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I am looking to refinance my 2 investment properties.
#1 – in both names and current LVR approx 30%
#2 – in my name only and current LVR is 100%.
Am looking to split the #1 loan or use LOC and use the funds to bring the #2 loan down to below 80% for Mortgage Insurance etc. My question is I can claim the interest on the split/LOC in my name only? ie since wife is not working is most tax effective against my name.
Answer
The basic rule is that the interest on a loan is only tax deductible when the money was used to buy an income producing asset or to refinance a loan that was used to buy an income producing asset. It does not matter where the loan is secured.
Who gets to deduct the interest is generally determined on the same basis as the ownership of the income producing property ie joint ownership 50% of interest is deductible each, though there are exceptions when the owners have borrowed separately to buy their share.
It should not matter who’s name the loan is in but the ATO have been known to be a bit silly about this in some private rulings. If you want to be really careful about the 100% deductibility to one borrower of a loan in joint names simple draw up a loan agreement where the other borrower agrees to lend their half to the borrower that is using the money to buy an income producing asset only in their name.
If you already have the loan then you would have already paid the mortgage insurance and it is very unusual for it to ever be refunded. So I will assume you are in the process of arranging the finance for investment property number 2.
Ideally you should organise a loan in your name but with the bank also taking some security over the first investment property to meet their LVR requirements. With your wife simply guaranteeing that security. But if the bank wants her to be on the loan document too then I suggest she formally loans you her share of the funds and thenyou have covered yourself.
Even if the loans are already in place and there is some way you can get your mortgage insurance back it would seem to me that it would be easier just to give them some more security from investment property 1 rather than organising a new loan. If you do organise a new loan as you say from loan number 1 then that loan is going to be in joint names so do the loan agreement between you and your wife anyway and be very careful to show the funds from that draw down going straight into number two loan no detours by any other bank account.
Here is a link to our claimable loans booklet that has lots of articles that will interest you there is also a list, on the front page, of brokers we trust. http://www.bantacs.com.au/booklets/Claimable_Loans_Booklet.pdf You may like to ring one of them to discuss how banks will deal with this arrangement. For example if Loan 1 and 2 are with two different banks you will have a problem with my idea of cross collateralising. I know some people do not like the banks to have access to two houses for one loan but really not giving them security will only slow them down. If you don’t pay the loan off they will get the other property eventually.
This advice has been provided on the basis of the limited information you have provided. Please do not act on it without having an Accountant look thoroughly into you particular situation.
