Each week, financial adviser and international best-selling author Noel Whittaker answers your questions. firstname.lastname@example.org
I have a long-term goal to keep my present house and rent it out when I move to my next house, so last year I set up an offset account and am paying double my normal repayments into it. To maximise tax benefits when it's time to rent my current house, should I be paying only the interest on my existing loan and putting the rest of my money into the offset account, which is a 100 per cent offset? My plan was to pay the mortgage down while also putting money into the offset account, then when I want to buy a new house, I would redraw the maximum amount on the rental house loan. Is this the right strategy or will redrawing on my existing loan limit what I can claim on tax later on?
If you intend to keep the existing house and rent it out, you should be keeping the loan on it as high as possible. By having it on a 30-year term, and accumulating all your spare funds in the offset account, you are setting yourself up to enjoy good tax breaks in the future. When you buy the new home, you could simply withdraw the money in the offset account to minimise the amount you will need to borrow, leaving the original loan intact to maximise the amount you can claim in interest. You do not want to be in a position where you are borrowing against your rental property to buy your own residence - the interest on that loan would not be deductible.
We have a house originally bought as an investment and rented for 18 months. We then moved in and renovated and it has since been our principal place of residence, but we are now thinking of selling. How do we work out how much capital gains would be applied to the sale if it has been our principal residence for 10 years? Do we take into account the cost of renovation, rates and interest, and is the capital gains halved because we lived in the house for over 12 months, or is it income?
You can include all the costs of ownership, such as rates and interest, that have not otherwise been included as a tax deduction for the whole period of ownership. Renovations are included in the cost base, as are buying and selling costs.
The whole capital gain for 11½ years is calculated and then apportioned 1½:10 on an actual-number-of-days basis. This 1½ part of the gain over 11½ years is then split according to ownership. For example, if you are joint tenants, it is split 50-50. You are each entitled to a 50 per cent discount in your personal tax returns - the remaining 50 per cent is taxed as normal income.
There are some very useful capital-gains calculators available for purchase at a reasonable price on the BAN TACS website.
Some years ago, I used an interest-only mortgage to buy an investment property, which I still own, although it is no longer negatively geared, since the rent I receive is greater than the monthly interest payments. What is the best thing to do with a negatively geared investment property when it is no longer negatively geared?
First of all, congratulate yourself that you no longer have to support it. I'd rather have an investment that was paying me than one that was costing me money. Your choices are to sit back and enjoy the extra income, or use the surplus from that asset to do more borrowing for investment. The younger you are, the more you should favour the latter option.
I have a question regarding refunds on mortgagee lenders' insurance that you have to take out if you have only 10 per cent deposit. We paid our loan out at 22 months. We paid over $6000 in lenders' insurance. Our bank is saying I am not entitled to any refund. Have the rules changed?
Unfortunately, it is most unusual for a lender to refund mortgage insurance. This makes it very hard to switch lenders because a person with a low deposit who tries to do it would lose their initial premium, and be faced with another lot of mortgage insurance to qualify for the loan from the new lender.