Refinance Investment Property

[DealSeeker]

Hi,
I have an IP bought a year ago.
Price Paid 725K + 40K cost of purchasing. Current Property value is now around 860K +-
Investment Loan is 500K which means I put in 265K of my own money.

I think I made a blunder by putting too much of my own money.

From TAX perspective, is it possible now to refinance it to 765K. ie. Get another 265K loan. ( From Bank Side no issue )
Can I still claim deduction on the interest for the 765K loan. Since 765K is my orig. cost of the IP.
I understand I definitely can't refinance to a greater amount than 765K and expect the interest to be tax deductible.

I plan to use the 265K for personal use. eg. as additional fund for me to rebuild my PPOR etc.

Other Points:
Yes I use Offset account and have some money in the offset account. Yes I should have borrowed to the max and put the extra cash into the offset account from day one.
Loan is interest Only.

 

[Mick C]

Hi,
I have an IP bought a year ago.
Price Paid 725K + 40K cost of purchasing. Current Property value is now around 860K +-
Investment Loan is 500K which means I put in 265K of my own money.

I think I made a blunder by putting too much of my own money.

From TAX perspective, is it possible now to refinance it to 765K. ie. Get another 265K loan. ( From Bank Side no issue )
Can I still claim deduction on the interest for the 765K loan. Since 765K is my orig. cost of the IP.
I understand I definitely can't refinance to a greater amount than 765K and expect the interest to be tax deductible.

I plan to use the 265K for personal use. eg. as additional fund for me to rebuild my PPOR etc.

Other Points:
Yes I use Offset account and have some money in the offset account. Yes I should have borrowed to the max and put the extra cash into the offset account from day one.
Loan is interest Only.

1. yes you can increase the loan amount since you property has gone up in value...BUT do not do a top up- carry out a split loan for tax reasons ($500 is IP and the rest of the equity release is PPOR)

2. You can create a new split loan of $166,000 with no LMI involved ( 80% LVR loan)
OR $274,000 ( 90% LVR) with LMI.

^ the extra loan IS NOT tax deductible as it's used for PPOR purposes..

3.Don't cross securitize your new PPOR loan.

 

[DealSeeker]

From what you are saying, I really made a blunder then for not borrowing to the max for my IP from day one. Sigh!

 

[Terry_w]

Hi,
I have an IP bought a year ago.
Price Paid 725K + 40K cost of purchasing. Current Property value is now around 860K +-
Investment Loan is 500K which means I put in 265K of my own money.

I think I made a blunder by putting too much of my own money.

From TAX perspective, is it possible now to refinance it to 765K. ie. Get another 265K loan. ( From Bank Side no issue )
Can I still claim deduction on the interest for the 765K loan. Since 765K is my orig. cost of the IP.
I understand I definitely can't refinance to a greater amount than 765K and expect the interest to be tax deductible.

I plan to use the 265K for personal use. eg. as additional fund for me to rebuild my PPOR etc.

Other Points:
Yes I use Offset account and have some money in the offset account. Yes I should have borrowed to the max and put the extra cash into the offset account from day one.
Loan is interest Only.

You can't reimburse yourself unfortunately. Once you have paid money into a loan taking it out again is considered new borrowings and the interest will only be deductible if the money is used for investment or business purposes.

However, if you had borrowed the $265k from a parent or a spouse for example you could possibly increase the loan from the bank and then borrow to repay your $265k loan to parents/spouse. It may be possible to claim all the interest. Whether you can do this will depend on the facts of the matter.

 

[DealSeeker]

You can't reimburse yourself unfortunately. Once you have paid money into a loan taking it out again is considered new borrowings and the interest will only be deductible if the money is used for investment or business purposes.
.

Thanks Terry,
Easiest is just sell my IP and in future buying another IP always borrow to the max.

 

[Terry_w]

Thanks Terry,
Easiest is just sell my IP and in future buying another IP always borrow to the max.

I notice you are in VIC. If your IP is also in VIC then you may be able to sell to your spouse who could borrow 100% to buy it off you. Spouse could then maximise deductions - yet you get to keep the property.

Seek legal advice before doing this.

 

[Aaron_C]

Terry's suggestion of a spousal sale is a good one to maximise the deductions - assuming it's available to you.

 

[Peter_Tersteeg]

Easiest is just sell my IP and in future buying another IP always borrow to the max.

Cost to sell would be about $15k-$20k. Cost to buy again would be about $40k (stamp duties again). There would be some capital gains tax in the mix as well.

Your initial mistake probably means you put about $150k too much into the property. At 5% interest this is about $7,500 interest per year. On a maximum tax rate of 45% selling and buying again might get you about $3375 per year in tax savings. This assumes that you're on the highest tax rate possible.

Selling and buying again will take you at least 15-20 years to recover the costs to repair via tax savings.

 

[Terry_w]

Another thing to consider

Selling would free up cash which could be used to pay down your non deductible debt.

But the longer you hold off the more growth and the more cash that is freed up potentially allowing you to pay off the non deductible debt quicker/

 

[DealSeeker]

Thanks all for your replies.

As a learning experience, if I can do it all over again:

My PPOR fully owned by me.

Would it be wised at that time to borrow 100% of the 765K for my IP and to prevent LMI, I use my existing PPOR as collateral together with my IP.

I know people say cross collateralization of your properties is bad. But how bad really is it in this case?

Or is it a fine idea?

 

[Aaron_C]

I know people say cross collateralization of your properties is bad. But how bad really is it in this case?

Or is it a fine idea?

Well you can borrow the full 105% using the collateral in your other property without having to cross collateralise. Don't you use a broker?

 

[Mick C]

Cross collateralization is generally a bad idea in most cases; it advantages the banks and disadvantages you a a borrower; eventually you will need to uncross when you sell.

Cross collateralization is more common when business finance is involved and on some rare occasion commercial finance.


Since this is your PPOR and IP's than you should and can avoid cross Cross collateralization and still achieve an 100-105% borrowing with no LMI; a much cleaner cut! and cheaper in the long run.

 

[DealSeeker]

No I did not use a broker at that time.

You guys said I can borrow 100-105% without LMI,
How do you do that?

 

[Mick C]

No I did not use a broker at that time.

You guys said I can borrow 100-105% without LMI,
How do you do that?

Same way the banks is happy to lend you 100% as a "crossed" loan...they used equity in your property to lend you the 20%

So instead of crossing, we would just take 20% CASH out and request the same or diff bank for a 80% loan ( no lmi) and settle the loan like a normal 20% deposit purchase.

 

[Peter_Tersteeg]

No I did not use a broker at that time.

You guys said I can borrow 100-105% without LMI,
How do you do that?

By lending against your equity in another property, but doing this as a separate loan transaction to the purchase to avoid cross collateralisation. It's simple enough, but generally the banks won't tell you about good loan structuring as it's more favorable to them to have it all crossed.

 

[allsuccess]

I notice you are in VIC. If your IP is also in VIC then you may be able to sell to your spouse who could borrow 100% to buy it off you. Spouse could then maximise deductions - yet you get to keep the property.

Seek legal advice before doing this.

We did this with one of our IPs. Wife gave her half to me cos she stopped working. She had to pay CGT but it was minimal due to no/low income. Only difference is, no money was exchanged.

 

[Terry_w]

We did this with one of our IPs. Wife gave her half to me cos she stopped working. She had to pay CGT but it was minimal due to no/low income. Only difference is, no money was exchanged.

That is no good as the interest on the transferred portion would not be deductible. This is why you need legal and taxation advice. You could have greatly increased deductions.

 

[Terry_w]

Allsuccess

It doesn't work like that. You have acquired 50% of a property through a gift.

eg.
$200,000 property with $100,000 loan. Both loan and property in 2 names 50/50.

Your portion of the property is $100,000 and $50,000 for the loan.

If your spouse gifts you $100,000 worth of property you can still only claim the interest on the $50,000.

The fact that the overall loan balance of $100k hasn't changed doesn't matter to individual deductibility as your share has changed.

You have therefore missed out on deducting the interest on the other $150,000.