Question for all the mortgage brokers/ finance experts out there ? Our next IP will either be a reno & sell; or sub-divide and sell one – we are thinking of capitalising the interest until we sell to ease our cash flow situation (we are negatively-geared up to our eyebrows and need to reduce some debt). Are there tips and tricks as to what type of capitised loan we get?
You will probably find a 'Line of credit' type loan for this, is the most sutiable, as many lenders allow interest to be capitalised up to the credit limit before requiring any payments at all, and then interest only. However some don't so check. Obviously if you are funding the property this way initially this will be no good, as you will have no funds 'left in' the loan facility unless you have it against another property or have put in a large deposit. However without more details I am speculating other than suggesting the loan type.. All the best.
Another option it to borrow the max, and use the extra funds to repay the loan. These can be put in the offset in the meantime. This actually looks better as if someone where to look at your statements, it shows regular repayments.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Thanks Terry – that's an interesting concept -will definitely look into that one.
At the risk of stating the unpalatable but obvious, if you are genuinely "geared up to your eyeballs", sell a property and reduce your debt. Capitalising payments just places a longer fuse on the same bomb.
The chaos in the international funding markets is and will have an effect on Australian interest rates and if you can't cope with .25-.50% increase over the next 3-6 months, reduce your debt now.
Cash flow loan could also be applicable here where the loan repayments can be part capitalised and increasing LVR with the capital growth generally a 50% reduction in payments for the first year then increasing each year.
Craig,
Can you please explain in what circumstances this would be a better option than what Terry proposed?
Regards
AlistairI would think Terry's idea would only work if you had the equity to borrow more than the probperty being purchased is worth however you have stated you are already negatively geared to the "eye balls" which may suggest there is not much equity available either??
Equity is not a problem – its the serviceability lenders tend to look at before equity (I think). We have thought about selling one of our properties but thats a last resort. Would like to do the next project first (ie. subdivide, build, then sell one); see if that increases serviceability, then do it all again
Alistair
4 posts in 3 years. You are unlikely to get a response until 2010.
Richard Taylor | Australia's leading private lender
APerry wrote:Craig,Can you please explain in what circumstances this would be a better option than what Terry proposed?
Regards
AlistairHi Alistair
The circomstances for cash flow loan is an advantage is where liquid funds are tight. Cash flow loans allow for reduced contribution and provide some gearing advantage by adding further interest capitalisation for legitimate tax claims.
The disadvantage compared to Terry's proposal is that cash flow loans do not allow for a starting LVR higher than 80% of the property value. The capitalised interest is allowed to increase upt ot 90% over 5 years.
The offset structure is a great self managed structure and a cash flow loan is a purpose designed loan structureThe circomstances for cash flow loan is an advantage is where liquid funds are tight. Cash flow loans allow for reduced contribution and provide some gearing advantage by adding further interest capitalisation for legitimate tax claims.
The disadvantage compared to Terry's proposal is that cash flow loans do not allow for a starting LVR higher than 80% of the property value. The capitalised interest is allowed to increase upt ot 90% over 5 years.This is a roundabout way of stating there is no advantage. The cashflow loan is expensive, inflexible and does nothing that can't be acheived with regular lending products at significantly lower cost. It really annoys me as it seems to simply be a way of selling people an overpriced loan.
Regards
AlistairSo true Alistair except this is non regular typeof loan which offers DSR up to 67%, does not use a mortgage insurer and the capitalised interest is tax deductable, unlike the interest capatalised in a loc or offset account.
CraigBrisbane Broker wrote:So true Alistair except this is non regular typeof loan which offers DSR up to 67%, does not use a mortgage insurer and the capitalised interest is tax deductable, unlike the interest capatalised in a loc or offset account.
CraigAre you sure thats correct ???
I agree with Wasp. It is far from certain that the capitalised interest on these cashflow loans can be deductible. As far as I know there is no private ruling on these products. But I think they have good reason to think it is, but not certain.
Also I believe there is no difference in these loans and paying from a LOC or capitalising interest in the same loan. It works the same way.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Would anyone else care to comment about the tax deductibility of interest on interest using an offset account, a line-of-credit or a 'cashflow' loan? I am no accountant by my understanding was that such deductions are quite legitimate.An article by Julia Hartman in the August edition of API makes the following conclusions on the matter of Capitalising Interest: "Those readers who aren't afraid of a confrontation with the ATO may choose to redirect rental income towards their private mortgage." And "…even the most conservative reader shouldn't use income that isn't directly from the investment to prop it up. Borrow the money necessary to meet the cash shortfall and use all of your personal income to pay off any personal debt."For those who are negatively geared like me, this is very important.My understanding is this has been thoroughly tested, and although I can't quote quote anything, the guideline is you can't claim interest on interest, only on the original cost.
Hi,
FYI – I have refinanced a few clients into a 'Cash Flow' facility. 2 of those being personal friends and both have finished their taxes for the year and the capitalized interest can be deducted.
There is another product due for launch that allows you to CHOOSE WHAT REPAYMENT YOU WANT TO MAKE with the minimum being $50 per month. Obviously there are conditions for this product and the remaining payments are capitalized up to the 80% LVR
Sharlene
[email protected]It's not that cut and dry Dave. Hence the ATO won't make private rulings on products such as the cashflow mortgage. Anyone thinking of using capitalised interest needs to consult their accountant on their specific situation.
Regards
Alistair
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