Hi all,
Can anyone tell me if it is possible to borrow money for renovations to your Principal Place of Residence (PPOR) on top of your Investment Property (IP) loan?
Are there any tax implications?
How much is too much? Etc?
Thanks,
pasandbecHi,
You can borrow for any purpose a bank will agree to. A bank will pretty much always agree to lend you money to improve your PPOR so long as you have sufficient income to service the debt.Tax implications: Interest paid on money for income earning (even future income) assets is tax deductible (in general). It is the purpose to which the money is put that counts, not the security against which it is borrowed. Thus if you borrow against an IP to pay for reno on your PPOR the interest on that portion of the loan is not deductible (you don’t pay CGT though so it sort of works out for the best).
I should add that I’m not a professional accountant or tax lawyer so I’m only offering advice based on my personal knowledge. You should always seek a primary source of information (the ATO for example) to back up what people on the net tell you.
thankyou for your speedy reply! [biggrin]
in your humble opinion, do you think we would be better off doing:
a) borrowing reno $ on top of existing IP that’s for sale?
b) waiting til aforementioned IP is sold and use profits of sale for renos?
c) borrow reno $ on top of our PPOR?
or
d) buy new investment property (with a good rental return) and borrow the reno $ on top of it?
thanks again!
pasandbecYou might as well borrow it using the PPOR as security – it will keep your records tidier.
Any profit you make on the IP should go into the PPOR (or an offset if the PPOR is not a forever PPOR).
Then borrow 100%+ for the new IP.
Check all this with your accountant though.
Cheers,
Simon Macks
Finance Broker
[email protected]
0425 228 985Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
Thanks Mortgage Hunter,
Thanks for your opinion. I have also thought it would be good to put profits from sale of IP into an offset account linked to the PPOR, instead of straight into the loan. Would this also allow us to access/use the profits without paying a redraw fee?
Does having an offset account linked to your PPOR change the interest rate or conditions on the PPOR loan at all?
All of those questions depend on your current loan. You should ask your lender or your broker for advice there.
If you have a redraw fee then an offset will save you this fee – but also make the money more accessible which some people find dangerous.
If you feel that you might ever make your PPOR into an IP I would strongly recommend you consider the offset.
Simon Macks
Finance Broker
[email protected]
0425 228 985Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
Also make your PPOR loan interest only to obtain the maximum benefit if you intend moving in the future. An offset account is just a transaction account linked to your home loan. Some have fees and some don’t. Most don’t and operate very simply. You can get internet access, eftpos access, ATM access and even cheque access with some.
The Mortgage Adviser
http://www.themortgageadviser.com.au
[email protected]
Essential LinksIf we DID move out of our PPOR and made it an IP, couldn’t we just redraw the money thats sitting in there? (just as an alternative option to getting an offset account)
Of course you can.
However if you use it to purchase a new PPOR or any other personal expense then that portion of the loan will no longer be tax deductible.
If you pull money from an offset and use it for a PPOR or personal expense the original loan is unaffected and still tax deductible.
This can be a tricky concept to grasp. I am more than happy to explain it over the phone if it helps.
Have a super weekend.
Simon Macks
Finance Broker
[email protected]
0425 228 985Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
An offset account is a seperate account. It operates just as a normal transaction account. The difference is that the offset account is attached to the loan. Whatever is sitting in this account will have the same effect as you putting the money into the loan.
The reason why it is better to use an offset is as Simon has outlined. If you make the principal payments to the loan, it will be deemed a repayment. If you only pay the interest and put the extra funds into the offset account, it will not be considered a repayment.
Say your loan was $100,000 and you paid $10,000 in principal into it over a year (plus the interest), you would only owe $90,000. This would be deductible if you moved out.
If your loan was $100,000 and you paid $10,000 into your offset and only paid interest into the actual loan, you would still owe $100,000 when you moved out but you would only be paying interest on $90,000. You could take the $10,000 out of the offset if you want to increase your deductions and put it into your new PPOR.
It sounds complicated but is really very simple and automate once set up.
The Mortgage Adviser
http://www.themortgageadviser.com.au
[email protected]
Essential Links
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