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Loan reorganising

Discussion in 'Real Estate' started by dudek, 13th Feb, 2009.

  1. dudek

    dudek Well-Known Member

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    Need some advice in reorganising loan.

    I have a friend who moved interstate. They left their house (almost paid off) behind and decided to rent it out. Mean time they purchased new PPoR with bigger loan.
    Their first one they rented out is +gearing but at the same time they are paying big mortgage. Is it possible to refinance loan to transfer funds to their new mortgage and at the same time increase debt for IP and reduce for PPoR?
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Unfortunately not. It is the purpose of the borrowed funds which determined deductibility. The interest on any refinance or redraw from what is now an investment property will only be deductible is that money is used for investment purposes. Using it to reduce their new PPOR loan is private in nature and will thus be non-deductible.
     
  3. dudek

    dudek Well-Known Member

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    Thanks Sim,

    Would it be still legal if they adjusted their balance on the first loan before they moved out (withdraw all additional repayments and increase debt) then use that sum as a deposit to purchase new PPoR?
     
  4. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    It's not illegal to redraw the money ... it's just that claiming the extra interest paid on the loan as a result will be disallowed by the ATO if the money is not used for investment purposes.

    You generally don't want to mix personal and investment use of funds - that really complicates things and could see you miss out on a lot of valid claims because the loan becomes "tainted". Most banks let you split loans into separate facilities so you can keep the original borrowing for investment and have a new separate facility for personal borrowing.

    ... but given their loan was almost paid off there's probably not a lot of deduction left either way - so probably not a big deal.

    For future reference - when buying a PPOR, if there is ever a chance you might move out and make it an IP, the best strategy to maximise deductibility is to not use a P&I loan, but rather use an IO loan with an offset account attached - this way if you do move out in the future, you can withdraw your deposit from the offset account without affecting the original loan balance and when the property becomes and IP, you get as much of the original balance as possible for claiming interest deductions on.