How To Borrow And Slash Your Mortgage
Sun Herald
Sunday April 13, 2003
IT seemed a great idea paying off your mortgage in just five years while at the same time buying an investment property, courtesy of the taxman.
If only a lender would give you a moratorium on the interest payments of the investment loan, which would be tax deductible anyway, you could put everything into paying off the main mortgage.
Once you'd paid off the home, you could then tip everything into an investment loan, helped by the money saved through the tax deductions on interest you hadn't paid.
Austral Mortgage thought so too, but the taxman didn't like it.
He didn't mind the normal interest being deductible on the investment loan, but wouldn't allow the extra interest being capitalised as a deduction.
The Federal Court had ruled that a couple had taken out the Austral split loan to refinance two properties, not to get the tax break.
But on Friday the Tax Office was granted leave to appeal against this.
Austral claims its split or double-sided loan works whether the taxman comes to the party or not; you still pay your home off quickly and end up with an investment property as well. The tax benefits are a bonus. Since the interest rate is the same on both loans, while one is blowing out the other is shrinking fast, cancelling each other out.
But investors can still win by applying the same principle ``without upsetting the taxman", Karen Anderson of mortgage broker Prime Alliance says. The trick is mixing lenders, plus the piece de resistance of an overdraft facility.
In short, you run your home loan as if it's a small business.
Anderson says it's Tax Office-friendly (but can't get a ruling until the High Court makes its decision) because it doesn't capitalise interest, nor does it use the same security your home for both loans.
She suggests using one lender for the mortgage and another for the investment property, or at least separate contracts with separate security. But with the mortgage for your home, get an overdraft facility. You use this on all expenses, including interest, for the investment property.
In short, you borrow on the overdraft to pay the interest on the investment loan. And bingo! The interest on the overdraft, in effect transferred from the investment loan, has become tax deductible.
It's well-established in the tax system that income from an investment can be used wherever you like. For example, rent from an investment property does not, from a tax point of view, have to go towards paying off the underlying loan.
So, like the Austral mortgage, you can use the rent to pay off your home loan. Many small businesses do this: run a large overdraft of business expenses, but use their profits to pay off the mortgage or personal debts.
Tax implications aside, each approach has pros and cons.
Austral's is convenient because everything is done through one lender. That also saves on fees.
But Prime Alliance doesn't lock you in to, say, a 25-year mortgage. It also gives you more flexibility: with two properties as collateral, you can borrow more for another investment.
Property prices to jump
PROPERTY prices will jump another 15 per cent this year, said Raine & Horne chairman Max Raine.
His prediction is backed by reports from home lenders of a pick-up, with some reporting a record month in March.
Sharemarket jitters and the prospect of continuing low interest rates appear to have spurred buyers and investors.
``Supply is as short as it has ever been and demand continues to grow," Raine who is credited with tipping the 2001 housing boom said.
Unit prices reached a record high in March and home prices a near record, says the independent CPM Research.
``This rebound is being driven by continuing low interest rates."
© 2003 Sun Herald