pay down PPOR and reborrow

[primaus]

Apologies if it has been covered before...

If I pay off my PPOR then reborrow against it buy IPs or shares - does that mean all interest if 100% deductible?

Does this work with partial payment scenarios e.g. pay down 200k - then create new IP loan for $200k?

Currently - my interest bill on the PPOR is over 5k a month (which I cannot offset against my salary). I also have a IP which is nearly CF neutral. I also have a reasonable share portfolio which is mildy CF +ve.

 

[RealBus]

Yes 100% deductable, I would be considering reducing the current MTG which isn't.

 

[Peter_Tersteeg]

In a nutshell, YES!

If you pay down your non-deductable debt in full, then borrow the money back purely for investment purposes, the loan will be fully tax deductable because at this point it's solely used for investment.

If you pay down part of the loan then borrow against the equity for investment, these borrowings would also be tax deductable. You should borrow this money in a separate facility in this case, to ensure that you're not mixing tax deductable and non deductable debt.

 

[BV]

primaus

Will you be paying capital gains tax if you sell?

Do the sums with various scenarios and see what works best.
Selling isn't always a bad move, it depends on what you're trying to achieve.

If you decide to sell, consider that one day you might be moving again so ideally you should be putting the proceeds in an offset account and not paying down the mortgage.

Also think of the times we live in.
Personally I wouldn't invest in shares at this point in time and I wouldn't buy Melbourne property either.
Sometimes the best thing to do is to do nothing......

 

[THEGREAT888]

Hi PT Bear

May I ask what you mean by "You should borrow this money in a separate facility in this case"

Does it mean that you will need to use different mortgage security?

T

 

[EarlyRetirement]

Hi PT Bear

May I ask what you mean by "You should borrow this money in a separate facility in this case"

Does it mean that you will need to use different mortgage security?

T

I think PT_Bear means that, for example, if the property is worth 400k, the mortgage is 200k and you want to use 100k of the equity, that you do not simply refinance and get one loan of 300k as that will be a mix of deductable and non-deductable debt - you should keep the loans/facilities for the different types of debt separate so they are not contaminated.

 

[Peter_Tersteeg]

Hi PT Bear

May I ask what you mean by "You should borrow this money in a separate facility in this case"

Does it mean that you will need to use different mortgage security?

T

Two loans secured by the same property. One loan is for non-deductable purposes (the original one), the second is accessing your equity and will only be used for tax deductable purposes (purchasing the next property, shares, etc).

By having two different loan accounts, you keep the use of funds separate and won't have any issues determining what is deductable and non-deductable debt.

 

[Terryw]

Two loans secured by the same property. One loan is for non-deductable purposes (the original one), the second is accessing your equity and will only be used for tax deductable purposes (purchasing the next property, shares, etc).

By having two different loan accounts, you keep the use of funds separate and won't have any issues determining what is deductable and non-deductable debt.

And, having 2 separate loans means you will be able to paid down the non-deductible loan first.

If you had one big loan then every repayment will go to reducing the investment portion as well as the private portion. This results in more ta being payable

 

[primaus]

Thanks for the feedback. I suspected this was the case but it seems almost too good to be true.

Could be the great solution to minimise my taxable income!

So just to make it clear... let say bought house for $800K with 80 LVR


Lending amount: 640K
Monthly interest (@ 7%) = $3.73K ($44.7K p.a)

Sell shares (pay CGT) then pay down PPOR by $200K

Remaining loan: $440K

Then create new loan against the PPOR for $200K. This will be used to invest back into shares/IP etc

Therefore, $14K p.a interest on this loan is tax deductible?

 

[BV]

Then create new loan against the PPOR for $200K. This will be used to invest back into shares/IP etc

Therefore, $14K p.a interest on this loan is tax deductible?

Yes it is.................

 

[primaus]

I might add - most of the shares I hold are applicable for the 50% CGT discount
therefore not too much of a CGT liability

 

[BV]

I might add - most of the shares I hold are applicable for the 50% CGT discount
therefore not too much of a CGT liability

And don't worry you'll be able to buy them back later for less....