Split loans back on the menu
Mortgage providers are going ahead and relaunching owner-occupier/investment split loans following a legal win against the Australian Taxation Office, despite the ATO announcing it will challenge the decision in the High Court.
These split loans are a mortgage divided into several accounts: one for personal use, such as buying a home, and another for investment purposes, such as buying shares or an investment property. Principal and interest payments on the investment account are deferred until the home loan account is paid off. This allows a home loan to be paid off twice as fast, as interest is calculated on the total loan but offset against the home loan account. Also, compound interest on the investment account is fully tax-deductible. The benefit to the investor is that interest on the home loan account is switched to the investment account, going from being non tax-deductible to tax-deductible.
Brad Seymour from Wizard Financial Services says he's watching the situation closely and will re-enter the market when the time is right. There's a real market for this kind of product, he said, as most of us use mortgages as our primary tool for wealth creation. However, the possibility of High Court action may create doubt for another year about this kind of product.
George Zakher of New Loan says his company will launch its Tax Smart line of credit product, a variation on the split loan, despite the ATO move but he doesn't advise people to unwind existing loan structures. But there's no downside for people already looking at refinancing or for new purchases.
Lisa Montgomery, CEO of Infochoice, says borrowers must understand the structure of a split loan and make sure it's affordable. She says that people considering switching should check out interest rates and penalties. Split loan rates are higher than the average standard variable rate of 6.57 per cent, but some lenders do offer lower rates, for example RESI at 5.75 per cent.