Switch mortgage ratio on principle to investment

Discussion in 'Property Finance' started by Gypsy78, 9th Jan, 2019.

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  1. Gypsy78

    Gypsy78 Member

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    Hi all
    Hoping for some advice please!
    I have an investment property that is mortgaged to full value 625k when I bought it over a year ago and my home which has about a 150k mortgage with value of
    @ 550k. I would like to move into my investment property and rent out my home.
    My question is can I adjust the mortgages so that the one I will be renting out is mortgaged to the maximum and use that to pay down one I’ll be moving into??
    Any advice greatly appreciated, spoke with bank and they weren’t much help
     
  2. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

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    Yes you can, but it would be a worse tax outcome.

    Why do you want to do this?
     
  3. Gypsy78

    Gypsy78 Member

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    Thank you for your reply Terry
    In the new scenario if I was to adjust the mortgages
    Investment would have mortgage of @ 500k
    Which would mean my ppor mortgage would be reduced to @ 300k
    Which means the investment property would have a higher mortgage that is being paid by renters?
    I need to move into the investment property due to family
    Not sure if I’m explaining myself properly?
     
  4. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    What you're trying to do is change the security against the investment loan in the hope that when you move into the IP, the loan will still be tax deductible because the security property (your old home), is now an investment property.

    Sorry, but that's not how it works.

    Tax deductability is generally based on the purpose of the loan, not the security property. The purpose of this $500k loan was to buy a particular property, therefore tax deductibility of that loan is aligned with what you're using that property. Even if you change the security for the loan, it won't be tax deductible when you move into that property because it's original purpose has not changed.

    If I understand everything you've said, the $150k loan on your current PPOR would then become tax deductible when it's rented.


    There is a small win in this though. The $500k loan is probably classified as an investment loan. When you move into that property, contact your broker or lender, tell them you now live in that property and ask them to arrange to have the loan reclassified as an owner occupier loan. That will probably give you a reasonable rate reduction. It's possible that this might cover most of the difference from loss of the tax benefits.
     
    Last edited: 9th Jan, 2019
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  5. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

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    It won't change the deductibility of interest
     
  6. Gypsy78

    Gypsy78 Member

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    I was in simple terms wanting to reduce what I owe on the mortgage of the property I’ll be moving into - currently the investment one
    So that I can pay off my ppor quickly. Is there anyway I can remortgage current ppor( soon to be investment) to pay down the other one
    Also I believe that the one I’ll be renting out that owes $150k will be getting approx $520 week rent with current repayment of $180 week
    I really appreciate any advice
    Thank you
     
  7. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

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    It is the use of borrowed funds that determines deductibility.
    The mortgage is irrelevant, what you are trying to do is to shift a loan so it is higher on the investment property. This won't change deductions because the security for the loan is not what counts, it is the use to which the borrowed funds count.

    See some strategies here:
    Strategy: 11 Strategies for when you move out of the PPOR and keep it Strategy: 11 Strategies for when you move out of the PPOR and keep it
     
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  8. Gypsy78

    Gypsy78 Member

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    My main goal is not tax deductions but owing leas mortgage on ppor. So I suppose the question is will the bank allow me to “increase mortgage on current ppor and use those fund to pay down mortgage on current investment regardless of tax deductions etc
     
  9. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

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    yes they would. this is just a substitution of security.

    Why do you want to own loss on the ppor?
     
  10. Gypsy78

    Gypsy78 Member

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    I want to pay off my ppor so I own it no mortgage.
    I don’t see any benefit of having a large mortgage on my ppor but maybe I’m missing something?
     
  11. The Y-man

    The Y-man Moderator Staff Member

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    Let's reverse it (this is what everyone is wanting to ask!)- what do you see as benefit of having no loan on PPOR? (other than being able to say I have no mortgage on my ppor?)

    The Y-man
     
  12. Gypsy78

    Gypsy78 Member

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    That’s pretty much it! Having the financial security of no mortgage on ppor.
    Reading through comments again though it appears it makes no difference which house has higher mortgage tax deduction wise as the rent excess would be put to the ppor?
     
  13. The Y-man

    The Y-man Moderator Staff Member

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    Basically comes down to aiming to have the largest loan with the lowest interest rate from an outright cost perspective (without taking any tax into consideration).

    Also, if you are thinking it is harder for a bank to get your PPOR if you run into bad times and you have no loan against it, unfortunately they can take anything (pretty much) ~ so there isn't much more "security" as such.

    Finally, while it is easy to say having a non-tax deductible portion on your IP is ok, in reality accounting for this can be quite a pain and if you are not an accountant, you could be paying a large amount in fees to your tax accountant to calculate this (especially if it is P&I, as you need to apportion the segments paid off)

    The Y-man
     
  14. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

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    If you just wish to release a property as security without changing the amount of deductions that can be possible

    But really this doesn't give much security.
     
  15. wylie

    wylie Moderator Staff Member

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    I think you need to forget this way of thinking.

    Whether you own your own home outright or the investment property outright doesn't matter.

    If you move into the place with the higher mortgage, just slog as much into that mortgage as you can. Better still, open an offset account for both, because if you ever move back into the other one, you may want to offset the interest against the rent again.
     
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  16. Gypsy78

    Gypsy78 Member

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    Thank you all for your comments
    Has given me lots of great info to think about