Refinancing Mortgage Questions

Discussion in 'Loans & Mortgage Brokers' started by AB12, 14th Jul, 2016.

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  1. AB12

    AB12 Member

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    Hello, I am looking for some comments on how to best structure my loan when I refinance my mortgage in the near future.
    I have a loan of just over $250,000 on an investment property (townhouse) purchased for $410,000. I believe that the value would be approx. $435,000. The loan is at a crappy rate (4.7%) with no offset. It is currently being rent out for $420 per week.
    My wife owns our home outright, it would be worth at least $600,000. In the next 12 months we would like to do some significant renovations, which I would expect to cost between $200,000 - $250,000.
    We have over $120,000 in cash, that we are saving for renovations, which we would like to put on an offset until we do the reno. We would need to borrow between $100,000 - $150,000 for the renovations.
    I make approx $110,000. My wife is currently on maternity leave and will be for the next few years at least.
    I plan to move to a mortgage with a much lower rate and an offset.
    My key questions.
    Is it worthwhile to change to Interest Only?
    Can I combine the loan for the renos with the mortgage and would there be tax benefits for this?
    Are there any other loan related or tax related considerations that I should be aware of?
    Thanks in advance!!
     
    AB12, 14th Jul, 2016
    #1
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    You need tax advice.

    I suggest you keep the existing split at $250,000 as IO and set up a new split for the remainder up to 80% also as IO (but could be PI) with an offset on this split (when you draw it down). Funding for the main residence can be taken from the existing split - no the interest will not be deductible as a private purpose.
     
    Terry_w, 14th Jul, 2016
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  3. AB12

    AB12 Member

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    Yes, thanks. I do intend to, but wanted to get a bit of an understanding and information before I do so. Forearmed is forewarned. Thanks for your suggestions. What is the reasoning?
     
    AB12, 14th Jul, 2016
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  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Reasoning for splitting is so that you don't end up with a mixed purpose loan:
    Tax Tip 54: Why Not to Mix Loan Purposes

    You can then pay down the non-deductible portion independant of the investment portion and thereby save non deductible interest and tax.
     
    Terry_w, 14th Jul, 2016
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  5. AB12

    AB12 Member

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    Awesome, makes sense.
    What is the logic behind going IO?
     
    AB12, 14th Jul, 2016
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  6. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    If IO you can divert funds to the non-deductible portion and pay that off first.

    Once paid off you can keep that loan open and reuse it to invest.

    Also added advantages are:
    1. low repayments
    2. can pay PI if you choose
    3. can build up cash for retirement quicker in a more tax effective manner
    etc
     
    Terry_w, 14th Jul, 2016
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  7. AB12

    AB12 Member

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    Thank you for your help Terry!
     
    AB12, 14th Jul, 2016
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