Refinancing IP for Home Mortgage

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From: Fiona W


Hi All,

I have searched the archives for this one, but there isn't the exact info. to suit what we'd like to do. We have 2 units with a P/I loan (before I knew any better!). We have dreams of refinancing these to I/O loans and using the small equity we have made to pay off some of our mortgage on our own home. Basically, can this be done, and would it be beneficial to do, or would there be too many costs involved? Would the part we use to pay off our mortgage not be tax deductible etc? Look forward to hearing from you!

- Fiona
 
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Reply: 1
From: Terry Avery


Hi Fiona,

In answer to your question you can refinance your IPs to interest only but
if you access the equity by increasing the loan and then use that extra
money to pay off your own home you cannot claim the extra interest as a tax
deduction. It is the use of the loan that is important for tax
deductibility. Personal use is not allowable.

What you can do is refinance to interest only and use the cash that is freed
up to pay down your own home quicker. By paying your own home off fast you
will then have equity available to borrow against for other income
generating assets.

There are many calculators available on the web which will show you how
quick you will pay off your own home loan if you increase the payments. You
will also find the IP loans easier to service when you only pay the interest
and depending on your circumstances may generate some free cash flow which
can also be used to pay of your own home.

All the best.
 
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Reply: 1.1
From: Paul Zagoridis


I agree 100% with Terry

Dreamspinner's Simple Rule #2
Never take a P&I loan for an investment property when you have a home mortgage.

Long-winded explanation:
The principle repayment is not tax deductible. The interest on most people's home mortgage is also not deductible. So take the principle you're paying on the IP and put it in your home loan reducing non-deductible interest.

As your home appreciates and your home P&I loan reduces, you can draw down for future IP's

Dreamspinner
 
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Reply: 1.1.1
From: Sergey Golovin


Can you refinance and access equities to use it for investment - yes, you can. And it would be tax deductible.

Can you use equities to live on it? - Yes you can. But it wouldn’t be tax deductible. It considered being a pleaser and it gets very messy and complicated. Once you spend it - that's it. Have to wait for next time around to put your hands on it again.
Your mortgage will go down that's for sure.

I have seen something similar has been done. They had own house (do not know how much has been paid off to start with), borrowed money to pay for the IP and also the rest of the loan on the house. So, house now is paid off completely (even they had few more years to go yet) and IP pays it self off slowly.
Do not ask how – I do not know. It was my manager from previous co. I worked for. He is an owner now of that very same co. I would like to know my self – How they did it? But it takes time.

The question is who is going to lend you or allow you to access that equity.
And how much is there to access it (to start with)? Is it worth it?
You have to find someone from finance co. to talk to. It is quiet an exercise.

Maybe it would be easier to do what other members ("forumers") suggested earlier?
Restructure your finance and settle with it.

Anyway let us know the outcome. Interesting to know where the other mines are on field.

Serge G.
 
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Reply: 2
From: Victor Mann


Fiona,

U can refinance the loan into a line of credit if your current lender has such a facility. it is essentially an interest only loan facility but it will give you access to your equity ( upto 80%). there would be a switching fee as well as stamp duty on the increased borrowing amount if u decided to take the extra amount. Also depends on your current loan facility if has no other break costs. Otherwise it should not be an expensive exercise. IF ur bank does not have a LOC let me know i can give further info if you need

victor
 
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Reply: 3
From: Rolf Latham


Hi Fiona

Yes you can

Yes you should

And costs may be little

My standard answer is to find yourself a good independent mortgage broker.

Ta

Rolf
 
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Reply: 4
From: Steve G


We have recently done just this,and converted from a fixed rate P&I to fixed rate IO. While there were break costs associated with the P&I loan, our lender "blended" the rates for us, the cost of which was negligible.

The bank actually took a long time in processing this, but one of the benefits of that was that in the time it took them to do it (would you believe 4 months from go to whoa, including hassling time! Amazing!) was that market rates fell below our previous fixed rate (6.99%), so the blended rate was actually lower!

But be careful about how you use the available equity, as some of the other posts have mentioned.

Steve G
 
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