I've just attended the property expo at Darling Harbour and spoke to a couple of companies there promoting cashflow mortgages. One in particular was promoting that you could capitalise 100% of your interest payments until the LVR was 80%. In the meantime you can take your rental income for personal use. When the LVR reaches 80% you just revalue again and assuming capital growth can go again. I understand there are issues around whether the property will appreciate sufficiently and I can see how cashflow wise this may be useful but my confusion arises because they are saying that the interest on the capitalised interest would also be deductible. The argument is that since it's being used to fund an asset which earns rental income and youre declaring the rental income as taxable income the tax office should be happy. I would have thought that it would only be deductible if the rental proceeds were used for investment purposes, or am i getting very confused. If it is allowable what would then stop you from using the rental income to pay off your PPR loan and would that not be getting awfully close to the principles in the Hart case. Does anyone have any ideas here?