Refinancing your loan on a property is a common occurrence. It is usually done to improve the interest rate or general terms on the loan which is often the case as you progress and either your earnings improve or the property itself starts to increase in value, which can combine to allow you access to a better loan product.
In addition, you may wish to use the built up equity available in your property to assist with the purchase of another property and in some cases that may require you to restructure or relocate your existing loan.
For most of us this can seem quite confusing as to how the tax situation will be effected with any changes to the loans, however it is quite a logical and simple method that the Australian Taxation Office applies in working out this.
All that matters is where the original drawdown of the loan was used for. Any subsequent change or refinance simply keeps the original purpose and appropriate tax treatment.
If the loan is increased, then a pro rata allocation of the loan against the different uses is made and applied against each expense.
Where the loan is secured against, or what it may be called is irrelevant, solely where the money went is the deciding factor.
For example, if I borrow A$80,000 to buy a property that is then rented, the bank advances the money to the settlement agent so it is clear that loan was for that property and as it is rented a tax deduction can be claimed.
If I later borrow an extra A$20,000 to do some renovations to that property, then again the loan can be seen to go on spending on that property and the new interest against the total of A$100,000 still remains deductable against that property.
If I then borrow A$25,000 to go on holiday but use the equity in the house as collateral and increase the loan to A$125,000 then this extra is not allowed to be claimed as it was for private purposes (even if it was me getting my extra repayments back) and there would be a pro rate claim of 100/125 (or 80%) of the interest as a deduction and the remaining as private with no claim allowed.
If I used the equity to help with deposit on another rental property instead of a holiday, then that portion would be a deduction against the new rental property, not the original one.
If I then refinance to another bank, then this ratio comes with the new loan as the original use is tracked forward. It does not matter how many times this occurs, as each time a redraw or refinance happens, you simply recalculate the ratio and bring that forward.
The main thing to be wary of here is if you want to repay the debt. If the loan is all in one amount then any repayment is also allocated in the ratio of the loan use, so if you wanted to pay off the A$25,000 holiday loan, only 20% would be allocated to reduce that portion on a proportionate basis. This would be detrimental so it is best to split the loans prior to this so that all the A$25,000 repayment can be used against a separate identifiable loan.
Many changes can be somewhat confusing over time if the proper records are not kept, so make sure you check with your accountant or tax agent if you are in doubt prior to any repayment of refinance.
