split loans and investment property

Question

Hi Julia
have your book and subscribe to the bantacs newsletter, and have read everything in the online property section. They are fantastic information sources.

All this reading has scared me away from the two words "split loans". So my question with respect to my situation below, can a split loans exist, that does not have capitalising interest, but provide the 20% deposit for an investment property and have the interest deductible? What should I look for and what should I avoid with a split loan setup?

From what else I have read, line of credit + split loan = bad.
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I’m in the process of financing 2 investment properties at 100% interest only, in my name only. They are for $410k and $423k.

The home my wife and I live in is valued at $950k, with a $155k loan P&I in both our names. I have a $140k income, my wife has near 0 income. no other debts.

The mortgage broker has found the following loan package where

Investment interest only loan 1 = 80% x 410,000 = 328,000 this tax deductible
Investment interest only loan 2 = 80% x 423,000 = 338,400 this tax deductible

Interest only loan = 20% x (410000 + 423000) = 166,600 is this tax deductible?
Split with
new home loan P&I = 155,000

I will receive 4 separate loan statements, and treat them as separate.
I avoid having to pay mortgage insurance by using the 20% split.

thank you

Answer




At first I wondered why you were worried about mortgage insurance as you have so much equity but now I realise what you are saying is that the loan for the 20% of the investment properties has to be secured by your home, the other loans are secured by their respective properties. Right?

Yes lines of credit and split loans are dangerous if not used correctly so if you don’t know what you are doing they are best avoided. You sound like you have read enough to know what you are doing. So here are the things to watch out for.

Lines of credit give you flexibility to spend more than you earn so should be avoided if you lack self discipline.

Lines of credit and split loan facilities where you have floating caps can allow you to mess about with the loans ie draw down here for private purposes, pay rental expenses there etc leaving you with a mess of mixed purpose loans where at best you have to analyse each transaction to apportion each month’s interest payment and at worse the churning will destroy all deductibility of the loan.

In Harts case one of the distinctive elements of the loan arrangement was that the loan for the rental property and the home loan were linked such as they are in the split loan arrangement you describe for your deposit and home loan. This allowed Hart to increase the cap on the rental loan as he paid down the loan on the home loan. Basically that when looking at the overall limit of your available credit the two loans were simply added together. Such a loan arrangement would be a problem if you were capitalising interest but the way the ATO has been going to town on Part IVA and capitalising interest any loan arrangement would be caught anyway. You say you are not going to capitalise interest, in other words you will make sure all interest payments on the loans are met without having to borrow funds. As you are not going to capitalise interest then you do not have to worry where the loans are secured. Even if you did accidently capitalise interest it would only be the deductibility of that capitalised interest that would be in doubt.

In short, you do not have to worry, in your particular circumstances about the loans being linked, just make sure you don’t intermingle private borrowings in your deductible loans.

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