Lenders usually sting you with a bunch of fees when you take out a new loan, known as borrowing costs. Some of which are tax deductible, but need to be claimed over a 5 year period. Borrowing Costs include any costs imposed by a lender on the mortgagee prior to, or at the inception of a loan. Unfortunately, these costs are frequently misunderstood, miscalculated, claimed incorrectly, or worse - omitted altogether.
Borrowing costs may include (but are not limited to) :
- loan establishment fees
- mortgage protection insurance (lenders mortgage insurance)
- legal expenses
- stamp duty
- valuation and survey fees
- brokers commission
- title search fees
- costs for preparing and filing mortgage documents
Borrowing Costs do not include:
- stamp duty
- insurance premiums where under the policy your loan will be paid out in the event that you die, become disabled or unemployed
These costs are tax deductible, but only to the extent to which they are used for income producing purposes. The cost must be amortised over a period of 5 years from the inception of the loan, or the term of the loan (whichever is the lesser).
Why all the fuss over a few bank fees?
Mortgage Protection Insurance, where it is required by the lender, is included in these borrowing costs. Generally, this will amount to between $2000 and $5000 dollars, and will provide a considerable tax deduction over the relevant 5 year period. In some cases, MPI premiums can be much much higher.
There are several important issues to be careful of: If you refinance or otherwise terminate a loan which has been in place for less than 5 years you are entitled to claim:
- the remainder of your borrowing costs
- any early termination costs
- the appropriate portion of the borrowing costs from the new loan
A conscientious accountant will calculate your deductible borrowing costs to the day. That is, if you take out a loan on 1 June 2010, 1826 days will occur "in the next 5 years" (2012 is a leap-year), and 29 days remaining in the 2010 financial year, therefore you are entitled to claim 29 / 1826 of the total borrowing costs.
Generally, your accountant will prepare a schedule of the borrowing costs deductible the first time you provide them with your loan documentation, you should not need to provide them with that information agin. However (and this is where problems can arise) if you change to a new accountant during that 5 year time period, you will need to provide the original loan documentation to the new accountant. Your old accountant generally will not provide that information to your new accountant.