixed loan



From: David Frost

Hello PI's,

I hope this doesn't get too complex!

I have a loan on my own residence (~50K) and am paying back P&I. Since the house is worth, say, $200k I can redraw on this loan to get a deposit for an IP. Now, interest paid on my home part is not deductible and interest for the IP deposit is deductible.

But .. ..

I am also paying off some principal. Can I tell the ATO that all of my payments above the interest are going off my home? (In effect P&I for my home and IO for the IP) or do they apportion the principal part of the payments in some way (effectively two P&I loans which is not as good from a Taxation point of view).

Hope this makes sense.
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Reply: 1
From: Rolf Latham

Hi David

If theres enough fat, ask you lender to split the loan for you. Should not cost much to do this assuming you have such a facility available.

This solves ANY confusion about what is being used for what.

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Reply: 2
From: PT Bear

Hi David,

I've you've got a 50k mortgage on a 200k home, you've got 150k in equity. Rather than redrawing and increasing the amount to pay off on your home loan, you can borrow 100% of the IP cost, plus legals (about 106% IP cost in total), secured against the equity in your home.

The balance to pay off on your home does not change. The interest on the IP will be tax deductible, where if you used your redraw, you'd have to pay that money back as a standard home loan and the interest wouldn't be deductible.

This is a fairly basic principal of property investment. Read some investment books. Also the seminars held by the National Property Investors group explains this very well, although I don't recommend purchasing property through them.

All the best.

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Reply: 2.1
From: Felicity W.

Any reason why you don't recommend National Property Investors? I bought through them and have been very happy.
Keep smiling
Felicity :cool:
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Reply: 2.1.1
From: Rachel Freedman

Thanks ..(David pretending to be Rachel here!)

However PTBear -your suggestion is what we have actually done for last 2 props but we have problems with cross collateralization. We want to aviod this for 2 reasons:
1) We want to be able to shop around for the best loan not be tied to one bank.
2)Every time we purchase we have to get all houses revalued and get independent legal advice for my wife as she part-owns our home but does not own the IP's (for tax reasons). This means getting approval is time consuming and nearly cost us our last deal.

Rolf - I thought split loans were actually separate loans? Not sure that this gives us required flexibility.

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Reply: 2.2
From: Duncan M

>I've you've got a 50k mortgage
>on a 200k home, you've got
>150k in equity. Rather than
>redrawing and increasing the
>amount to pay off on your home
>loan, you can borrow 100% of
>the IP cost, plus legals
>(about 106% IP cost in total),
>secured against the equity in
>your home.

Dont forget that the institution who lends against your home will assume your LOC is fully drawn even if the balance is $50K when calculating DSR and LVR.. Refinance your home into a straight $50K mortgage (no LOC) either before your first purchase or as part of a refinance whilst you're purchasing your first IP..

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Reply: 2.1.2
From: PT Bear


Several reasons I don't feel comfortable with NPI:

1) Every property they've pushed at me is in Brisbane, which is a market place I know little about right now.

2) Some of the prices they're quoting seem awfully close to Melbourne prices and I do know that Brisbane prices aren't that high. It seems to me that they're adding some padding to the price. I don't know enough about the Brisbane market to determine the prices in the better areas and a weekend (that they fly you there for - where does that money come from?) isn't enough to gauge this.

3) Their strategy of unlimited wealth through seven properties is flawed. I don't believe their gearing strategy can sustain 7 properties, nor will a bank constantly loan money on that strategy. They don't explain how your loan will be serviced after you draw all your equity into cash.

4) I've been to several of their meetings and I've never met anyone there with more than 4 IPs. There's plenty of people in this forum who have a lot more than that and I doubt any of the would go through NPI.

5) I'd rather learn investment strategies myself than have my hand held by a marketing group. I the long run, I'll do better making my own decisions rather than having someone else make them for me.

Please don't miss-understand me. For some people these sort of groups is a good thing. It's better than doing nothing at all. I just feel that through my own education, I'll do better over the long term.

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From: Rolf Latham

Hi Rachel

Yes they usually are classed as two loans, on the one security, usually two loan (or more) contracts

I have yet to find a situation where the split is not best. WHat could be more flexible than having your Ip and personal debt separate, and having an offset account against your personal debt to park your positive cashflow to reduce interest on your personal debt?

Set up properly split loans are impossible to beat for ease of use, legitimacy of tax deductions and minimising interest costs

Splits do not have to be LOCS, can be whatever you like depending on the lender. In your case P&I for personal debt and I/O for IP debt. This also avoids my pet hate of cross collateralisation.

Truly, my best suggestion is to seek out the service of a good independent mortgage broker. He/She will clarify all the pros and con - pictures are much better than words :eek:)

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Reply: 2.2.1
From: Paul Zagoridis

Or you request your LOC limit be reduced to $50K save the refinancing expenses (stamp duty etc).

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From: Scott Marshall

GET A NEW LINE OF CREDIT on your home... that way your IP is also separate to your home, use the LOC as deposit and expenses..and deduct able
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Reply: 3
From: Terry Avery

Hi David,

You must apportion the principal and interest to each loan. Any principal
you pay is not deductible. Only the interest for the IP is deductible so you
must be able to separate the interest on the IP from your own home. If your
bank cannot do this you or your accountant must. You cannot tell the ATO
that all principal is going off your own home as this is capitalising the
interest on your own home. This arrangement was squashed by the ATO a few
years ago hence my initial comments on apportioning principal payments.

It is much tidier to take out a separate IO loan on the IP or a line of
credit against your home so the interest is documented clearly in a separate
loan. You can then focus on paying of the LOC quickly and then drawing on it
again for your next IP.


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