A loan reducer or pivot loan allows you to reduce your home loan rate and “shift” some of your interest payments to your investment loan.
The goal is then to pay down your mortgage faster while maximising tax benefits on your investment loan. Is it really worth it though?
You’re usually better off with a lower interest rate!
Also known as a 2% home loan, loan reducer mortgages have only recently come back into the market after a tax ruling by the Australian Taxation Office (ATO).
In many ways, they’re a gimmick that some lenders are using to get you to bundle your home loan and investment loan with them.
You’ll likely yield higher negative gearing benefits in the short-term but, over the long-term, you’re typically better off trying to get a better interest rate for both your home loan and investment loan:
- We’re experts in home loan refinance and investment loans.
- We have access to discounted interest rates not advertised to the general public.
- There are nearly 40 lenders on our panel to choose from.
Call us on 1300 889 743 or fill in our online enquiry form to discover whether you’re better off with a pivot loan or a reduced interest rate.
How do I qualify for a loan reducer mortgage?
Only a few lenders offer pivot loans. Generally speaking:
- You can borrow up to 95% of the property value.
- Maximum loan limits or mortgage exposure limits will apply.
- You’ll be required to refinance your home loan and investment loan to the lender offering the loan reducer.
We recommend that you seek advice from a professional accountant before you start investing in property to ensure that you’re taking advantage of the tax benefits while also adhering to Australian tax law.
How does it work?
Interest payments on the home loan for your owner-occupied property aren’t tax deductible.
A pivot loan allows you to reduce the interest on your home loan and increase the rate on your investment loan, allowing you to claim tax benefits on these interest payments.
In the meantime, you can reduce your principal and interest (P&I) repayments and focus more on paying down the principal.
The lender will set a ceiling rate for your investment loan and a floor rate for your home loan.
Generally speaking, the two rates will look something like this:
- Your investment rate: The Reserve Bank of Australia (RBA) cash rate plus 2.50%.
- Your home loan rate: The cash rate plus 0.40%.
Will I actually benefit from a pivot loan?
There are both pros and cons to a loan reducer mortgage. Some property investors will benefit and other won’t.
It will depend on:
- Your taxable income.
- The size of your investment and home loan balances.
- Whether your investment loan rate is higher than the discounts currently available in the market.
- What your future investment plans are, whether it’s continuing to grow your portfolio or sell (flip) your investment property in the short-term.
Bear in mind that for lenders that offer this product, it’s very much a way for them to capture your home loans and make you a “stickier” customer.
You have to also consider the cash flow benefits over the long-term in comparison to the tax benefits.
What is a pivot loan?
Loan reducer mortgages have been around since the 1990s but have only returned to the market in 2015 following an ATO tax ruling (PR2017/13).
The main benefit of 2% home loans is that it can save you thousands per year in interest payments, particularly in a rising interest rate environment.
The reason why the ATO initially clamped down on this product was that it allowed borrowers to shift all of their interest payments on their home loan to their investment loan.
Borrowers on high tax brackets and with multiple investment properties were able to claim substantial tax deductions, and the tax office saw this large-scale tax avoidance as unacceptable.
Today, only a portion of the owner-occupier interest payments will shift from your home loan to your investment loan.
For example, if you’re currently paying 4.50% per annum on your home loan, the pivot loan will switch around half of those interest payments to your investment mortgage.
Effectively, it means you’ll pay around 2.00% p.a. on your owner-occupier compared to 4.50% p.a.
Product ruling licences have only been granted to a few second-tier lenders.
Will the ATO reverse its tax ruling?
The tax office has overturned rulings in the past so, yes, it is possible.
It’s very much “wait-and-see”.
What are the alternatives?
A 2% home loan is a great idea in theory, and there are cases where some borrowers have benefited.
However, the investment loan portion typically has too high a rate to make the loan reducer mortgage worthwhile.
Also, there are sometimes hidden fees that make pivot loans very expensive.
You’ll usually be better off just speaking with a mortgage broker who can assess your investment plans and compare many banks and lenders to refinance you to a low home loan or investment loan rate.
Discover how much you could save by calling us on 1300 889 743 or by completing our free assessment form today.
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