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Borrowing Limit

Discussion in 'Accounting & Tax' started by Gary, 19th Jul, 2016.

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  1. Gary

    Gary Member

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    Hi All, been reading this forum for a while and have learnt a great deal from you all.

    I have a few IPs and all of them had 80% loan to value ratio at the time the loans were set up. As the values of the IPS have now gone up substantially, I am wondering if I am able to refinance to the extent that the loan value is greater than my original purchase price, and whether I will still be able to claim full tax deductions on the interest expenses if I do so?

    For example, if I paid $400k for my IP ($320k loan + $80k cash) a few years ago and its now worth $700k. Can I refinance my loan to $560k (80% LVR) and cash in $140k? If so, will the interest from the bigger loan still be fully deductible even though its more than the original purchase price?

    Many thanks for your advice.
    Gary.
     
  2. Propertunity

    Propertunity Exclusive Real Estate Buyers Agent Business Member

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    Yes, but only if you use the funds released from the refinance for investment purposes. NOT if you use it for personal expenses.
     
  3. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    Subject to the banks regular lending criteria (essentially demonstrating you can afford the increases), what you've described is quite straight forward. It's common place for the brokers contributing to this forum.

    You may need to perform the equity release as a separate split (loan account number) so you can differentiate between different uses for the money. This may help to avoid tax related issues.
     
    Last edited: 19th Jul, 2016
  4. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Gary You are talking about equity release. An equity release is deductible IF the use of the new borrowing is for income producing purposes. eg : Buy a new IP that new loan is deductible against that new IP not the one used as security. eg Use new loan to fund deposit, duty etc. Then borrow 80% against new IP also. Remember its the USE of the borrowed funds not the loan security used.

    Its also essential a new loan "split"is given by bank so you can track and trace. Watch out for crossed loans too !! A good (PC) broker will know this and advise on it.
     
  5. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    If you borrow against the equity, whether the interest is deductible or not depends what you use the money for.

    It's all about the loan purpose, so you'll need to use the funds to invest if you want to claim the interest.

    As others have mentioned, structuring the loan correctly is so important here! A simple loan top-up will make a mess of your deductions, especially if you use the new funds for personal reasons like a holiday for eg, or a new home.
     
  6. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

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    You can borrow up to $560k - but what are you using those extra funds for?
     
  7. Gary

    Gary Member

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    Thank you all for your quick replies. Yes I'm thinking to release the equity for a new IP, so it sounds like the additional interest from the higher loan will be tax deductible.
     
  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Make sure you split it, and get some tax advice on how to do it so that you can make sure it is deductible.