Restructuring mortgage portfolios

Question from Mark updated on 23rd February 2018:

I am holding two rental properties (through a LTC) and I own a residential house (outside LTC). All the properties are mortgaged are on cross-collateral security to the same bank, but there is a different mortgage account for each property. The rental properties are on interest-only and the residential house is on interest+principal mortgage.

One of my residential properties was purchased four years ago and has seen a significant rise in market value. If sold today, it could cover its own interest-only mortgage and gain enough money to cover mortgage for my residential house. But I would prefer to keep it and am considering releasing the residential house from a mortgage by restructuring all the mortgages. Is there any way of doing this ?

Our expert Mark Withers responded:

This depends on whether your question is from a banking or a tax perspective. From a banking perspective, if you can demonstrate to the bank that there is sufficient security for the overall lending in the rental properties they may be persuaded to release the mortgage security over your home. You and the company will be guarantors of the debt though so the property is still at risk even if the mortgage is lifted. A sale to a Trust with the resulting debt back to you would strengthen this if the Trust does not then mortgage the property or offer any guarantee.

But none of this manoeuvring with the bank security would lead to any further tax deductibility of interest. That's because this is determined by the use to which the borrowed money is put (to gain a nexus with income) rather than the security for lending. So your personal debt would remain personal even if secured against the rental properties. You can refinance contributed capital to the extent that the company owes you money but you can't claim interest of debt borrowed by a LTC to fund a tax free dividend from an unrealised revaluation reserve.

The option of sale to reduce the rental debt and the personal debt therefore could be wise especially if the properties yield on current market value is below the interest rate you are paying on the debt. Remember, the interest you save by avoiding your private interest burden is not taxable which makes getting rid of this debt particularly attractive.

Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.

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