I buy an investment property(IP1) today and borrow 80% LVR to purchase it, 6-8 months later(or maybe even 1-2 years later ? time really does not have any bearing here) I decide to refinance the loan to 90% LVR ? (with the same bank) ? but use the extra 10% as deposit for a subsequent investment property(IP2). Refinance in this case as it is for 90% will incur a lender?s mortgage insurance cost. Does the ATO allow the LMI to be deducted as a borrowing expense(remember the LMI is against IP1)? I understand that the interest payments on the 10% extracted from the refinance will be tax deductible since it will be used for an investment, but not sure where the LMI fee will sit in this case? as it is a genuine expense of borrowing the additional 10% to fund an investment?
Refinancing an investment loan (LMI Deduction)
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- lmi refinance tax deduction
You'll need to choose the lender carefully. Trying to increase to 90% later can be challenging for some lenders as they'll want to see evidence of what the funds will be used for, and probably control the use of those funds. They may not simply give you the cash.
If the purpose for the increased facility is to draw further funds and those further funds are solely used for IP2 then the LMI is a cost of borrowing deductible solely against IP2.
Just like interest it is necessary to consider the USE of the borrowed funds at that time. The LMI is "necessarily incurred" in the refinancing. So review of the use of that new finance is required.
Sometimes when a refinance facility occurs the bank may approve say $100K. If you draw $50K and use it as a deposit on IP2 then apportion the LMI deduction. When (and if) later redraws occur then LMI reside may be deductible also depending on the use of those borrowed funds. eg $50K to buy a car = Non-deductible v's Drawn $50K to buy IP3 then deduct this against IP3. Unused LMI will waste and be non-deductible if that portion of loan is not drawn down.
