Borrowing to pay down an investment loan

Hello Forum tax experts,

Just wanted to ask, when borrowing to pay down an investment loan, is the interest on this loan tax deductable ?

Say to refinance 2 IPs from one lender to another, IP1 loan is at 60% LVR (say 60K) and IP2 loan is at 90% LVR (say 90K) hence if the lender allows a further 10K equity to be pulled from IP1 into another separate loan account to be used to pay down IP2 loan (to 80K) in order to bring its LVR down to 80% and avoid LMI when switching lender. Would the interest on this 10K equity extract be tax deductable ?

Thanks very much

 

See my ta tip on this

 

If its a refinance of part of the original loan. Yes, potentially. However if the new loan is being used to make the loan repayments on a progressive basis this may be a capitalisation issue and a concern. The strategy can work where you have equity is one IP with one lender and a seperate IP that has a high LVR on a poor rate with another lender. You also need to consider if you will "blend" the two uses and ensuring the new loan is a seperate split would be wise so that the new loan interest is identifiable with the property that the refinance element relates to. eg The new $10K loan is NOT deductible against the property used as security. It is deductible against the property that had its loan reduced.

eg Old loan $90K is now $80K. So its $80K + $10K

 

Thank you so much Paul for the great tip Yes I intend to pay the IP1 loan down in one hit hence no progressive basis. So structure is as follow:

Current: 90K loan against IP1 and 60K against IP2
Future: 80K loan against IP1 and 10K loan & 60K loan against IP2

Both scenarios have the same loan total and interest on the 80K & new 10K loan shall be claimed against IP1.
Refinancing is for better rates and extend IO period and the extra 10K payment is purely to reduce LVR to 80% and avoid LMI.

Hence would this scenario enable a legitimate tax deduction on the interest incurred on the new 10K loan ?

 

I am a big fan of your tax tip page

 

not enough info

Paying one loan down with another is a refinance and it does not change deductibility of interest - if done right. So if loan A has deductible interest and loan B was used to refinance Loan A, even in part, then the interest on loan B would be deductible in full, assuming Loan B was use for nothing else and no detours.

 

Hi Rolf, yes both properties have always been IPs and purpose now is to avoid paying LMI as part of refinancing. Total loan deductable amount shall be the same. Just the principle of borrowing to pay down an investment loan that i was uncertain if it is tax deductable.

Just wondering, if a borrower has too many small split accounts against a security, does this affect their credit report and rating by any chance ?

 

Hi Terry,

Yes there will be no detour. Just a clean swap from one lender to another hence the tax deductability on the original loans remain.

The tricky thing here is loan A from IP1 is at 90% LVR and to avoid paying LMI the lender has agreed to extract 10K as a split loan from IP2 to bring the LVR of Loan A down to 80%.

Total loan amount from both IPs shall remain the same hence no change in total interest bill other than reduced rate from refinancing.

The 10K extract loan interest shall be claimed against IP1 whose loan it was used to pay down (instead of IP2 which is the security it was extracted from.)

I've always only borrowed to buy income producing assets for the loan to be tax deductable, but in this case it's the borrowing to pay down an investment loan that is new to me hence the question.

Thanks very much

 

If you are borrowing $10k on a separate loan to pay down an existing loan that is a refinance so the interest on the $10k should be deductible if the loan it is going into is deductible interest

 

thank you Terry