Structuring mortgages
Question from Louana updated on 21st June 2019:
I have a rental property purchased at $500,000 and a home loan for $350,000. The rental property is under the LTC owned by my husband and I. We have been approved for refinancing and both the rental property and the home loan will be under the same bank which holds security on both properties.
Can we structure our mortgages as follows: rental property mortgage will be $550,000 and home loan mortgage will be $300,000? Can we load as much debt onto our rental but keep the home loan as low as possible so we can pay it off faster. In this case can we use the equity from the home loan to buy another rental property?
Our expert Mark Withers responded:
No, you can’t. An LTC can borrow money to distribute a dividend from the unrealised revaluation of its property assets, subject to remaining solvent. But the interest on the loan drawn to pay this is only deductible to the extent that the shareholder loan represents contributed capital from the shareholder – ie: real money they have lent the company. So, in effect, you get no interest deduction beyond the debt associated with the acquisition of the property at its original cost price.
Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.
Search the Ask an Expert archive
Browse all questions in the Ask An Expert Archive »