Pivot Loans or Loan Reducer Mortgage
A Pivot Loan enables you to bundle the interest rate from your Investment Loan with your Home Loan to decrease your home loan interest rate while increasing your tax benefits.
Fact checked
The Pivot Loan or Loan Reducer Mortgage may not be something you’ve heard of before, probably because they’re a relatively new product in Australia. Having only been around since 2015, Pivot Loans effectively allow you to shift the interest from your home loan to your investment loan. The benefit of this is that because your home loan isn’t tax deductible whereas your investment loan is, you can lower your home loan interest while increasing the amount you claim as a tax deduction on your investment loan. Despite the buzz around pivot loans, caution is required as there are still plenty of areas where you can be stung.
How does a pivot loan / loan reducer mortgage work?
The objective of pivot loans is to help you pay off your home loan sooner. They can do this by reducing the interest rate you pay on your home loan while increasing the tax deductions on your investment loan. So together, you end up further ahead.
You need to have both an owner-occupier loan and investment loan with the same lender. From here, the lender can assess you as one loan package rather than as two separate loans. They will determine how much risk they’re prepared to take on and set an interest rate return they need from you overall.
Effectively this means that they can divvy out the interest rates to make sure they’re still receiving the return they need while structuring it in a way to help you get ahead.
A Pivot Loan Example
- Owner-occupied loan rate: 1.70%
- Investment Loan rate: 4.20%
Rates for individual loans
- Owner-occupied loan rate: 2.00%
- Investment Loan rate: 4.00%
In the example above, the lender has offered an incredibly low rate for the home loan so you’ll save a lot of money there. But the Investment Loan rate is higher compared to other investment loans on the market. This is the trade off — the bulk of the repayments will be attributed to the investment loan which is tax deductible. So, you save money on the home loan by paying more for the investment loan but then claim a higher tax deduction on the interest of the investment loan. After your tax return is completed and all cashflows are considered, you essentially save on the home loan and the investment loan.
So what does this mean for you? Well firstly, you can access an incredibly low interest rate on your home loan, which means more of your repayments are going toward paying off the actual principal of your home (the home itself) rather than just paying off interest charges. This helps build equity in your home faster, meaning you own more of your home sooner.
Secondly, whilst the investment loan rate could be higher than other advertised loan rates, you can claim a tax deduction on your interest payments because it’s an investment loan — you can’t do this with the home loan.
Considerations to be made if you’re looking at a pivot loan or loan reducer mortgage
There are important financial factors to consider with Pivot Loans and Loan Reducer Mortgages.
When considering if a pivot loan is right for you, you’ll need to look at:
- Your marginal tax rate and taxable income. Increasing the amount of interest you pay on an investment loan can increase your deductions at tax time. This has the potential to reduce your taxable income enough to lower your marginal tax rate. For example, reducing your marginal tax rate from 45% to 37% would have a huge beneficial impact on your tax liability. You may be paying more in interest costs, but it could be well worth it to significantly lower your marginal tax rate.
- Your cashflow needs. Reducing your tax liability is a standout benefit of a Loan Reducer Mortgage, but you need to consider whether your cashflows needs can accommodate the interest expense. Depending on your employment structure, you may not reap the benefits until tax time. This means you may need to be outlaying more cash to cover the investment loan throughout the year, without seeing the payoff until after your tax return is completed.
Pros and cons of loan reducer mortgage
Pros
Lower Interest rates:
access to lower interest rates can be advantageous in repaying your home quicker
Bundled Deal:
By having your owner-occupied loan and investment loan in the one package deal could save you time, fees and make it easier to manage your finances
Tax Advantages:
By pouring more of your interest into the investment loan cup, you can utilise more of the tax deductibility on your overall repayments.
Obstacles
Fees and charges:
Not only will the pivot loans themselves hold fees and charges but you may also be charged if moving to a pivot loan setup requires refinancing.
Product Restrictions:
These types of loan facilities are only offered by specialised lenders, which could mean moving from your trusted current lender. In addition, they’re only accessible to investment borrowers – if you only have a home loan then you can’t access a pivot loan or loan reducer mortgage
Guidelines and Rules:
Any financial product or service in Australia is governed by a strict set of rules, however pivot loans operate within a strict set of guidelines set by the Australian Taxation Office (ATO). The ATO stipulates that after two years, the lender must review your loan portfolio which could mean further adjustments to your interest rates.
Other rules include:
1. An automatic recalculation of your interest rate if:
a) The lender’s standard variable rate for either type of loan is adjusted
b) The lender varies its target rate
c) You advance your new loan or refinanced loan
d) You substantially repay either your home loan or investment loan (which is entirely impossible if you’re accessing such low interest rates)
2. Your home loan or investment loan can’t form part of a linked loan or split loan facility, be cross-collateralised or involve capitalisation of interest.
