Beware of split loan promotions
Money Matters by George Fredrickson

You have your own mortgage you are paying off ever so slowly. And you hear you can get an investment property and make all repayments off your own mortgage.

The concept behind this split loan is that your own mortgage is not tax effective and there are not any deductions allowed.

Whereas for an investment property you can have lots of tax deductions, such as interest on the loan, rates, maintenance, agents’ fees, etc. If your deductions are greater than the income (rent) received, then you are negatively geared and the Australian Taxation Office (ATO) will give you a refund.

The Federal Court recently gave the green light to these split loan style of repayments. So prepare yourself for a flood of advertisements to tease and tempt you into renegotiating any and all current mortgages.

But there is a major issue you should be aware of – the ATO is appealing the decision and taking it all the way to the High Court.

At stake could be billions of tax dollars going back to property investors to pay off their home mortgage.

If the appeal is not successful, investing as we now know it could be turned on its head.

To understand more about the split loan concept, look at the following example.

You have a $100,000 mortgage at seven per cent for 25 years. You will pay $707 a month (most of which will be interest in the first few years). If this is on your own house, then repayments are made with after-tax dollars.

You then go out and purchase a $100,000 unit at the same interest rate and receive rent of $500 a month. You will find yourself in a negatively geared situation and perhaps receive nearly 50 per cent of that shortfall back from the ATO (easily more than $100 a month when you take into consideration other deductions).

With a split loan you can have both repayments taken off your home mortgage, effectively eliminating this one as quickly as possible.

Your tax deduction-laden investment property mortgage is actually increasing during this time, however the interest provides a larger tax deduction. And, in theory, a greater tax refund.

So repayments on your home mortgage would double to $1414 a month, and that $100,000 mortgage would be gone in roughly 7½ years rather than 25 years. By that stage your mortgage on the investment property would have ballooned to some $170,000.

However, up to 50 per cent of that increase would have been funded by the ATO’s generous tax refunds while you were wiping out your non-deductible home mortgage ASAP.

Sounds too good to be true?

Negatives exist. As with any negatively geared investment, you should only be interested in capital growth and any taxation benefits should be viewed as a bonus. It is the asset that is of supreme importance.

And also remember the other problems associated with investment properties – too many properties on the market, the expense of buying a property, rents might not go up like the prices of property, a whole class of renters have bought their own homes using the First Home Buyers Grant, tenants will haggle for lower rents and incentives, and so on.

Until the ATO’s appeal is settled, it would be advisable not to enter into one of these split loan schemes.

• George Fredrickson is an authorised representative of Ray Carnall Financial Services.
  

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