Tax Q&A: Buy now with cash or wait for mortgage

By Contributor | 04 Jul 2019

I am currently disputing a legal matter with an ex. He’s living in a unit where I was coerced into allowing him to have 10% of the tenants in common ownership. I only have verbal agreement that he will pay for that share. 

I have good legal advice and have protection in place for my investments. My concern is that I cannot refinance my current portfolio until this legal matter is dealt with.

But I want to continue increasing my investment portfolio, renovating and holding it to rent. I have the cash funds to purchase properties that are not tied up, although in the long run I would prefer to obtain finance for my investment properties and claim taxation deductions, and use my cash funds for renovation and/or redevelopments. 

Can you please advise whether it’s in my best interests to purchase with my cash funds so I can start renovations ASAP to upgrade the property value and tenant appeal; then, once this legal matter is finalised, get finance for my properties so I can have tax-deductible loans and free up my cash again?

Regards, Shellie


A: Thanks for your questions. We certainly sympathise with your personal situation in relation to your ex-partner.

I want to focus on increasing your investment portfolio, where you are looking to renovate your properties and hold. I note you have cash funds to purchase properties; as you are aware, you may need cash funds of up to 20% for the purchase of a property to complete a transaction, particularly since you may not be able to access equity from another property where you currently own tenants in common with your ex.

In terms of future purchases and renovation of properties, from a tax point of view, when borrowing, you can only claim the deduction if the borrowing of the money can be directly linked to an income-producing activity, eg the purchase of an investment property. So, for the purchase of a $500,000 property, for example, if you were to use $250,000 cash and borrow $250,000, you could not then substitute additional borrowings to pay yourself back and claim a deduction on the $250,000, which you originally made with a cash deposit. I will always advise that you borrow the maximum that you can and save your cash for nondeductible assets, such as a principal place of residence.

We advocate this because it’s still possible, if you want to reduce monthly interest holding costs, to use an o­ffset account facility whereby interest is reduced until that amount of savings in the o­ set account is taken and used for other purposes.

Using the example of the $500,000 purchase, if you borrowed $400,000 and kept $150,000 in an interest offset account, you would only pay the same amount of interest as the original loan of $250,000. If you were to then use the $150,000 in the offset account for another purpose, the whole $400,000 would still be deductible. The same principle applies to renovations or developments in terms of interest deductibility. Having excess cash, particularly for redevelopments, might be the difference between completing and not completing a transaction.

In short, borrow as much as you can up front, and preserve cash funds for non-deductible purchases, or for use if you can’t obtain money from a bank for additional refurbishments.

Refinancing properties after the fact is problematic unless you are using refi nanced monies to produce an incomeearning activity.

Need to know

  • Borrow as much as you can up front.
  • Preserve cash funds for non-deductible purchases like a PPOR.
  • Refinancing properties after the fact can be problematic unless used in an income-earning activity

David Shaw
CEO of WSC Group



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