LMI allocation

[s0805]

question for brokers....

Refinancing existing loan from 70% to more than 80% and using that money to fund the 20% costs for new Investment property. Plan is to set up the additional account for this equity release. As I am going more than 80% LVR would be payable. initial loan did not had LMI.....

Trying to understand how will this LVR be added to the existing and new split. E.g. If 200K existing loan and releasing additional 50K equity will the LMI be approtionate on the both splits 200K LMI $$ & 50K LMI $$. Or can you ask lender to top up entire LMI on one split only....

what could be tax remification if this 200K is PPOR loan/IP loan....may be not much if it is IP loan???

thoughts....

 

[Jamie M]

Hiya

It's usually apportioned to both splits.

Given the purpose I'd assume it would all be deductible despite which loan splits it's against - but one of the accountants will clarify.

Is LMI going to be cheaper against the current property or the IP? Have you had the numbers crunched on both scenerios?

Cheers

Jamie

 

[Terry_w]

LMI would apply to the total loan amount not just the new split. So one argument is that only part of it would be deductible.

Another argument is that it would all be deductible because the purpose of the loan increase is investment.

 

[s0805]

thanks Jamie & Terry.

Jamie, have reviewed the numbers few times and appears that won't be able to go higher LMI with new IP alone...

I understand that purpose of the Loan increase (i.e LMI Payable) is for investment so LMI is deductible. But lender is
also adding LMI to the final loan amount. Just thinking if this could've been PPOR then one wouldn't be able to claim
interest on the LMI portion of the loan as it will mixed...However if its IP then should be ok....as money is
mixed but purpose is the same for investment purposes....am i right?

 

[Marty McDonald]

Usually they apportion it across both loans. I have on occasion in the past completed a rewrite of the existing loan at a slightly lower amount so that with LMI apportioned and added it ends up at the same rough amount as it was previously. That way in my mind at least the LMI has been applied to the new loan split.

 

[s0805]

Thanks Marty. it seems usually apportion happens across both splits....but assume if this is PPOR and you are creating new split by causing LMI then interest on LMI apportioned amount sitting on original PPOR split can't be deductible....but total LMI cost can be.....tricky...

I have on occasion in the past completed a rewrite of the existing loan at a slightly lower amount so that with LMI apportioned and added it ends up at the same rough amount as it was previously. That way in my mind at least the LMI has been applied to the new loan split.

i am lost on this....can u explain with numbers on this example...

 

[Marty McDonald]

Reading this again I think you will be fine because as you have the existing loan already in place which you wont be touching they will add the LMI to the new split. That should make it a pretty clean paper trail.

I was referring to a case where you would be redoing the existing loan at the same time as doing a new loan. Either by refinancing to a new lender or doing an internal refinance so to speak. This would trigger 2 new loan offers and thus they would be wanting to apportion LMI across both loans.....If this was your case you could anticipate how much LMI would be apportioned to each loan and then reduce the existing loan amount accordingly in the new application ie to say $195K with the cash out loan $55K (instead of $200K and $50K). That way making sure the LMI amount was added to the new loan. Whether this is correct from a tax point of view not 100% sure but at least you are not increasing the non deductible debt unnecessarily.

 

[s0805]

Reading this again I think you will be fine because as you have the existing loan already in place which you wont be touching they will add the LMI to the new split. That should make it a pretty clean paper trail.

I was referring to a case where you would be redoing the existing loan at the same time as doing a new loan. Either by refinancing to a new lender or doing an internal refinance so to speak. This would trigger 2 new loan offers and thus they would be wanting to apportion LMI across both loans.....If this was your case you could anticipate how much LMI would be apportioned to each loan and then reduce the existing loan amount accordingly in the new application ie to say $195K with the cash out loan $55K (instead of $200K and $50K). That way making sure the LMI amount was added to the new loan. Whether this is correct from a tax point of view not 100% sure but at least you are not increasing the non deductible debt unnecessarily.

Hmmmmmm.....I am doing the second part not first. As lender seems to add LMI apportion to both splits generally....i.e. LMI on existing loan and LMI on new split.....

good to know as i can see this becomes tricky from tax perspective especially when your existing loan is PPOR so you've PPOR loan (non deductible) + LMI (which used for investment)....