Hello, I'm planning to buy an investment property (eg. $500K) and I was thinking of entering into an agreement with my parents whereby they are happy to enter into a loan with a bank to secure the 20% deposit (eg. $100K) solely to assist me with the investment property purchase. My parent's loan with the bank will be secured against their principal place of residence and paying principal and interest repayment with a redraw facility with $50K of my parent's money sitting in it. The family loan will be evidenced by a formal legal agreement and the interest rate will be the same as that charged by the bank providing the mortgage loan. Essentially a written on lending agreement on an arm's length basis. The agreement states that instead of regular repayment on my end to my parents, the repayment will be processed once the investment property that I have purchased has enough equity for a cash out refinance (eg. in 5 years time, my investment property has grown to $650K and I can cash out refinance $100K worth of equity and more to cover the loan with interest and pay back my parents).
Since the $100K refinance is now under my name, does this make it deductible going forward and does this mean that the one lump sum repayment to my parents will be deductible (interest portion only of course)?
If my parents charged 1% more than what they were charged by the bank, does this make it more commercially formal? and I guess they will need to declare this interest income on their tax return once this one lump sum repayment is made (do they declare only the 1% or the whole interest received from me)?
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