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Refinancing an investment loan - LMI deduction
Topic Started: 19 Aug 2014, 03:46 PM (458 Views)
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I buy an investment property(IP1) today and borrow 80% LVR to purchase it, 6-8 months later(or maybe even 1-2 years later – time really does not have any bearing here) I decide to refinance the loan to 90% LVR – (with the same bank) – but use the extra 10% as deposit for a subsequent investment property(IP2). Refinance in this case as it is for 90% will incur a lender’s mortgage insurance cost on IP1. Does the ATO allow the LMI to be deducted as a borrowing expense (remember the LMI is against IP1)? I understand that the interest payments on the 10% extracted from the refinance will be tax deductible since it will be used for an investment, but not sure where the LMI fee (for IP1) will sit in this case? as it is a genuine expense of borrowing the additional 10% to fund an investment?
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miw
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swi
19 Aug 2014, 03:46 PM
I buy an investment property(IP1) today and borrow 80% LVR to purchase it, 6-8 months later(or maybe even 1-2 years later – time really does not have any bearing here) I decide to refinance the loan to 90% LVR – (with the same bank) – but use the extra 10% as deposit for a subsequent investment property(IP2). Refinance in this case as it is for 90% will incur a lender’s mortgage insurance cost on IP1. Does the ATO allow the LMI to be deducted as a borrowing expense (remember the LMI is against IP1)? I understand that the interest payments on the 10% extracted from the refinance will be tax deductible since it will be used for an investment, but not sure where the LMI fee (for IP1) will sit in this case? as it is a genuine expense of borrowing the additional 10% to fund an investment?
I would say yes, and it should be a borrowing expense against IP2 because the expense happened as a result of your purchasing IP2. Remember it is the purpose and not the security that matters.
The truth will set you free. But first, it will piss you off.
--Gloria Steinem
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Trojan
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swi
19 Aug 2014, 03:46 PM
I buy an investment property(IP1) today and borrow 80% LVR to purchase it, 6-8 months later(or maybe even 1-2 years later – time really does not have any bearing here) I decide to refinance the loan to 90% LVR – (with the same bank) – but use the extra 10% as deposit for a subsequent investment property(IP2). Refinance in this case as it is for 90% will incur a lender’s mortgage insurance cost on IP1. Does the ATO allow the LMI to be deducted as a borrowing expense (remember the LMI is against IP1)? I understand that the interest payments on the 10% extracted from the refinance will be tax deductible since it will be used for an investment, but not sure where the LMI fee (for IP1) will sit in this case? as it is a genuine expense of borrowing the additional 10% to fund an investment?
As with miw's response, the answer is yes but only against IP2.
Note LMI and borrowing expenses are not written off in the year they are incurred but spread out over 5 years.
I put trolls and time wasters on my ignore list so if I don't respond to you, you are probably on it ....
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peter fraser
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swi
19 Aug 2014, 03:46 PM
I buy an investment property(IP1) today and borrow 80% LVR to purchase it, 6-8 months later(or maybe even 1-2 years later – time really does not have any bearing here) I decide to refinance the loan to 90% LVR – (with the same bank) – but use the extra 10% as deposit for a subsequent investment property(IP2). Refinance in this case as it is for 90% will incur a lender’s mortgage insurance cost on IP1. Does the ATO allow the LMI to be deducted as a borrowing expense (remember the LMI is against IP1)? I understand that the interest payments on the 10% extracted from the refinance will be tax deductible since it will be used for an investment, but not sure where the LMI fee (for IP1) will sit in this case? as it is a genuine expense of borrowing the additional 10% to fund an investment?
If you ask your bank to cross collateralise the two loans they may be able to debit all of the LMI costs to the new account - maybe.

It will be an expensive exercise in LMI for you with both loans attracting full LMI premiums. I hope that it's a good deal.

Edited by peter fraser, 19 Aug 2014, 05:45 PM.
Any expressed market opinion is my own and is not to be taken as financial advice
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Mike
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peter fraser
19 Aug 2014, 05:45 PM
If you ask your bank to cross collateralise the two loans they may be able to debit all of the LMI costs to the new account - maybe.

It will be an expensive exercise in LMI for you with both loans attracting full LMI premiums. I hope that it's a good deal.
I agree, be careful.

If both IP are at 90% make sure you are buying at a good price and not paying top dollar. Hard to know as you did not indicate what state,city, suburb you are looking at.

Not saying it is a bad idea, just be careful.
http://mike-globaleconomy.blogspot.com.au/
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miw
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Trojan
19 Aug 2014, 05:16 PM
As with miw's response, the answer is yes but only against IP2.
Note LMI and borrowing expenses are not written off in the year they are incurred but spread out over 5 years.
Of course the LMI could be charged against Loan account 1. But it would still be a borrowing expense against IP2.

It is important to keep this all clear and documented, because things can get quite hairy later on if you do not.
The truth will set you free. But first, it will piss you off.
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