Refinancing to get a better rate, tax treatment advise requested?

Discussion in 'Property investment and tenants' rights' started by Seamus00, Aug 11, 2017 at 9:53 AM.

  1. Seamus00

    Seamus00 New Member

    Posts:
    2
    Hi,

    I would would like input if anyone has experience of this issue. The figure/situation below is simplified but issue the same.

    Situation:

    I have 100k at 6% rate on a buy to let property loan. The 6% interest is hurting me. I am buying a new house as a principal private residence for 200k and need no finance to do this.

    Potential Solution:

    I was thus thinking of taking out a home mortgage at 4% for 100k at the same time as the house purchase for 200k. The 100k would then be immediately paid of the commercial loan thereby saving me 1% per year for 30 years. The bank is fine with this, but the security and purpose of the loan will state the new house and not specifically the buy to let property i.e. it will be considered by them a home mortgage.

    Question

    My question is, can I still use the 4% interest charge as a deductible against the rental income from the original property. I see this as refinancing, but will the tax man?
    and how do I help him/her see this as refinancing?

    I have received advise, but there was no clear answer.
     
  2. Gordon Gekko

    Gordon Gekko Frequent Poster

    Posts:
    1,946
    Yes, the interest will still be deductible.

    Revenue recognise the distinction between security for funds and purpose of funds.
     
  3. Seamus00

    Seamus00 New Member

    Posts:
    2
    Thanks good feedback. I was nervous in relation to the purpose and the detail of how the loan will be reduced.

    In practice what will have to happen is that I will transfer 200k to solicitor and the bank will transfer 100k. The solicitor will then pay the 200k to buy the house and a 100k to reduce down the loan. So my concern was on that revenue might argue that the 100k from the bank actually went on the house purchase. This seems not to be the case from your input. Cheers.
     
  4. Brendan Burgess

    Brendan Burgess Founder

    Posts:
    32,069
    If you take out a loan today from EBS at 4% to pay off a Buy to Let loan at 6%, then it's clearly a refinancing of a loan and it continues to be tax deductible.

    So if you buy a house with €200k cash and later remortgage it, then there is no issue.

    However, you have €200k cash.
    You are going to pay €100k off your buy to let mortgage
    You are going to borrow €100k to buy the house

    In your head, that is a refinance, but it's not on paper, so I think Revenue would disallow it.

    To be clear, you should buy the house for cash first and then remortgage it.

    Brendan
     
  5. Brendan Burgess

    Brendan Burgess Founder

    Posts:
    32,069
    A bigger question might be whether you should have a buy to let property at all if you need to borrow at 6% or 4% to finance it.

    If you provide all the figures, we could give you some views on it.

    Not sure why you are borrowing at 4% when the LTV will be 50%.

    Brendan
     
  6. etablet

    etablet New Member

    Posts:
    1
    Hi Brendan,

    The slight issue with doing exactly as you say, is then the bank considers it radically differently and you don't get the same rate, this is a technicality with the bank. So almost no point doing it. The rates/figures used are not exact and I could be getting slightly lower than 4% if considered a mortgage by the bank.