Mixed loans can be a complex tax issue to understand. This blog post aims to demystify some of the challenges and considerations associated with mixed loans, especially in relation to property investment.
What is a Mixed Loan?
A mixed loan is a type of loan that is used for multiple purposes. For instance, a loan could be used for the purchase of an investment property and the same loan was also used for private purposes such as purchasing your main residence.
For example, let’s assume that Michael has a original loan of $150,000 and used the funds to purchase his main residence.
He has paid the loan down to $50,000 and has $70,000 available as a redraw.
Michael decides to purchase an investment property and uses the $70,000 as a deposit for an investment property and for the stamp duty on the investment property.
Michael therefore has a mixed loan which is made up of $70,000 for investment purposes and $50,000 for private purposes.
The Challenge of Tracking Mixed Loans
Tracking a mixed loan can be quite challenging, especially when there are multiple apportionments to consider. For instance, you may need to record each transaction separately, categorising it according to the property it relates to.
Each month, you’d then need to calculate the ratio between the properties and apportion the interest and fees accordingly.
This process can be tedious and prone to errors, which is why it’s often recommended to let the bank handle it by splitting the loan.
What Happens to Repayments I Make if I do have a mixed loan?
If Michael has a mixed loan, then any repayments made to the loan will need to be apportioned across the private portion and the investment portion.
The ATO says you can’t just allocate the payments and say they came off the non-deductible portion first.
So every time Michael makes a repayment, he is reducing both his deductible and non-deductible portion of his debt reducing this tax deductions.
If structured properly Michael would be able to maximise his deductible interest.
The Risks of Mixed Loans
While mixed loans can offer flexibility, they also come with certain risks. For instance, lines of credit and split loan facilities can lead to a mess of mixed-purpose loans if not managed properly.
This can result in a situation where you have to analyse each transaction to apportion each month’s interest payment. In some cases, this could even jeopardize the deductibility of the loan.
In conclusion, while mixed loans can be a useful financial tool, they require careful management and understanding. It’s always advisable to seek professional advice when dealing with such complex financial matters.
Can I fix the problem?
Fortunately, the ATO allows a mixed loan to be fixed.
You will first need to work out the portion of debt that relates to private purposes and the portion that relates to investment.
Once this apportionment is worked out using a loan apportionment calculator, you can then split the loan into two separate loans and claim interest on the deductible portion only.