Navigating the Complexities of Mixed Loans

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.

Frequently Asked Questions

What is a mixed loan?

A mixed loan is a type of loan used for multiple purposes. For example, it could be used for the purchase of an investment property and at the same time for private purposes like buying your main residence.

Why is tracking a mixed loan considered challenging?

Tracking a mixed loan can be complex due to the need for multiple apportionments. Each transaction needs to be recorded and categorised according to its specific purpose, and each month, the interest and fees need to be apportioned between the properties. This process can be time-consuming and prone to errors.

How are repayments apportioned in a mixed loan?

Any repayments made towards a mixed loan are split between the private and investment portions. According to the ATO, you can’t allocate the payments to only one portion of the loan. Therefore, every repayment reduces both the deductible and non-deductible parts of the debt.

What are the risks associated with mixed loans?

While mixed loans provide flexibility, they can also pose certain risks. Lines of credit and split loan facilities can create a muddle of mixed-purpose loans if not managed properly. In some scenarios, you might have to scrutinize each transaction to apportion each month's interest payment, which might even jeopardize the deductibility of the loan.

Is it possible to rectify issues with a mixed loan?

Yes, the ATO allows for a mixed loan to be fixed. The debt should first be apportioned into private and investment portions. Once this is determined with a loan apportionment calculator, the mixed loan can be split into two separate loans, and you can claim interest on the deductible portion only.