Currently all our loans are interest only (for first 5 years) and then converting to P+I. Payment to cover the loans comes out of our LOC.
So far i have been careful to ensure that everything coming out of the LOC is purely a rental expense (eg rates, insurance, interest). To maintain tax deductability of the interest payments for the LOC.
My question is what happens when the loans convert to P+I? The interest portion is a tax deductable expense. But the principal portion wouldnt be, and neither would any interest incurred on it. What do other forumites do in this case? Do you persuade the bank to collect the interest portion from one account, and principal from another?
Every investor i have spoken to so far says all my loans are interest only !! Can that go on forever? Do the banks at some stage say, no – you are now age x. You need to start paying off the principal..
Comments anyone
After 5 years just ask to stay on interest only.
I've never heard of anyone having a problem.
5 years is a long time. You may have enough property by then to pay them down and retire.
Seems a little more complex than that. Property is student accomodation
– After 5 years i can certainly remortgage (starting at interest only for first 5 years again) BUT
1) Fee involved
2) Banks no longer accept student accomodation as security for itself. So i dont wish to remortgage !!Hi WS,
It really does depend on your 'bank' and what their policy is.
One of our banks has just rolled our I/O period out beyond year 10 without batting an eyelid. Mind you they did say they wouldn't extend the I/O period for five years beyond Yr 15. Mind you they did say that after year 10 too.
Another one of our banks has also said they will extend I/O period out to 10 yrs as they have changed their I/O offerings since we initially took out the loan. On top of this we have been classified as 'good customers'
Another one of our lenders will not extend I/O beyond 5 yrs so we are currently looking at refinancing out of them into a more favourable lender.
In not so recent past ANZ would do a full real assessment of your situation if you wanted to extent I/O period beyond the initial loan term.
The banks do have slightly different positions on these matters. I suggest find a good broker (if you are not using one) and have a chat.
I think it wouldn't matter. If you are able to claim your interest on the LOC now, then in future you should be able to claim it the same even if the main loan is PI. You will just be borrowing to pay down one loan
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
The concern i have is more in relation to paying the principal portion out of the LOC. As any interest on this would not be tax deductible….so the LOC would then have some good debt and some bad (breaking the nexus??). Just trying to avoid if i can and wondered how others had achieved it.
Why do you think paying principle woudn't be deductible.?
What about if you had a loan with Bank A and you refinanced it with bank B? You would be borrowing to pay principle
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
Terryw wrote:Why do you think paying principle woudn't be deductible.?What about if you had a loan with Bank A and you refinanced it with bank B? You would be borrowing to pay principle
In that case, you are not paying off the principle, you are just rehousing the the loan facility. And the interest continues to be deductible.
…technically wobbly is rehousing the debt bit by bit by shifting it into his LOC. So interest that accrues on that is deductible.
But the money paid to reduce the principle on the other loan in itself generates no deduction (which you may not have meant).
Interest expense used to pay principal is not deductible… call it what you like. I would ask for a private ruling on this one if this was your intention.
number 8 wrote:Interest expense used to pay principal is not deductible… call it what you like. I would ask for a private ruling on this one if this was your intention.No. 8, think about that.
How can you pay principle with interest. What would happen is the principle of one loan is being refinanced with another.
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
Interesting comment TerryW. I had not thought of it like that. With a big enough LOC (s) i could never actually pay off the loan, just shift the account from which money was owed. So would always have 100% loan for property.
-Unless i desired otherwise.Really, all you are doing to paying one loan down with another loan – which is refinancing. It doesn't matter if you pay the whole loan or just a little, the principles are still the same.
eg. $100,000 loan with monthly repayments of $100 pw principle and $900 interest. You borrow $1000 from your LOC and pay the main loan. You are not claiming the $1000 as a deduction, but are claiming the interest on the LOC as a deduction. $100 of this main loan is being refinanced into the LOC and $900 is being borrowed to pay interest.
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
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