Loan Fees and tax deductibility (and/or refinance)

2 Questions:

Question 1: (Probably a simple question, but just want to be sure)
Are IP loan discharge and refinance fees tax deductible? (ie as part of refinancing from 1 lender to another.)

Question 2:
I have one IP loan that is coming close to the end of the 5yr interest only period and I have the option of:

1. the loan reverting to to P&I at a rate of 5.39%
2. Continue the IO period for another 5 years and lock in at 4.73(1yr), 4.88(2yr), or 4.63(3yr).
3. Look at refinancing to another lender. My broker is looking at Bankwest variable 4.39%, or can be locked in at 4.29% for 3 years.

The question is , which option should I take up? My initial reaction would be to sway to option 3, but I then began thinking about the loan discharge fee (no break fee), and re-establishment fee with the other bank. Discharge from the existing bank will be somewhere around/under $1000, then there is the establishment of the new loan (and valuation etc), which could be ~$300-500?
The loan amount in question is $360,000, so the saving going from 4.73% with existing lender to 4.29% with BW is $1584, yet the setup will cost somewhere the same?

I suppose the real saving will be noticed in year 2 and 3...

Am I missing something? What are your thought? Is it a good idea to refinance in this situation?

Thanks in advance.

JK

 

It's probably a good idea to refinance, but not to BW

There are better deals than you've stated, and with better lenders.

 

Lvr at purchase was 80%. It would be about 72% now.

 

J

Jess,

Who do you recommend?

 

That depends on your circumstances but BW is not known for their investor friendly policy. Right now, CBA is a better option both policy and price wise. If you ask your broker today, they might be able to squeeze in 1.5% off the SVR pricing for you.

 

Sorry, what's svr?

 

Sorry - standard variable rate.

 

Re: BankWest and cash out...

BW is limited to 80% on investment loans, that's their first problem with cash out.

They also want a detailed accounting of the purpose of the cash out, often accompanied by evidence, even for small amounts. This is a very conservative approach. Most lenders want an general overview of what you need the cash for within certain parameters.

Then there's the long term performance of their loans. I'm betting you most people take BankWest because they're promoting a product with a very cheap interest rate. Funny how about every 2 years they replace their flagship product with another cheap product. The old one (what you signed up for) gets more expensive. They've done this consistantly for 9 years now.

If you're able to stay within 80%, most lenders are easier to deal with for cash out purposes. The list gets narrower above 80% LVR however. Quite a few lenders are offering good deals at the moment which will almost certainly be more cost effective in the long run.

 

Hi Peter,
I'm just trying to understand what you mean in the post above re cash out. Lets say the val comes back at 600K, which means an additional equity of 120K. Will I be able to refinance the 360K and take out the additional120K equity, or will they restrict this?

 

They'll restrict the amount of $120k. If you tell them it's for a future property purchase they'll tell you that's fine, but they won't release the funds to you until you actually produce a contract for that property. Kind of makes it difficult to give a deposit until a few weeks after the offer has been accepted.

BW also has a very restrictive serviceability calculator. They may tell you that you can't afford the proposed IP and not give you the cash, even though there's other lenders that would approve it.

 

Would anyone like to comment on this?

 

I'm not a tax guy but to the best of my knowledge they are.

 

Form part of borrowing costs. Deductible over a 5 year period. Unless you refinance during that period at which point the balance may become deductible immediately. But seek tax agent/legal advice.

 

The mortgage discharge fees for the old IP loan will be immediately deductible (s 25-30 - INCOME TAX ASSESSMENT ACT 1997 - SECT 25.30 Expenses of discharging a mortgage). You can also deduct any remaining borrowing costs (if any) in relation to that loan at the time it is refinanced.

Borrowing costs in relation to the new loan are deductible over 5 years (or the life of the loan if that is shorter).

 

Break costs of a fixed rate loan are also deductible when broken for the purpose of refinancing with another lender or to access a variable rate of finance. However when fixed rates are broken to enable a mortgage discharge due to sale the fee is NOT deductible but may reduce CGT as a third element cost base adjustment.