Capitalizing Interest (when required??)



From: Anonymous

Can you Capitalize interest amongst investment properties only, when you have available credit?

This would open more opportunities to purchase more and even service a loan through uncertain times and times of less income generation?

Is splitting the load fixed/ variable fixed a better option for this to occur??
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Reply: 1
From: Rolf Latham

Hi Anon

You can do what you like subject to the product rules of your loans.

Is the interest on the capitalised interest deductible - specifically ruled about three years ago by the ATO as no.


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Reply: 2
From: Splinter Wood

Hi Anon,

If I understand your Q correctly, and assuming you have a LOC (Line of Credit) as part of your loan package, yes of course you can capitalize interest from various properties, spend it on a holiday, new car or whatever else your heart desires.

You can combine all and any after the bank or lender agrees and you have your loan(s) set up. For example you can have 3 IPs and 2 loans - where 1 maybe P&I for 50% of the total borrowings with fixed interest for 5 years and the rest as a LOC with variable interest.

Just remember when you capitalizing interest (or buy more IP's or cars !!) when you Max out on the LOC - you still have to pay the Interest on the outstanding amount AND on any fixed loan.

It sounds like you want a bit of a buffer in your loan but on the one hand you say you may want to use it to purchase another property and on the other to protect you in times of low income ??

To purchase another property would then mean you need more finance right ? If so you can extend the LOC to incorporate the new IP BUT the bank will reassess you for repayment capability.

Just keep in mind that most LOCs are variable interest so if you go too close to the wire and then % rates move, prices fall etc..bad scenario.

I have found the banks generally useless in giving advice on how to structure your loans for a such a split. Much depends on your anticipated activity and market conditions. I always 'knock the wheels of the cart' ie do a worst case scenario, and then work back to a reasonable level of risk.

Hope this is of some use
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