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Deductibility of Interest - Equity in Investment Property

Discussion in 'Finance & Banking' started by Mr S, 7th Feb, 2008.

  1. Mr S

    Mr S New Member

    7th Feb, 2008
    Sydney, NSW
    I have a situation whereby I have the following scenario:

    1. Value of Investment Property: $500K
    2. Interest Only Loan on Investment Property: $300K
    3. Equity in Investment property: $200K
    4. I would like to refinance the IP loan and increase it to $400K, giving me $100K in funds to play with ....
    5. I would like for all the interest payable on the IP Loan to be deductible
    6. I would like to reduce my home loan

    Is there any way I can use the funds from the equity in my investment property ($100K) to pay-off my home loan so that I can still get a full deduction on the entire investment property loan?

    I'm proposing the following:

    1. Refinance the IP Loan to $400K interest only
    2. Setup a Mortgage Offset account for the IP Loan and have the $100K in credit sitting there
    3. Start Date would have $400K Loan LESS $100K - i.e. interest will only be payable on Net IP Loan of $300K (at the beginning of the loan period)
    4. Each month, the interest repayments will be taken from the Mortgage Offset Account eg If Interest for Month 1 was $2K, this would be taken from the $100K of available funds in the Mortgage Offset account, reducing the balance to $98K and increasing the total Net IP Loan Balance to $302K.
    5. For Month 2, the interest repayment will increase given the Net IP loan has increased to $302K. Say if interest is $2.1K for the month, this would be taken from the mortgage offset account of $98K leaving a balance of $95.9K and increasing the net IP Loan to $304.1K ............ etc etc for years 3, 4, 5 etc
    6. Eventually, over a period of time, say 4 years, the IP Loan balance will reach $400K and the mortgage offset account will be zero
    7. I would have increased savings over the 4 year period (increased savings due to non-requirement to make personal contributions to IP Loan)
    8. On a regular basis, I would contribute amounts to my home loan
    9. After 4 years, I would have reduced my home loan by $100K but increased my investment property loan by $100K
    10. Rental Income derived from the property is used to pay off my home loan

    Will the above scenario allow me to claim 100% of the interest deduction on the IP Loan? If not, are you aware of any other strategies that will allow me to use the equity in my IP to pay off my home loan?