Tax related – mortgage interest

[Chelsea]

Hi I have one question as above and appreciate if anyone can shed some lights.
For example:

I have a residential unit has a market value of $200k, it has a mortgage of $100k, so the maximum value I can top up for this is unit is:
200k * 80% - $100k= $60k
I am going to purchase a rental property with market value of $500k, due to new LVR rule I can borrow $350k ($500* 70%).
So overall I can borrow up to $410k ($60k+350k) from the bank, technically.

If eventually I end up buying a rental property for a purchase price $410k, then technically I can borrow the full amount from bank, is this correct?
Then my questions is:

Will the mortgage interest on the loan of $410k tax deductible against the rental income or only $350k will be tax deductible (because the $60k is top up from my existing residential unit)?

[marklowes]

Hi I have one question as above and appreciate if anyone can shed some lights.
For example:

I have a residential unit has a market value of $200k, it has a mortgage of $100k, so the maximum value I can top up for this is unit is:
200k * 80% - $100k= $60k
I am going to purchase a rental property with market value of $500k, due to new LVR rule I can borrow $350k ($500* 70%).
So overall I can borrow up to $410k ($60k+350k) from the bank, technically.

If eventually I end up buying a rental property for a purchase price $410k, then technically I can borrow the full amount from bank, is this correct?
Then my questions is:

Will the mortgage interest on the loan of $410k tax deductible against the rental income or only $350k will be tax deductible (because the $60k is top up from my existing residential unit)?

Im sure one of the resident accountants will be along soon to give you the proper answer, but my understanding it ALL interest on the full 410 will be tax deductible as whats important is the purpose of the lending, in this case the purpose is to buy a rental property.

I would check you can borrow that much though, its possible the bank would group both properties and require 30% across both (not 20% across first one and 30% across new one as you have indicated).

Let us know though as this is all new and many questions remain!

thanks

[OneStepCloser]

From my understanding, the bank will use your purchase price as market value for your loan. However, you can do a revaluation after 6 months and top-up the loan. The rules may be different for different banks.

[Rosco]

Hi Chelsea,

I'll stick to the tax part, and I'm sure a mortgage broker will help on the borrowing part.

The interest on the loan (s) you use to buy a rental will be deductible.
- So if you borrow $350k to buy the rental, secured over the rental. Then the interest will be deductible.
- If you borrow a further $60k to buy the rental, secured over your personal house. Then the interest will be deductible.

Ross

[Chelsea]

Im sure one of the resident accountants will be along soon to give you the proper answer, but my understanding it ALL interest on the full 410 will be tax deductible as whats important is the purpose of the lending, in this case the purpose is to buy a rental property.

I would check you can borrow that much though, its possible the bank would group both properties and require 30% across both (not 20% across first one and 30% across new one as you have indicated).

Let us know though as this is all new and many questions remain!

thanks

yes i am not too clear about this but based on what I heard, you can borrow up to 100% as per my above calcu for overall maximum loanable value.

[Chelsea]

Hi Chelsea,

I'll stick to the tax part, and I'm sure a mortgage broker will help on the borrowing part.

The interest on the loan (s) you use to buy a rental will be deductible.
- So if you borrow $350k to buy the rental, secured over the rental. Then the interest will be deductible.
- If you borrow a further $60k to buy the rental, secured over your personal house. Then the interest will be deductible.

Ross

thanks Ross, so in your opinion, the $410k will all be deductible doesn't matter it secure against my personal property or rental property?

[Rosco]

correct

Ross

[BigDreamer]

thanks Ross, so in your opinion, the $410k will all be deductible doesn't matter it secure against my personal property or rental property?

I'm not Ross but assuming that the $410k is used for an investment property and not for anything else then yes, it does not matter whether it is secured against your PPOR or IP.

[Chelsea]

thank you all, you are all very helpful.

[Bob Kane]

I have a residential unit has a market value of $200k, it has a mortgage of $100k, so the maximum value I can top up for this is unit is:
200k * 80% - $100k= $60k
I am going to purchase a rental property with market value of $500k, due to new LVR rule I can borrow $350k ($500* 70%).
So overall I can borrow up to $410k ($60k+350k) from the bank, technically.

If eventually I end up buying a rental property for a purchase price $410k, then technically I can borrow the full amount from bank, is this correct?

No, it's not.
You can borrow 70% of the purchase price - not the market value.
If you buy the property for $410k then you can borrow $287k ($410k *70%). Add the $60k from the other property = $347k total available to borrow.
All the interest on the $347k will be deductible.

[Anthonyacat]

As Bob has said, most banks won't lend you 70% of the market value at purchase, but 70% of the purchase price. You can then revalue it to extract the extra equity a few months down the track. I have heard of what you describe happening, but it's very rare.

So you can only borrow $287k (trusting Bob's math) at time of purchase, and need to make a deposit of $123. You can then ask the bank a few months later to give you the extra $123, and most of the time they'd be happy to as you have plenty of security. However, because that extra borrowing was not for the purchase of the property, it wouldn't be deductible.

But if instead of making the $123 deposit from your own funds, you borrowed it from elsewhere (friends, family, credit cards, etc) then the mortgage top up would be deductible, because it is taken for the purposes of paying off another loan which was for the purpose of buying the property.

[Chelsea]

yes i missed this! thanks for pointing it out.