My brother-in-law has the following situation:
He has just purchased a new property that will be an IP for about 2 years and then he and his family (wife plus 2 kids – 3yo and 1yo) will move into this property as their PPoR.
He owns an existing IP worth $550K, with a mortgage of $150K. He was planning to use the equity in this IP to fund 20% deposit of the new property + stamp duty, other costs, etc.
The bank has suggested he refinance to have one loan (? line of credit) against the existing $550K property, for $300K, which would consist of the $150K owing on the $550K property and $150K to fund deposit, etc for the new IP. The new IP would then have a separate loan for the remaining mortgage (ie, would not be cross-colateralised).
At the outset, when both properties are IP's, my brother in law is assuming the interest on the line of credit of $300K will be fully tax deductible. When he moves into the new property and it becomes his PPoR, I am assuming $150K of the LOC will no longer be tax deductible. Is this correct?
It seems like the loan structure suggested by the bank could become messy down the track and just wondering if others have come across this scenario or can suggest a better loan structure?
Cheers,
PaulHi Paul
I say it ever day Banks and their employees should be held liable like we are as Mortgage Brokers and FInancial Planners.
Clearly the strategy and suggested structure your brother in laws lender has suggested will cause him so many problems down the track it is not true and potentially he could kiss goodbye to the interest deduction not only on the new $150K borrowing but also the current $150K on his present PPOR.
It sounds to me like he is talking to someone without any experience of loan structuring or Tax planning.
This is a minefield and when he moves in it is too late to change.
He needs to think about:
1) The loan structure both now and in the future.
2) The entity or names in which the asset is purchased.
3) Whether he looks at selling the current home to the party on the highest marginal Tax rate and gearing to 100% as eventually this will be the IP and then shifting non deductible interest to deductible.Try and convince him NOT to proceed as is.
God Bankers make me so annoyed when they are so concerned about keeping the client and not loosing them to a Broker yet they tell clients absolute rubbish and then are never there to pick up the pieces down the track.
Richard Taylor | Australia's leading private lender
You must be logged in to reply to this topic. If you don't have an account, you can register here.
