Tax deductable LMI if loan is 2nd mort on PPOR?

C

Casserole Dish

I've done some searches and can't seem to find my exact answer on this one...

If we extend our PPOR loan to 90% to access some equity (so paying LMI for the privledge) to have in an account ready to use to purchase an IP, is the LMI tax deductable over 5 years as a borrowing cost? The money from this
2nd mortgage would purely be used in the purchase of the IP (no private use at all) and would at all times be kept seperate from the PPOR loan. The reason for doing this would be to save paying LMI at the 'other end' ie. on the IP loan and we get a fairly good interest rate by using our current lender.

So it's all good unless the LMI on this portion is not tax deductable, in which case we wouldn't bother going over 80% on the PPOR loan and pay LMI on the new IP loan if it was to work out cheaper.

Yes I understand it takes us to a higher LVR than what a lot of investors here consider to be comfortable, but thats the just the position we are in at the moment.

Thanks for any help in advance. :)
 
I would have some concerns with you plan.

- You would be incurring the expense well before contracting the investment purchase.

- You would be borrowing to place the money in a savings account.

This doesnt mean it is not possible though.
 
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It might legitimate but it's not 100% clean... As Terryw said it's a little strange why you wouldn't finance the entire IP and PPor on one loan in the future to possibly save on LMI and avoid paying so much upfront
 
Ok i guess it does sound a little strange but we were hoping to keep our options open at this stage in regard to which lender we go with for the IP. And we didn't want to be cross-collaterising (spelling?) our loans.

By doing it this way we know exactly how much $ we have to put into the IP and have comfortably got 20% even if it comes in undervalued at settlement.

Hmm, I'll check this out tommorow with our financial advisor.
 
Casserole Dish said:
Ok i guess it does sound a little strange but we were hoping to keep our options open at this stage in regard to which lender we go with for the IP. And we didn't want to be cross-collaterising (spelling?) our loans.

By doing it this way we know exactly how much $ we have to put into the IP and have comfortably got 20% even if it comes in undervalued at settlement.

Hmm, I'll check this out tommorow with our financial advisor.
Click to expand...

Cross collateralising isn't always a bad thing - if it saves you thousands in LMI and gives you greater flexibility and greater gearing
 
Here is a made up example:

A: $300,000 property
B: $300,000 property

Loan 1: existing 70% LVR = $210,00
Loan 2: new purchse, need to borrow $320,000
Total loans = $530,000

total Value = $600,000

LVR = 88%

----
Normally, I would do it like this:

Property B.
Take 90% LVR = $270,000
$50,000 extra is needed.

Property A
Loan 1 = $210,000 (existing)
Loan 2 = $50,000
total loans = $260,00
LVR = 87%

Option A
So, you would have 2 lots of LMI
a) LMI on 90% loan at $270,000
b) LMI on 87% loan at $260,00

vs

Option B
LMI on 88% loan at $530,000

So I guess it could work out cheaper with option A. I don't have any LMI rates handy (as I am not a broker, I used to be, and I miss it now!:(). But I would still suggest the benefits of not crossing would be worth a bit extra in LMI in anycase.
 
It would be fine to do that way IMO as long as the nexus between the borrowed funds and the ip purchase aren't lost. Laymans terms that means the IP would have to be purchased shortly after the 90% top up loan settles...what is a reasonable time after? how long is a piece of string? I would say ideally no more than say 12 months.
 
Terryw said:
So I guess it could work out cheaper with option A. I don't have any LMI rates handy (as I am not a broker, I used to be, and I miss it now!:(). But I would still suggest the benefits of not crossing would be worth a bit extra in LMI in anycase.
Click to expand...

I'm actually the opposite to you. Lawyer --> Broker lol
 
Casserole Dish said:
I've done some searches and can't seem to find my exact answer on this one...

If we extend our PPOR loan to 90% to access some equity (so paying LMI for the privledge) to have in an account ready to use to purchase an IP, is the LMI tax deductable over 5 years as a borrowing cost? The money from this
2nd mortgage would purely be used in the purchase of the IP (no private use at all) and would at all times be kept seperate from the PPOR loan. The reason for doing this would be to save paying LMI at the 'other end' ie. on the IP loan and we get a fairly good interest rate by using our current lender.

So it's all good unless the LMI on this portion is not tax deductable, in which case we wouldn't bother going over 80% on the PPOR loan and pay LMI on the new IP loan if it was to work out cheaper.

Yes I understand it takes us to a higher LVR than what a lot of investors here consider to be comfortable, but thats the just the position we are in at the moment.

Thanks for any help in advance. :)
Click to expand...

You better get a pbr.

The interpretation is very narrow for s.25-25 ITAA97

" ... to the extent YOU USE THE MONEY for the purpose of producing your assessable income ... "

While the money is in a 100% offset account against this debt, it is not earning your assessable income.

To rely on Steele's case is dangerous because this is based on the general deduction provision of s.8-1.

Better err on the safe side and get a pbr.

Cheers,

Rob
 
Im not a tax adviser, but Id say its ok as long as there is no contamination of funds ( contaminatiion as happened in Domjan v ATO), and A "purchase" transaction of an investment nature occurs within a reasonable period of time. That may mean having to buy a small parcel of shares or the like.


There is NO other way to do such a transaction without the securities being crossed, so there is commercial advantage, and its a neccesity. Often we dont want securities crossed for a variety of reasons.


Rather than get a bunch of opinions from unrelated people that dont know all the fluff around what you are looking to do and why, get an opinion from YOUR tax adviser as to why its ok or why not.

ta
rolf

Id agree that looking to rely n Steele V ATO isn't reliable.
 
Rolf Latham said:
There is NO other way to do such a transaction without the securities being crossed, so there is commercial advantage, and its a neccesity. Often we dont want securities crossed for a variety of reasons.

.
Click to expand...

Rolf,

What about this:

Set up a LOC or a new facility with redraw on the existing loan up to 90% LVR.

When the new property is found borrow the deposit from this new loan.
 
Terryw said:
Rolf,

What about this:

Set up a LOC or a new facility with redraw on the existing loan up to 90% LVR.

When the new property is found borrow the deposit from this new loan.
Click to expand...

Very tru That fixes your LOC vs the offset concern ( which I have yet to see core evidence of it being "real time" if its properly set up) , but doesnt get around the LMI depreciablity question..

MANY LOCs have sad commercial considerations that most people dont know about. Some include

1. No fixed loan term, so many are reviewable annually. No bog deal when alls good...........not so hot if you are in trouble, or the market is. Ask NAB clients........

2. Repayable on demand clauses, not 30 days, on demand, ask Westpac clinets

3. Many lenders wont approve a 90 % lend on LOC, the credit score gets hit for a six

I could go on. LOCs have their place, but in general, as an "equity pull" mechanism they arent best suited in most situations

A suitable alterantive is a term loan that offers redraw during the IO period, WBC RRIL, CBA SVR, and a bunhc of others of properly set up.

ta
rolf
 
I think if the new loan was set up near the time of the purchase of the second property and the purpose was entirely for the investment then the LMI should be deductible as it would all relate to the new property.

Rob, any thoughts?
 
When the LMI cost is incurred for the purpose of investment, I treat it as a deductible expense. As with everything, you have to work closely with your accountant and keep it crisp and clear though. I would, however, moreso select the acquisition property before undertaking the transation. Lending rules differ based on locations and property types, and so do LMI offerings. It'd suck to do the transaction and pay LMI to 'save' on it, only to find out that you could've done it cheaper if you'd taken the LMI out against the new asset's risk rating instead of your PPOR risk rating. In my limited experience there is a very small chance of such a circumstance (unless you're playing with tiny studio apartments etc), but it's better to be safe than sorry when you're on the margins of LVR policies! :) For better information, yes I agree with the others here - best to go wine and dine your accountant. Good luck!
 
Thanks for all the replies, I posted on here as it was a Sunday and therefore I couldn't reach the people I'd normally ask. We will track down an answer from our friendly accountant but I have a feeling the answer will be, yes as long as it's all 'clean' as stated.

The property we are purchasing will be part of the NRAS (all going well) which limits our choice of lender which is why it was important for us to know what LVR we'll have at settlement. Purchase will be approx 5 months from now.

Anyway thanks again for all the help and advice, will let you know how we get on! :)
 
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