“I want to use my rental property as a bank security to borrow, so that the new loan interest can be tax-deductible.” That’s what we’ve been hearing from our clients from time to time. But it’s not always right.

In fact, it depends on the purpose of borrowing. It’s not about the loan security. Say you’re looking to upgrade your home, even though you have an equity-rich rental property and use that for a security, the additional borrowing against the rental can not necessarily offset the rental income because the purpose is purchasing a new home, rather than buying a rental property.

The loan interest may not offset rental income

Video Timeline

1. The rental income from property cannot be offset if the borrowing purpose is inappropriate not for purchasing investment purpose - 00:20

2. Which property to use as security for a home loan? -  02:42

1. The rental income from property cannot be offset if the borrowing purpose is not for purchasing investment purpose

People are confused about loan security versus purpose of borrowing. In fact, these are two separate things.

When it comes to borrowing, security is an asset that is pledged by the lender as protection for banks. Security for borrowing is a financing structure to satisfy bank requirements, while purpose of borrowing is to do with the tax.

When applying for a home loan, you need to declare the real purpose of the borrowing to your bank or mortgage broker. For example, if you use the rental property as a security but the purpose of borrowing is to buy your new home, then the interest generated from the new lending cannot offset your rental property income.

On the other hand, let's say you're looking to buy a rental property. You don’t necessarily need to bring your rental property as additional security. If your home has enough equity, you can keep your current home with your bank. The borrowing purpose is to buy a rental property, then the interest generated from this new lending still can offset your rental income, even when the loan is secured against the home.

2. Which property to use as security for a home loan?

When applying for a home loan, should you use your family home or rental property as security?

There are no right or wrong answers when deciding which security should be used. It depends on your situation and goals, and make sure you seek professional advice from your mortgage broker at the early stage of buying before it’s too late to fix the issue.

Prosperity Finance - Here to Help

At Prosperity Finance, we don’t have a one-size-fits-all solution for your home loan. We look at your case, understand your needs and situation then make a tailored solution for you. Call us at 09 930 8999 today.

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Disclaimer: The content in this article are provided for general situation purpose only. To the extent that any such information, opinions, views and recommendations constitute advice, they do not take into account any person’s particular financial situation or goals and, accordingly, do not constitute personalised financial advice. We therefore recommend that you seek advice from your adviser before taking any action.